Fed Delivers Third Rate Cut ✂️💵📈

Week of December 23rd, 2024

Welcome to AI8’s weekly newsletter, your ultimate source for curated insights and updates from the dynamic world of venture capital!

We’ve scoured the vast landscape of the web to bring you a comprehensive roundup of the industry’s top news articles, all in one convenient place. We keep you ahead of the game and in the know about all things related to the vibrant world of investments

🦄 STARTUPS

ROUNDS AND UNICORNS

Interesting Startup Deals You May Have Missed In 2024 (5 minute read)

As the year winds down, it's a good time to reflect on the lesser-known but intriguing startup funding deals that often go under the radar. Many of these deals are driven by innovative technologies rather than big names or large sums of money

1. Elicit Plant (Agriculture/Climate Tech): raised $48 million to develop phytosterol-based solutions that help crops better withstand climate change, reducing water consumption by 20% and increasing yields by 10%
2. CharacterX (AI/Social Networking): secured $2.8 million to build a Web3 AI social network, enhancing human-AI interactions through multimodal AI, including 3D modeling, with over 500,000 users
3. Carbon Robotics (Agriculture/AI): raised $70 million for its AI-powered LaserWeeder, which uses CO₂ lasers to eliminate weeds with millimeter accuracy, reducing weed control costs by 80% and increasing crop yield
4. CorPower Ocean (Clean Energy): raised $35 million to commercialize wave power technology, addressing storm survivability and efficient power generation, with successful trials in Portugal
5. Amulet (Health/Tech): raised $5.8 million to create portable allergen-detection devices, offering peace of mind for those with food allergies

INDUSTRY

Digital Banking Startups Are Hot Again (4 minute read)

After several slow quarters, digital banking startups have seen a notable increase in funding, with nearly $1.2 billion raised in the past three months. Key recipients include One, which raised $300 million at a $2.5 billion valuation, led by Walmart and Ribbit Capital. This uptick in funding coincides with expectations for a fintech IPO resurgence in 2025, with high-profile companies like Chime, Klarna, and Stripe preparing for public offerings

• Public markets are showing more receptiveness to fintech newcomers, as evidenced by strong recoveries in stock prices for companies like Affirm, SoFi, Coinbase, and Robinhood
• Despite some recent market volatility, the outlook for digital banking and fintech startups appears more optimistic, particularly for those who managed to navigate the previous funding slowdown

Funds-of-funds swallow their worst year in fundraising in a decade and a half (4 minute read)

Private market funds-of-funds are on track to have the lowest capital raised in 16 years in 2024, facing a significant decline in investor interest. Capital raised by funds-of-funds dropped 44.5% over the past year, a sharp contrast to other private equity strategies, such as private equity (down 10.8%) and venture capital (down 2.4%). This decline is partly due to longer holding periods by general partners (GPs), which reduced available capital for limited partners (LPs) to invest in new funds

• The traditional value proposition of funds-of-funds—diversification and downside risk protection—has been challenged by the rise of evergreen and semi-liquid vehicles, which offer similar diversification benefits without locking up capital for extended periods
• The declining need for funds-of-funds from top PE and VC funds is also attributed to investors now having more resources to evaluate fund managers, weakening the product’s appeal

2025 US Venture Capital Outlook (20 minute read)

In 2025, fundraising activity in the U.S. venture capital market will continue to be constrained by historically low distribution rates and limited LP liquidity. Distribution yields have been at record lows, resembling levels seen during the Global Financial Crisis. This has led to longer intervals between fundraising cycles, especially for smaller and mid-sized funds, which LP liquidity challenges have most impacted. So far, only 77 first-time funds have been raised in 2024, a sharp decline compared to 215 in 2023

• However, larger and more established venture managers have managed to secure capital, though typically at reduced fund sizes
• The anticipated recovery in exit activity in 2025, driven by improved M&A volumes and a thawing IPO market, is expected to unlock LP liquidity and create momentum for new fundraising cycles
• Fundraising projections for 2025 suggest a base-case estimate of around $90 billion in capital raised
• Downside scenarios predict $70 billion, while more optimistic projections anticipate $110 billion, depending on how quickly market conditions improve

5 Trends In Tech And Startups We’re Watching In 2025, From An M&A Rebound To A Defense Tech Boom (5 minute read)

As we look ahead to 2025, several key trends are expected to shape the startup and tech landscape. These trends reflect both optimism and challenges, offering insights into how sectors like M&A, IPOs, AI, blockchain, and defense tech may evolve in the coming year. Here are the top five trends to watch:

1. M&A Market Rebound: Optimism around the potential for a revival in M&A activity, driven by regulatory changes and a more favorable environment for dealmaking
2. IPO Resurgence: Expectation that the IPO market will pick up in 2025, with companies like Klarna and Cerebras filing for public listings, and increased momentum across sectors like fintech, AI, and SaaS
3. AI and Blockchain Investment: Continued heavy funding for AI companies, with an emerging focus on the intersection of AI and blockchain to enhance security, efficiency, and cost-effectiveness in enterprise applications
4. Challenging Job Market: The tech job market will remain tough, particularly in mature startups and tech companies, as they focus on cost control, although generative AI could provide exceptions
5. Boom in Defense Tech: Venture investment in defense tech is expected to grow due to increased government spending and the integration of advanced AI technologies into military systems

🏦 ECONOMIC SNAPSHOT

Key takeaways from the Fed’s third rate cut (5 minute read)

The Federal Reserve cut interest rates by a quarter point, marking its third cut since September, bringing the benchmark rate to a range of 4.25%-4.5%. This decision, aimed at easing pressure on the economy and preserving the labor market —the U.S. economy added over 227,000 jobs in November, surpassing expectations—, was not unanimous, with Cleveland Fed President Beth Hammack dissenting

• The Fed signaled it would likely hold rates steady in the future due to persistent inflation above its 2% target, although economic growth has remained resilient
• The Fed reduced its forecast for rate cuts in 2025, expecting only two, down from four in September, and predicts stronger economic growth, lower unemployment, and higher inflation next year
• Despite positive economic indicators, inflation remains a concern, with the Fed projecting it won’t reach the 2% target until 2027

U.S. economy grows at 3.1% pace in third quarter, an upgrade from previous estimate (5 minute read)

The U.S. economy expanded at a healthy 3.1% annual rate in Q3 2024, an improvement from the 3.0% growth in Q2. This marks eight quarters of growth above 2% in the past nine, signaling resilience despite high interest rates. Consumer spending, which represents about two-thirds of economic activity, grew at 3.7%, up from an earlier estimate of 3.5%, making it the fastest pace since Q1 2023

• Exports surged by 9.6%, while federal government spending increased 8.9%, driven by a 3.9% rise in defense spending
• Business investment showed mixed results, growing only 0.8%, though investment in equipment rose by a significant 10.8%
• Inflation trends were encouraging. The Federal Reserve’s favored PCE inflation index rose by just 1.5% annually, down from 2.5% in Q2

Flash PMI signals US economy ending 2024 on strong note as output surges higher (5 minute read)

The U.S. services economy is experiencing significant growth, with the S&P Global flash PMI showing output expanding at its fastest rate since 2021, driving overall economic growth at an annualized rate of over 3% in December. The S&P Global Flash US PMI Composite Output Index rose from 54.9 in November to 56.6 in December, signaling robust business activity

• Future sentiment also improved, with confidence in the next 12 months reaching its highest level since May 2022, fueled by a more business-friendly administration and a clearer post-election outlook
• However, concerns over tariffs and inflation persist, particularly in manufacturing
• Hiring increased in December, marking the first rise in employment in five months, although increases were modest across both sectors due to caution about payroll expansion

🌱🌎 IMPACT & CLIMATE RESILIENCE

The Rising Force Of Women In Dealmaking (4 minute read)

Women are increasingly shaping the future of dealmaking, driving innovation as entrepreneurs and leaders while transforming industries. In the U.S., women own 12.3 million businesses generating $1.8 trillion in revenue and have played a vital role in post-COVID-19 economic recovery. Despite these achievements, women-led businesses face persistent challenges, receiving only 7% of venture capital funds and encountering biases in loan approvals

• Research shows that companies with women in leadership roles often outperform their male-led counterparts
• Female representation in investment banking, private equity, and corporate finance has risen, enhancing diversity and success in dealmaking

Trump 2.0, Climate Change, and the Energy Transition (4 minute read)

President-elect Donald Trump’s proposed policies could impact climate change efforts and the energy transition. Key actions include withdrawing from the Paris Accords, easing restrictions on fossil fuel extraction, and imposing tariffs that may hinder clean energy investments. While these may benefit fossil fuel companies in the short term, they could delay the transition to a low-carbon economy and conflict with global climate goals

• However, several countervailing forces could mitigate these effects. The Inflation Reduction Act’s funding is largely secure and enjoys bipartisan support for its economic benefits
• Market forces, such as declining costs for renewables and energy storage, continue to drive the transition despite policy uncertainties
• For investors, the energy transition presents both risks—like regulatory changes and physical impacts of climate change—and opportunities in clean energy, electrification, and energy efficiency

🚀 IPO & EXITS

Forecast: 2024 Was Slow For Tech IPOs, But 2025 Could Be Different (5 minute read)

After a slow year for tech IPOs in 2024, there is growing optimism for a pickup in 2025. Key factors driving this optimism include stock markets reaching all-time highs and a renewed focus on high-growth sectors like tech. Companies that were preparing to go public in 2022, but delayed due to market volatility, have now had time to stabilize their valuations and grow their businesses, providing more clarity for potential IPOs

• The IPO window is expected to open wider in 2025, with several sectors—fintech, cyber, AI, and SaaS—likely to see activity
• Notable IPO candidates include Klarna (a buy-now, pay-later provider) and Cerebras Systems (an AI chip company)
• In 2024, nine venture-backed companies went public for over $1 billion, with ServiceTitan's IPO in December marking a notable success

2024 IPO wrapped: Americas and EMEIA recover, Asia-Pacific lags (6 minute read)

The global IPO market in 2024 saw 1,215 deals raising US$121.2 billion, slightly below 2023 levels, with the H2’2024 showing stronger performance, especially in Q4. India led globally in IPO volume, while the US topped IPO proceeds for the first time since 2021. The US stock market reached unprecedented valuation levels, with 55% of US listings being foreign issuers. Cross-border listings increased, with 113 deals compared to 83 in 2023, and the US remained the top destination for IPOs

• China experienced its weakest IPO performance in a decade
• PE and VC-backed companies contributed 46% of global IPO proceeds, with 12 of the 20 mega IPOs being PE-backed, a significant increase from 2023
• Technology, media, telecommunications, industrials, and consumer sectors led IPO activity, making up 60% of deals by both volume and proceeds
• AI companies attracted significant investor interest, with over 600 AI-related public companies and more than 60 currently in the process of registering for IPOs

🗞️ AI8 VENTURES HIGHLIGHT

Trumponomics 2.0

Following President-elect Donald J. Trump’s victory over Kamala Harris, the financial world witnessed an immediate response. In just one week, the S&P 500’s value surged by $1.9 trillion, pushing stocks to record highs. The U.S. dollar strengthened globally and Bitcoin achieved unprecedented highs.

Wall Street is preparing for more government spending, lighter regulation, bigger deficits, and accelerating growth under a Trump administration and a Republican-led Congress.

Biden’s Economic Legacy

The Biden era was marked by headlines of massive layoffs and a cost of living crisis. The average worker faced double-digit increases in food, energy, housing, and other essential expenses that impacted middle-class families the most and consumed the bulk of household budgets. Despite record highs in the stock market, nearly half of Americans believed the nation was in a recession. Is this Biden’s fault? No. Global supply chain disruptions, stimulus checks, the aftermath of COVID-19 lockdowns, and the ripple effects of geopolitical tensions all contributed to soaring prices. Did Americans blame Biden? Election results suggest they did. Two-thirds of voters believed the economy was on the wrong track.

Hence, Trumponomics 2.0.

Trump’s campaign capitalized on promises of economic revival, pledging to deliver low taxes, low regulations, low energy costs, low interest rates, and low inflation -Trumponomics.

Alpha Insights on Trump and AI in Mexico City

What an incredible experience at the NAA International Symposium and Startup Pitching Last week, we hosted our first Alpha Insights event in Mexico City, where we brought together industry experts, investors, and entrepreneurs to discuss the evolving landscape under the new U.S. administration. We dove into how the election of Donald Trump, "Trumponomics," and the transformative role of AI are shaping the future of investments, regulations, markets, taxes, and cross-border opportunities.

Missed the event? We’ve curated the key insights in our Alpha Insights Special Edition: Trumponomics Report. Understand everything VC-related that happened in 2024 and how profit will shift under Trump 2.0

(Trumponomics 2.0 Special Edition starts on page 22)

Read Full Report

Alpha Impact 8 Ventures is thrilled to share our latest insights into the dynamic world of investments with our 2024 Venture Capital Report.

Last year, Michael Burry, the legendary fund manager who famously profited from shorting the US housing market in 2008, bet more than $1.6 billion on a Wall Street crash by shorting the S&P 500 and Nasdaq-100. Nothing happened.

This year, Warren Buffett’s cash reserves reached a record $276.9 billion as Berkshire Hathaway trimmed its stock holdings in Apple. Some view it as a routine adjustment, while others speculate that Buffett perceives an overheated, overvalued market.

Everyone talks about a soft landing, but warning signs are flashing and the world seems to be teetering on a delicate balance. Is there something we’re missing? Is there an unseen factor at play?

Read Full Report

If you have any comments or feedback, just shoot an email @unicorn@alphaimpact8.com!

Happy reading,

AI8 Ventures’ Research & Investment Team