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2024 First Half Review
IPOs
We’ve spoken at length about some of the bigger named IPOs of both 2023 (Klaviyo, Arm, Instacart) and 2024 (Reddit, Astera Labs, Rubrik, Ibotta). There’s no doubt that Venture Backed Startups have seen more IPO activity in the past 12 months than the previous year, as Q2’24 (51) marked the most IPOs in a quarter since Q1’22 (80).
That being said, the IPO market as a whole is still barely chugging along compared to previous highs. As shown by the graph below:
Overall, since 2000 there have been on average 247 IPOs per year or 214 if you remove the 1,035 outlier in 2021.
With 94 IPOs in the first half, we expect 2024 to be below that 25 year average, but higher than 2022 and 2023.
We found it interesting to look back at both the Dot Com crash of 2000 and the 2008 financial crisis. Following 397 IPOs in 2000, the IPO market didn’t go above 200 offerings until 2004 which featured 314 IPOs. Similarly, in 2007 there were 268 IPOs followed by back to back years under 100. The IPO market didn’t again hit the 200 mark until 251 companies debuted in 2013.
This is all to show that after such a large boom in public offerings, it will take some time before companies start going public again in masses. It took 3 years following the Dot Com crash and 5 years following the 2008 crisis for IPOs to cross above the 25 year average again.
Both of these moments represent more serious downturns in both public equities and the economy compared to today. However, while public markets have shown resilience in 2024, the notable downtick from 1,000 IPOs in 2021 suggests that the Venture Capital / Startup bubble was just as serious.
Quickly, regarding M&As: Per PWC, global M&A activity fell 30% in the first half of 2024, relative to the same period in 2023. However, the total deal value rose by 5% (29% in the US). Fewer deals are getting done, but some large AI and energy deals skewed the total value higher.
Most of the deal activity was in public energy companies, but some semi-recent IPOs were acquired this year and taken private. Squarespace (acquired by Primera) and Hashicorp (acquired by IBM) provide measurable comps for the current crop of Unicorns. Both companies were acquired for less than their 2021 valuation highs. This highlights the difficulty many startups face today: raising money at a lower valuation than they received in 2021 or growing until they can command a higher valuation. Just look at Cathie Wood’s ARKK, which is down more than 70% from its Feb 2021 high and holds a number of companies that IPO’ed during the bull run.
One major startup, AuditBoard, was acquired by Hg for more than $3B. AuditBoard, who crossed $200M in ARR in February, had not raised money since late 2019 and was reportedly profitable. AuditBoard is definitely an outlier given they didn’t raise at a massive valuation, but shows that strong fundamentals can still lead to outsized exit events.
Notably, the liquidity crunch that has been going on in the industry is starting to lead to some fire sales at deep discounts as well, as companies find themselves no longer able to continue their operations.
Investments
Venture investing has also been tepid in 2024, but similar to M&A, a few prominent AI deals led to a big jump in May. Per Crunchbase, VCs invested $31B in May, the 3rd highest total since June of 2022. Note that $6B of this went to Elon Musk’s xAI, with other AI companies like Coreweave and Scale receiving $1B+ funding rounds as well. Overall, Crunchbase says 40% of all VC funding went to AI companies in May. For now, it pays to be in AI!
Touching back quickly on the state of public markets, below you can see the year-to-date performance of 3 indices.
1) The SP500 is up thanks to the performance of the Magnificent 7 and AI.
2) The Russell 2000 is essentially flat and likely a better representation of reality.
3) ARKK is down YTD and represents a bundle of stocks more similar to the crop of Unicorn startups that hope to IPO in the coming months/years.
Why this matters: Given the current economic situation and the all-time highs being experienced by the SP500, we expect IPO activity to continue trending upward in the second half of 2024 and into 2025, especially when interest rates eventually fall.
Scale is a prime example of a company that had not raised money since the highs of 2021. Their massive up-round is a great sign for startups. We expect more companies that have not raised in multiple years to take on funding in the next 6 months. It will be interesting to see how many are able to meet or exceed their previous valuations, especially companies outside of the AI trend.
Tips of the trade
A section where we provide helpful tips for anyone with stock options or shares at private companies.
Exercising Stock Options
We will keep it simple this week and hit home on an important topic here at ESO Fund: Exercising Stock Options
Stock options are often treated as a bargaining chip and rationale for startups paying lower salaries.
“We can’t pay you as much, but the equity could be worth way more one day!”
For some reason equity isn’t treated equally when you leave a company as compared to when you are hired. Per Carta, only 33% of in-the-money options were exercised in Q1 of 2024. Even at the peak of the bull market in 2021, just over 50% of options were being exercised.
So why don’t people exercise their options?
1) The company isn’t doing well.
If the company isn’t going anywhere, there’s no reason to spend money on your stock options. Options being “in-the-money” does imply some on-paper gain, but does not necessarily mean the company is doing well.
2) The employee doesn’t understand their equity.
We believe this is one of the biggest addressable issues, hence us starting this newsletter. On average, employees really don’t know a ton about their equity, and companies frankly don’t do a great job explaining it or handholding people as they exit. In fact, many people may not even realize they 1) have to purchase their shares to keep them and 2) their options expire if they leave the company.
We’re hoping to solve this problem in years to come!
3) The employee can’t afford to exercise.
This is the main reason ESO Fund exists. We help people pay for their exercise risk-free. This allows people to maintain their hard earned equity, without having to risk a substantial amount of their own capital in doing so. The issue here is if the employee doesn’t understand their equity, or doesn’t know someone like ESO exists, they are likely to let it expire.
Why this matters: We’re still trying to better understand this ourselves. If 67% of in-the-money options expired in Q1 of 2024, what percent of those people would have exercised if they either better understood their equity or had a funding source to cover the costs. There are still plenty of great companies out there, so we can assume they didn’t all just deem the stock worthless…
Funding 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.
Public Multiples Check-in: "Yesterday's Price is not Today's Price"
June equity markets continued their positive streak to close out the first half of the year. All the three major indices end May in the green, with the S&P, Nasdaq, and Dow up 3.6%, 6.0%, and 1.2%, respectively. However, despite the index gains, only five out of the eleven sectors contributed to the positive month for equities. The gains were led by Technology, and more specifically, Nvidia. Despite these gains led by Nvidia, the sectors we track saw multiple declines across the board. HealthTech and Enterprise SaaS had the largest declines at 35% and 28%, respectively. Industrials saw the only uptick year over year, up 7%.
Why this matters: The market right now is being propped up by a few companies that are performing spectacularly. However, a rising tide doesn’t necessarily lift all boats, and many companies outside of these few have been underperforming. This has implications for the private markets as well, and companies looking to go public. However, the positive performance from recent IPOs continues to point to a favorable economy for late-stage companies looking for an exit.
May's Top Ten:
Anduril has had early discussions to raise what would be one of the largest venture capital rounds of the year so far. The company is seeking about $1.5 billion of fresh funds at a valuation of $12.5 billion or more. Founders Fund and Sands Capital are reportedly co-leading the round.
Cerebras Systems, a leading player in the AI chip market taking on Nvidia, has reportedly filed for IPO. The IPO is rumored to take place later this year.
OpenAI has surpassed $3.4 billion in annualized revenue, having doubled it in the past six months. The news indicates that growth in the ChatGPT developer’s business has continued to accelerate despite competition ramping up.
Databricks announced that they are acquiring Tabular, a data storage optimization company. The purchase price is over $1 billion, and the addition should help Databricks bring out more products more quickly.
Voodoo acquired the social network BeReal for roughly $530 million this month. The acquisition is notable because it’s a great exit for a company that thrived primarily during the pandemic.
Tempus AI debuted on the Nasdaq this past month, jumping 8% on its initial day on the market. As of the time writing this though, the company last closed at $33.34 , roughly 10% below their debut price.
Harvey, a generative AI startup focused on legal, tax, and financial matters announced they are targeting a $600 million raise. The raise would push the company’s valuation to over $2 billion, more than double their valuation this past December.
SpaceX is planning on selling insider shares at $112 a piece in a tender offer, valuing the company at a record $210 billion. The new valuation is a record for an American private company, but still trails ByteDance’s $268 billion valuation.
AppsFlyer, a marketing analytics provider, has tapped bankers for IPO in early 2025. The company has been rumored to be seeking about $300 million.
Carta’s woes continue as they are reportedly working with the investment bank Jeffries on a secondary sale that would value the company around $2-4 billion. This is a huge decline from their previous valuation of roughly $7.4 billion in the summer of 2021
Why this matters: IPO news continues to make our Top 10 list. This movement is much needed after a lackluster 2023, and is encouraging to the VC ecosystem as a whole. Public markets have performed well in 2024 thus far, though as we discussed in our multiples section, and the environment is continuing to look good for private companies looking for an exit.
Startups that are still 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 funding 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!