ESO's Monthly Start-Up

January 2023

2022 Year in review

Fact 1: The S&P 500 closed down 19.4% marking its worst year since 2008 (down 38.49%).

Fact 2: VC spending on pace for 2nd largest year ever (trailing only the $329.9B invested in 2021).

After investing an all time record $105B in 2000 (per WSJ), Venture Capital spending did not reach the $100B mark again until 2018. In 2022, VC spending is expected to reach or come close to $200B for the second consecutive year (per EY $176.7B as of end of Q3 2022).

Per the above October study by EY, VC "investment continued to weaken from the record-setting levels of 2021, declining by 37% in Q3 2022, from $60 billion in Q2 to $37 billion invested." While that number is expected to continue to fall in Q4 2022 and in 2023, you can see that despite a rough year in the public markets, VC investments have not slowed to pre-bull market levels.

Why this matters: Heading into 2023, it will be interesting to see if this downward trend continues and where capital is deployed. Per Harvard Business Review, there was still $290B of VC "dry powder" ready to be invested as of mid October. It does seem to indicate that another year of $100B-plus in VC investments is in store.

Tips of the trade

A section where we provide helpful tips for anyone with stock options or shares at private companies.

File an 83(b) if you exercise early!

Many startups offer the ability to exercise options early - meaning you can purchase the stock before it vests. This can be a very powerful opportunity for employees because typically your exercise taxes will only rise as time goes on (assuming the company is successful).

Early exercise allows you to purchase as many of your options as you'd like regardless of how long you have been employed. The catch is if you leave early, the company will buy back your shares at cost. If you are able to early exercise, the safest route is to early exercise the lesser of either as many options as you can afford to exercise or as many options as you can reasonably guarantee you will vest (assuming you believe in the company's future).

For example, if you can afford $20,000 of exercise but only think you will stick around to vest $10,000 worth, there is no reason to exercise more than $10,000 worth of options.

If you do go through with an early exercise, MAKE SURE TO FILE AN 83(i) WITHIN 30 DAYS. An 83(i) tells the IRS that you exercised all your options on a certain date, and allows you to pay taxes based on the date of exercise. If you do not file an 83(i), you will pay taxes as you vest - effectively eliminating the advantage of the early exercise opportunity.

Many companies do not offer early exercise, but if yours does it may make sense to take advantage while the Fair Market Value (and thus your tax liability) is low due to the current market. Of course, the tax savings only work out if the company eventually makes it, so be sure to do your homework before making a decision.

Financing your option exercise can be expensive and a require a large capital outlay. Feel free to reach out to us to discuss your options for partnering with ESO to exercise your options risk-free.

The ESO Fund does not provide legal, financial, or tax advice.

Layoffs cool down a bit in December

December was marked by another round of fresh layoffs from tech companies. We have laid out the largest layoffs for U.S.-based private companies for December, as well as aggregate info on layoffs to date.

Our guess as to why November was so high, and December was not: companies wanted to get salaries off the payroll before the end of the year to start 2023 anew, but preferred not to layoff employees around the holidays. Additionally, Twitter and Kraken layoffs skewed November numbers much higher. We expect tech layoffs to continue in 2023, but it is possible November 2022 is the peak barring any materially negative macroeconomic events.

Brought to you via layoffs.fyi

Brought to you via layoffs.fyi

Secondary Market Sentiment: where the buyers at?

The graph below displays the ratio of buyers vs sellers for a given month on the private secondary market. Months with more buyers than sellers are displayed in green while months with more sellers than buyers are displayed in red. All data pulled from Zanbato, the below list does not imply completed transactions, simply intent to either buy or sell shares.

December 2022 marked the 20th consecutive month of more sellers than buyers on the private secondary market. This graph only shows interest in selling and/or buying stock, not completed transactions.

However, to get a data point for completed secondary transactions, we can look at the publicly available data on revenues from Forge (ticker: FRGE) which is a secondary marketplace for private stock that handles secondary transactions in a number of venture backed companies.

We do not yet have Q4 2022 numbers, but in 2021 Forge did $128M in revenue. Assuming they receive a fee of 5% of each transaction, this implies about $2.5B in transactions on the platform in 2021. Through Q3 2022, Forge has only done $52M in revenue, implying only $1B in transaction volume. Below is a look at Forge's quarterly revenue over the last 5 quarters.

Why this matters: Basically, the secondary market continues to be far less active in 2022 than in 2020 or 2021 - people want to sell, but there may not be anyone willing to buy. This trend is unlikely to turn around until public market sentiment improves. Why? Well, when people are fearful of buying public equities they are even less likely to purchase their riskier less liquid counterparts on the private market.

Public Multiples Check-in: "Yesterday's Price is not Today's Price"

As we look where multiples stand at year end, everything continues to trail where things were this time last year. Cryptocurrency continues to be a standout loser as the crypto winter drags on. Tech multiples in general continue to trail last years record valuations, and we expect to see this LTM decline continue into the beginning of next year.

Why this matters: Like we mentioned last month, as companies last funded in 2021 are forced to raise capital, they will be facing much harsher conditions. This has directly impacted the fundraising and exit environment. We have seen with an uptick in the number of down rounds and a reduction in exit activity. Looking into 2023, keep an eye on where real estate multiples are landing. While the Fed raising interest rates is going to continue to put pressure here, there's still a lot of opportunity in the sector, especially in the single family space. Compressed multiples for real estate companies, especially real estate technology companies, could present some interesting acquisition opportunities for larger players.

December's Top Ten:

  1. Thoma Bravo agreed to buy Coupa Software (Nasdaq: COUP). Bravo is buying the the business spend management software provider in an all-cash transaction with an enterprise value of $8 billion. Coupa shareholders are set to receive $81 per share in cash if the transaction goes through. The per share price represents a large haircut to the $369 per share price the company peaked at at in February 2021. The purchase comes after Bravo announced they had raised a record $32.4 billion to be spread across three separate buyout funds.

  2. The down rounds have arrived. While many start-ups have been trying to avoid the inevitable with debt raises, it looks like the start of a cycle of downrounds. Some notable of the notable unicorns with down rounds this past month include Snyk whose valuation dropped from $8.5B to $7.4B (13% drop), Dataiku at $4.6B to $3.7B (20% drop), and Checkout.com down from $40B to $11B (70%). One bright spot in the funding environment is the Anduril, who had a flat-extension of its Series E raise in December. This $500M extension brings their total Series E funding in 2022 to $1.5 bn in funding. Total, this is the second biggest venture capital round of the year, and brings the defense technology company's valuation up to $8.5 billion.

  3. Talk of the town: If you have been listening even vaguely to the tech and VC landscape this past month, you have probably heard about OpenAI's development of ChatGPT. While people are saying that it could potentially be revolutionary, its (probably) not going to take your job. OpenAI was most recently valued at $20 billion, and the company is projecting to reach $1 billion in revenue by 2024.

  4. An Elon story that doesn't involve Twitter? We are as surprised as you are. SpaceX has started to market employee stock for sale at $77 each. This price gives the company an implied valuation of around $140 billion

  5. SBF was finally arrested, but somehow managed to post a $250 million bail. He is scheduled to appear back in court January 3rd. Considering he has been doing interviews and tweeting nonstop since the FTX collapse, prosecutors are going to have a lot to work with here.

  6. More crypto pain: The fallout from the FTX collapse continues with the Circle SPAC deal between the company and their partner Concord has been pulled. Despite this setback, Circle has reported that they are profitable, closing their third quarter with a net income of $43 million. CEO Jeremy Allaire has noted that the company is in the "best financial position" its ever been in

  7. US lawmakers introduced a bill to ban TikTok from operating in the U.S. due to security concern with the Chinese-owned app. This is probably more of a political move than an actual attempt to implement, but it's notable since the company is owned by Bytedance and a number of large VC's in the US (most notably Tiger Global) have pretty large stakes here.

  8. Saudi Arabia's sovereign wealth fund acquired a majority stake in US-based Magic Leap for $450 million. Once valued at more than $4 billion with investors such as Google, JP Morgan, and Morgan Stanley, the AR company has failed to live up to the hype that it once garnered.

  9. Fungible has been sold to Microsoft for $190 million, despite raising more than $300 million since its founding in 2015.

  10. Seattle-startup Banzai is going public via SPAC, as well as will be acquiring marketing optimization start-up Hyros for $110 million after the SPAC deal closes. SPAC returns for 2022 have been lackluster to say the last, with December marking a historic downturn with 70 SPAC deals being liquidated. This is the sharpest monthly decline in SPAC history.

Why this matters: After ServiceTitan raised at a 20% lower valuation in November we get 2 more "down-round" data points from Snyk (down 13%) and Dataiku (down 20%). In addition the Coupa Software acquisition provides a great comp for how an unprofitable but growing SaaS company may be valued in this market. The 10x TTM Revenue paid by Thoma Bravo likely wouldn't look amazing next to some of the valuations that unicorns raised at in 2021. Keep an eye out as more unicorns are forced to raise capital and others are gobbled up via M&A, this will provide the best data on how to value any startup until the IPO market heats up again.

Startups that are still hiring!

Open positions are per the company's website.