Will JPow Save VC Funds this Year?

If you’ve been reading our newsletter lately, one consistent theme has been our commentary on what will happen “when the Fed cuts rates this year”.

Unfortunately, the Fed has continued to kick that can down the road. Here we are in early September and the benchmark rate is still 5.25% to 5.50%. However, we think its finally happening this month (at least based on the predictions of analysts who are spending a bunch more time reading over these numbers than we are).

As of writing this, traders are pricing in around a 75% chance of a 25 bps rate reduction in September, while 25% are pricing in a 50 bps lowering. 

What does all of this noise surrounding rate cuts mean for the larger VC ecosystem this year? If the Fed does in fact drop rates 25 bps on the 18^th (or even 50 bps), Will we finally see the IPO wave of all these late stage companies in the pipeline? Will VC funds be washed in liquidity rivaling the party days of 2021? Mmm.. probably not.

The main issues surrounding the current macroeconomic environment for venture backed companies is less the wait for rate cuts, and moreso the uncertainty surrounding the situation and the magnitude of the cuts when they occur. This uncertainty increases market volatility, which ultimately is going to keep these IPO prospects on the sidelines as they don’t want to get caught in a negative market environment. To make matters worse, we have an election coming up in November that almost certainly is going to cause some market volatility leading up to the event.

Based on all of this data, we think that the cohort of IPOs we saw earlier this year (Reddit, Astera Labs, Rubrik, Ibotta), is likely all we are going to get this year. For the larger swath of companies in the pipeline, the most logical play for exit is going to be to wait until the election is over, which will also buy them some time to see how low the Fed ultimately goes this year on rate cuts, and what they signal for 2025.

Why this matters: The silver lining on this is that 2025 is shaping up to have some much more positive tailwinds for the industry overall. While the back half of 2024 hasn’t been quite as exciting as we initially predicted, we think the timeline has just shifted back a little bit.

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

While the equity market pullback continued into August, most indices were able to recover a substantial amount of their losses by month end. The S&P500, DJIA, and Nasdaq increased 2.4%, 2% and 0.7%, respectively. Of the industries we track, Enterprise SaaS showed the largest year over year multiple decline at 20%, while Real Estate multiple expansion was the largest at 14%. 

Why this matters: The jury is still out on if there will a market correction this year, as a recent weak jobs report has spooked some investors that perhaps the Fed has waited too long for economic easing. We should have much more clarity at the end of September after we get more indications on what the Feds next move will be.

September's Top Ten:

1. I don’t know if I would classify it as the “biggest” story of August, but it is certainly the craziest. The Information reported earlier during the month that Bolt was finalizing a Series F fundraising round of $450 million at a $14 billion valuation. In the subsequent days, ludicrous deal terms, fake investors, and most recently, a restraining order, have made it clear this is far from a done (or real?) deal.

2. Startup Character.AI announced this past month they had signed an agreement with Google that grants the search engine giant a non-exclusive license to the company’s LLM.

3. After walking away from a $23B acquisition proposal by Google, Wiz is now in search for a CFO to lead them down an IPO path. However, due to struggling to find one that is the right fit, media articles have suggested that an IPO might not be on the table until 2026 at the earliest.

4. Efforts are ramping up in California to establish first-in-the-nation safety measures for the largest AI systems through the S.B.1047 bill. The bill has largely divided the tech and policy world, and after passing both the State Assembly and Senate, Governor Newsom has until Sept 30 to decide if he will veto it or pass it into law.

5. French authorities arrested Pavel Durov, the founder and CEO of Telegram, a messaging app that’s popular with the European far-right. The move has sent ripples through the tech industry and has raised questions about digital privacy and social media liability for the illegal and violent content they host.

6. OpenAI is in talks to raise several billion at a valuation at more than $100 billion. Thrive Capital is reportedly in talks to lead the round.

7. In addition to the round news, OpenAI also announced some financial numbers that are pretty eye popping. While annualized revenue has surpassed $3.4 billion, the more interesting number is that they are on track to lose nearly $5 billion by year end. The company has already burned $8.5 billion on AI training and staffing to date.

8. Once a high-flying software firm, Carta, released some sluggish growth numbers this past month. The Information reported that ARR only grew by 19% last year to $380 million. As customers have laid off thousands of employees, the need for subscriptions has been reduced.

9. Klarna is reportedly considering a secondary sale to see if investors value it above its last valuation of $7 billion. Goldman is apparently advising the buy now pay later company in the deal which could value it around $10 billion. The round could help ease some pressure on current shareholders before the IPO.

10. WeRide, a Chinese self-driving technology company, has delayed its US initial public offering, citing need for more time to complete the necessary documents. The company was seeking to raise up to $440 million in the listing.

Why this matters: As we mentioned in the intro, with all of the volatility in the market caused by interest rate cut speculation and the election, we are expecting a pretty light news list on the IPO front for the back part of the year. We likely will see more companies indicating IPO prospects for 2025.

Hot startups that are still hiring!

Open positions are per the company's website.

• Glean

• Metronome

• Temporal

• Merge

• Cribl

• 1Password

• Grafana Labs

• Typeface

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