Trace CohenEstimated Reading Time: 3 minutes
It’s kind of interesting that our stock market is primarily being driven by concentration right now as well. Apple, Microsoft, Google, Amazon, Nvidia, Meta and Tesla make up like 35%+ of the S&P 500! Additionally, these tech giants have historically played a crucial role in providing market liquidity through M&A, particularly in deals valued over $1 billion. These M&A activities not only allow smaller companies to exit but also fuel the expansion of these tech giants. Ironically, while the market depends on these acquisitions to sustain liquidity and growth, these companies have recently stopped their acquisition strategies, potentially curbing an important source of market dynamism and further entrenching their dominant positions.
Meta: Kustomer, WhatsApp, Instagram, CTRL-Labs, and Oculus VR
Alphabet: YouTube, Actifio, Nest Labs, Looker
Cisco: Cerent, Duo Security, AppDynamics, Jasper
Microsoft: $7.5 billion purchase of GitHub in 2018
Google: $3.2 billion purchase of thermostat maker Nest Labs in 2014, and its $2.1 billion acquisition of fitness tracker Fitbit in 2019
Amazon: $1 billion purchase of smart doorbell maker Ring in 2018
With all that in mind, I was going through the latest PitchBook-NVCA report for Q1 which covers a lot of what I normally discuss and cover but I wanted to run through it with you and give my thoughts similar to what I did with the recent Carta data.
This makes me sad
We’ve seen this in many different forms that new funds easily peaked in 2021 (way too many) and now are basically at an all time low (way too few). As the legendary investor Fred Wilson said in a talk 2 years as things were starting to go downward after we peaked at the end of 2021, is that we really need more smaller funds, not just more multi billion dollar funds. Ideally we need both but that’s up to us to convince LPs it’s a good investment.
Just imagine if $1B in LP went to 10 funds and not 1. If $5B went to 50 funds and not just 1, the early stage startup world would be completely different. This would help jumpstart the early stage engine again by funding hundreds of more startups, providing capital for thousands of founders to pursue their hopefully disruptive and innovative ideas.
You may say we’re dreamers… but this wont happen in the foreseeable future as most VCs still believe we need to see 30-50% of startups and investors shut down. We had 400+ new firms started in 2021 when the historical average was mid 200s a year so that math is pretty simple, though I know of dozens of amazing emerging managers out there raising right now. Hit me up!
So it’s no surprise that when there are less funds, there are less startups/founders that can raise capital. A lot less potential competition, innovation and passionate, smart people potentially working on problems that need a better solution. Sadly with so many tech/startup layoffs/shutdowns, I do expect in the coming year there to be an increase in startup formation and activity just by sheer necessity.
Then it makes sense that small rounds $500,000 - $5M which I would consider a solid pre-seed to seed round range keeps shrinking. We also have to understand that this is also relatively skewed because larger funds are going earlier, which means more $5M+ rounds and fewer smaller rounds. Basically deal total deal count is going down, so as smaller rounds become less common and larger rounds are happening more, they will continue to dominate the funding world.
Why is this happening? Because of the two charts below - no exits. The Carta report showed that very few investors from 2018 had any DPI, which should be expected as they wouldn’t really have much of a chance to cash out during the 2020-2021 ZIRP with startup investments that are only a few years old. It’s especially difficult for the 2020-2021 vintage that really had no chance to cash out / create any DPI (should be recycled anyways) as they went from feast to famine with the rest of us.
There are still billions in exits but not so much in the majority of our little niche tech world that gets outsized coverage. The last 4 IPOs - Reddit, Astera Labs, Klaviyo, Instacart - are all faring relatively well after a bumpy start now that they have a few earnings under their belt. It definitely gives hope to the many (1000!) startup unicorns out there but really only the top 30 or so that have a real chance at the multi billion dollar exit. We need to remember though that most startup IPO after generally 8-10yrs, so this will be more for the 2014-2016 vintage to benefit from as other investors are just trying to get up rounds on their investments.
I want to be clear though that all this later stage capital is generally a good thing when the earlier stage is a little more robust - more follow-on capital. This is definitely a symptom of the Ai hype/bubble we’re in as it takes more capital than usual to fund these very capex heavy, no revenue startups that are reliant on cloud compute. So hopefully trickle down economics is real and we’ll all see the affects soon 🙂
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When do you think M&A/IPOs will come back?
Talking with a lot of Family Offices about the current funding environment - small/big funds, variance, expectations and more
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