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2023 Year in Review
In our 2022 Year in Review, we highlighted the S&P 500 finishing its worst year since 2008, while Venture Capital spending reached its second largest total all time.
In 2023, the public markets rebounded with the S&P 500 up 26.29%, marking its fifth best year of the 21st century. Meanwhile, VC spending declined 38% year over year, marking its lowest total since 2018. This breaks the 2 year run of more than $200B invested by US VCs in 2021 & 2022, with 2023 coming in at a “mere” $138B.
Displayed quarter-over-quarter, you can see 2023 was similar to the latter half of 2022. While the numbers are down from all time highs, we are unlikely to return to pre-2018 numbers given the massive hoard of dry powder VCs are sitting on. That being said, there is less new money joining the mix as both the number of new funds and average size of new funds are down significantly from 2021 & 2022, according to Pitchbook.
In short: we’ve likely found a local bottom in VC spending, especially with optimistic sentiment surrounding the public markets going in to 2024.
Why this matters: We still have a backlog of startups without material funding events since the 2021 bull market. 2023 saw the fewest total exits since 2013, meaning for now companies, don’t have a reliable path to liquidity. If the IPO & M&A markets remain limited in 2024, companies will be forced to seek funding in this new environment and inevitably, many companies will fail to raise. Those who are able to whether the storm through fundraising or prioritization of their bottom line will hopefully emerge from this IPO winter to lead a new class of public-ready companies.
Tips of the trade
A section where we provide helpful tips for anyone with stock options or shares at private companies.
Exits and Liquidity (IPOs & M&As)
We talk a lot about IPOs and M&A from the company level, but what do these exit events mean for employees?
Initial Public Offering (IPO) - An IPO is when a private company lists its shares on the public markets for the first time. An IPO is the ultimate goal of most startups, and results in both common and preferred shareholders receiving publicly tradable stock. Shareholders are not taxed until they sell, unless they have “double-trigger” RSUs.
The main wrinkle with IPOs is insiders (any private shareholder) are not allowed to sell shares for 6 months. Many think this is to prevent “insider trading” but most of these shareholders do not have access to material non-public information. The true reason for the 6 month IPO-lockup period is to prevent investors from selling their shares and depressing the share price. Banks that lead IPOs want the shares to “pop” and preventing insiders from selling alleviates downward pressure on the stock.
Mergers & Acquisitions (M&A) - Getting acquired can be a great outcome for private company. Many companies will never get large enough to be IPO, and must rely on an M&A exit. Others plan IPO before a buyer offers the right price. In adverse cases, companies sell off assets to generate cash and pay back investors. M&As are a necessary part of the private company lifecycle allowing larger companies to purchase whole businesses rather than attempting to build them from scratch.
Companies can be acquired for either stock or cash (or a combination of the two).
When a public company buys another company with stock, shareholders of the acquired entity receive stock in the acquiring company. Typically taxes are not owed until this newly acquired stock is sold. Ex: if Microsoft buys your startup, you will get publicly tradable MSFT stock.
When a private company buys another private company using stock (ex: Airbnb buys HotelTonight in 2019), shareholders receive shares in the acquiring entity, but are not taxed unless they also receive cash.
Cash is simple, shareholders get cashed out for their stock. The only downside of a cash transaction taxes are due immediately.
The biggest wrinkle with private company M&As is the rights of the preferred stockholders. At minimum, Venture Capital investors will guarantee at least their money back in an acquisition. Ex: If your company raised $100M in funding and is acquired for $100M, that money will go to the preferred stockholders. Common stockholders receive nothing.
Before reaching IPO or M&A many startups are semi-liquid through the private secondary market, which we have covered in the past.
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.
Secondary Market Sentiment
From Hiive Private Market Report - January 2024
The focus of the secondary markets is a flight to quality. As seen above, "top quartile” securities are priced at or above par value while anything that isn’t considered best in class is being price below 75% of par value.
This is further demonstrated through Hiive’s bid/ask spread metrics. Buyers and Sellers are more or less in agreement on top quartile pricing, while bid and ask prices differ by more than 60% for lower quality securities.
Why this matters: This confirms what we laid out in the introduction. Investors know there will be failures, and unlike in 2021 where everyone got priced like the best, buyers must be careful in choosing where they park their capital. If buyers are interested in non-best-in-class companies, they are making sure to price in the risk. Read more from Hiive’s 2023 in Review.
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Public Multiples Check-in: "Yesterday's Price is not Today's Price"
Although 2022 proved to be an extremely difficult year for the public markets, 2023 has been a bright spot. Bolstered by the combination of a solid economy, better-than-expected corporate earnings, and an apparent end to the Federal Reserve’s interest rate hikes, stocks rallied 25% in 2023. Technology stocks also performed well, jumping thanks to expections of multiple rate cuts in 2024 along with the emerging boom in artificial intelligence technologies. As such, all industries we follow saw their forward multiples increase year over year, with the exception of Healthtech which is flat.
Why this matters: While public equities have seen a resurgence over the past year, as we noted in the intro, the private markets have largely had a lackluster year plagued by lack of exit opportunities and difficulties fundraising. However, as we move into 2024, interest rate drops and continued positive performance from technology stocks could help pull the the private landscape out of its rut.
December's Top Ten:
OpenAI is continuing to dominate, as its annualized revenue has reportedly topped $1.6 billion. The sky high growth OpenAI has experienced this year isn’t expected to slow down any time soon, with some executives believing its annualized recurring revenue will nearly quadruple next year to $5 billion. The news comes as the company is hoping to raise new funding at a valuation of at least $100 billion.
Buzzfeed, a once high-flying digital media startup, is close to an agreement to sell most of its Complex Networks business to Ntwrk, a live video shopping and e-commerce startup. However, the price will likely be far below the $150 million price tag that Buzzfeed CEO Peretti was hoping to get. People familiar with the sale have indicated the ticket price is likely to be closer to $100 million, which puts Buzzfeed in a pickle as they will have to raise another $100 million to pay off most of what it owes on convertible notes that come due for repayment in December of 2024.
Palo Alto Networks completed their acquisition of Talon Cyber Security at the end of December for $625 million, according to Pitchbook. The purchase will allow Palo Alto Networks to enhance browser security technology.
Although not at the level of OpenAI, their competitor, Anthropic, is projecting to generate more than $850 million in analyzed revenue by the end of 2024. The news comes as the company is in discussions to raise $750 million in a funding round led by Menlo Ventures.
Reddit, one of the top VC-backed contenders for a 2024 IPO, is expected to finish the year with ad revenue growth of 20% to $800 million. While this growth rate is faster than companies such as Snap and Pinterest, its below their target to achieve over $1 billion in ad revenue by 2023.
Okta, the identity and access management company, is acquiring Spera for approximately $100 million to $130 million. Spera has around 25 employees and had raised $10 million prior to the Okta acquisition.
Antitrust red tape continues to impact the VC world, as Adobe and Figma call off their pending acquisition due to no longer seeing a path toward regulatory approval. The deal process started 15 months ago at a price of $20 billion. Adobe will be required to pay Figma a reverse termination fee of $1 billion in cash as a result.
VAST Data, a data infrastructure company, raised $118 million in its latest funding round during December. The round valued the company at $9.1 billion, more than double what it was worth two years ago. The company is rumored to be preparing for an initial public offer in 2024.
Elon Musk’s AI startup, X.AI, filed with the SEC in December to raise up to $1 billion in an equity offering. The company has already brought in nearly $135 million from four investors.
The VC winter has begun taking casualties, with OpenView abruptly winding down. The wind down comes just eight months after securing $570 million for its Fund VII to invest in high growth startups, and was a result of key partner departures and paper losses. Countdown Capital also shut down last month, with solo GP Jai Malik blaming “funding industrial startups is not inefficient enough to justify our existence” as the reason for returning capital to limited partners.
Why this matters: OpenAI and Anthropic’s growth numbers are no joke, and likely indicate money is going to be continuing to flow into the AI sector in 2024. However, the question remains if these smaller AI companies will be able to capture enough meaningful market share from these big guys.
Hot startups that are hiring!
Open positions are per the company's website.
About ESO Fund
ESO Fund empowers startup employees to turn their stock options into reality. Since our inception in 2012, we've been dedicated to providing risk-free financing for the exercise of stock options, ensuring that individuals can seize the opportunities embedded in their equity.
Our mission is simple: to make equity compensation accessible and understandable. Through our innovative solutions, we've assisted countless individuals at 650+ companies in realizing the full value of their stock options, contributing to the success stories of numerous startup employees.
For more information on ESO Fund and how we can help fund your option exercise, please refer to our website at www.esofund.com!