Alan’s Thinking Cap | Q2 2023 Capital Markets Update

The venture capital industry is undergoing a reset with a sporadic IPO market the last 18 months or so. EisnerAmper’s webcast titled “Alan's Thinking Cap | Q2 Capital Markets Update” discussed the state of the capital markets in the last quarter, including what has happened with exits, valuations and more. The webcast featured Alan Wink, Managing Director of Capital Markets at EisnerAmper, and Ian Sigalow, Co-Founder and Managing Partner of Greycroft Partners, a venture capital firm focused on the software and technology industry.

Below are the topics the two discussed:

Exits

With respect to exits, specifically IPOs, the public capital markets remain unsettled. Many firms went public from 2020 through the beginning of 2022, when the U.S. economy suffered a downturn. Overall, trading for these firms has been poor.

Since there were so many small firms that went public during that time period, public market investors have not included them in their investment strategy, focusing more on larger-cap companies. Public investors often don’t think the smaller venture-backed companies are worth the risk when large-cap companies, such as Microsoft, Google, Amazon, etc., have been performing so well. In addition, more prominent investors value the larger-cap companies' ability to leverage artificial intelligence (“AI”).

For these reasons, there is expected to be a significant reduction in the number of IPOs for the next 18 months or so.

Valuations

During Q2 2023, only around a third of the firms that went to market were able to complete a round successfully. Deals in 2020 and 2021 were done at “sky-high” valuations, and these companies have not achieved the expected milestones. This is reflected in Q2 2023, when around 14% of all venture capital deals were down rounds. This starkly contrasts 2021 and 2020, where an up round was almost a certainty and startups had a high survival rate into the next funding round.

Artificial Intelligence Expected to Dominate Next Market Evolution

The next evolution of the market will be AI-driven across all industries to increase bottom line and productivity. In the next three to five years, there is speculation an AI-driven platform will replace mobile devices. In addition, professional services will be augmented by AI.

Although this anticipated next-market evolution might be met with friction in highly regulated areas such as healthcare, there are many examples of success with previous technological innovations; for example, Uber disrupting the taxi industry.

The healthcare industry is another sector that might face significant friction, but as younger practitioners enter the market, they are expected to have a higher adoption rate of new technologies.

Venture Capital Outlook

In summary, the venture capital (“VC”) industry is looking to invest in people that will “change the world.” Since VC is mainly focused on technology initiatives, investors need to discern whether the technology is ready for market adoption. Also, the next evolution in technology must align with existing technologies, which will determine its business feasibility.