By Jorge Mercado Friday, August 23rd, 2024

Even though venture capital investment is falling below previous peaks like in 2021 here in the United States, there is still money flowing, a report from Silicon Valley Bank found.

According to the Aug. 13 report on the state of the market through the halfway point of the year, there is more capital flowing to startups this year than in 26 of the previous 30 years.

A big part of that is due to the continued investment boom in AI companies.

According to the report, AI companies account for 28 of the 73 new unicorns in the last 18 months.

They’re also achieving that status faster than other companies as 30% of new AI unicorns are “early-stage,” compared to only 11% of non-AI unicorns. 

According to the report, VC fundraising has materially picked up with $1 billion-plus funds accounting for $14 billion. This growth is undergirded by the booming AI investment cycle. 

Of funds closed in the first half of 2024, 35% claim AI as a focus area. 

However, everyone outside of the AI space is still struggling. 

In early 2022, software developers were the most sought-after among all job groups reported in federal data. 

Two years later, they are the least sought after, with software job 31% postings now as rare as they were in the initial months after the pandemic, the report said.

This is because many companies are cutting back on hiring and cutting back on spending as a whole as money is drying up.

The report added that “until software spend bounces back, SaaS startups Q1 Q2 may stay in freeze mode, conserving cash rather than aiming

for growth as CAC costs remain high.”

Seed-stage companies are also finding it tough.

Seed funding deals are outpacing Series A deals at a ratio of 3:1. 

This imbalance is creating an investment bottleneck that threatens to become even larger as seed-stage companies sacrifice growth — a key metric for series A investors — for the sake of runway, the report found.

One good sign, however, is that valuations and deal sizes are recovering across the board, with median Series B valuation increasing 20% year over year. 

Of course, that is still being mostly carried by the AI craze as factors driving the recovery include investor enthusiasm for AI companies, strong public market performance, and top-tier companies coming back to the market to raise, according to the report.

For many companies, cutting back and extending the runway would be better than taking a down round. 

In many cases, raising a down round can dilute ownership percentages, have a damaging effect on employee morale and damage overall confidence in a company from the wider market. 

But Matt Nugent, a partner at L Catterton, said that “the healthy thing to do might be to just accept a down round with a standard, clean security that assures greater go-forward alignment between investors and management. I’d hypothesize that over the long term that would increase liquidity in the market and result in better outcomes for a greater number of stakeholders.”

Marc Cadieux, president of Silicon Valley Bank, also noted in the report that recovery should “hasten in the back half of the year.”

“With anticipated cuts in interest rates and increased political clarity after the US election season. Those changes may grease the flywheel of innovation — helping to support IPO markets, return capital to distribution-starved LPs, and spur fundraisings and investment,” he said.

A return for the initial public offering would be huge.

According to the report, just five US VC-backed Tech IPOs have dared to venture into public markets this year. 

Performance has been mixed with only one (Reddit) trading up since its IPO. 

The lackluster performance of 2024 IPOs, continued high interest rates, and an impending election are likely to put a damper on the back half of the year, though a few may exit between November and December, the report found.

Here on the Central Coast, only one big series round raise has carried the mantle, with Latigo Biotherapeutics emerging from stealth with $135 million in Series A financing.

Outside of that, the venture capital market has been very quiet.

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