Pre-Money: Apr 29th, 2024

KPIs

The week’s top performance indicators

Dots & Lines

The week’s top takeaways

• Rubrik made it out: As expected, 10-year old data management and security firm Rubrik went public on Thursday, bringing in a cool $752M at a market cap of $5.6B, exceeding expectations. The stock held up in trading, closing the week up 16%, with a market cap above $6B. Lightspeed Venture Partners and Greylock partners were venture capital’s winners, holding 24% and 12% of the company going into the IPO respectively, with the former’s gains pegged above $1B. While bullish for enterprise Pre-IPO companies, the Rubrik offering underscores the very high expectations in place for private companies to go public. In Rubrik’s case, the market found their transition from one-time to recurring revenue compelling - they reported $784M of ARR for the last year - and was willing to put up with net losses given the company’s strong (50%+) growth rates and optimism about the sector. Now watch to see which unicorn is next to demonstrate a similar level of appeal.

• TikTok ban battle time: President Biden signed into law a measure to force divestiture of social network TikTok, providing twelve months for a buyer to be found and the intricacies sorted out. An unprecedented step, the law takes the messy realities of free speech, social media and geopolitics and mashes them together into a complex situation likely to intensify. TikTok parent ByteDance, which has investment from institutions like Carlyle, Susquehanna and General Atlantic, said it has no intentions to sell. Expect lawsuits, rhetoric and no resolution this year. But keep an eye on how geopolitical rivalries shape venture as the game goes even more global.

• Pre-seed leads the way: Receipts are in from the first quarter, and it’s a surprise to nobody that funding remained tight, resulting in the lowest aggregate level in seven years. But within that data, one story emerging is the relative strength of the early stages. Early stage funding ticked up 6% year on year to $29.5B. The pre-seed stage, meaning checks written into a company at the earliest moment of its journey, held strong in Q1 too. There is a sense that angels are coming back into the ecosystem, as 41% of checks written into pre-seed rounds of $1M or less have been $25K or below. Exits from pre-seed checks written today will happen 8-10 years out, well into the next cycle, so going early looks like a reasonable strategy to insulate oneself from the challenges of today. Post-money Simple Agreements for Future Equity (SAFEs) are now the dominant means of pre-seed funding, as the market opts for fast and flexible instruments over more rigid priced rounds. However, once financing hits the $3M threshold, priced rounds are preferred. Watch this space as the proceeds from the year’s IPOs start working their way back into fueling the next cycle.

• AI Inflation: The eye-popping sums raised by AI companies have been talked about endlessly since ChatGPT’s November ‘22 release started the arms race. But it’s now clear to investors and founders just how challenging the economics of this emerging sector will be, as it seems likely that only massively funded entrants can keep up. AI startups have raised more than $330B over the past few years. And yet they find it challenging to operate infrastructures on the scale of what big tech companies are running, and to generate significant revenues from business applications. AI data centers voraciously consume the chips, power and parts needed to run the services effectively, driving shortages and backlogs of building blocks where supply cannot be ramped up very quickly. With Google allocating $11B to capital expenditures, up 45% from one year earlier, it’s hard to imagine anyone but the biggest companies with the strongest balance sheets competing. That said, investors should consider the overall economics of generative AI. Once infrastructure is more established, profit opportunities at the application layer are likely to expand, consistent with how prior tech waves like cloud and mobile evolved. Investors should have a thesis on where opportunities are going to come from when chasing today’s valuations.

Deal Points

A few items of interest

• The proposed FTC ban on non-compete agreements looked like a threat to the ecosystem, but on review it may hold potential to unlock hiring and accelerate innovation rather than diminish the value of proprietary knowledge, and it only matters if it sticks

• Elon Musk’s xAI is getting close to finalizing a $6B fundraise at an $18B valuation led by Sequoia Capital

• Cognition Labs, Bay Area-based maker of the AI software engineer, Devin, raised once again, hauling in $300B at a $2B valuation, 4.7x on last month’s price

• Brazil-based financial infrastructure platform QI Tech became the latest unicorn, extending its $200M Series B with an additional $50M led by General Atlantic

• Venture OG Norwest Venture Partners raised $3B for its seventeenth fund, notable for its size in a market where fund sizes have been shrinking

• The great VC migration is underway with headcount stalling, as the fundraising slowdown leads firms to freeze or shrink their ranks

• Critics, like the author of a recent Wall Street Journal piece, are lining up to target venture capital, as recent yields fall short of expectation

• An insightful look at the syndicate misalignment that frequently shows up in SPV deals as compared to fund commitments

• The emerging unstructured capabilities of AI may lead to it taking over many human tasks, and invert the SaaS business model to “service-as-software”

• Five deals closing soon on Republic, including a hot AI one  → Invest Now**

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