Inflation, Rates, and Debt 📉💸

Week of October 21st, 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

The Week’s Biggest Funding Rounds: X-energy And Lightmatter Lead The Way (5 minute read)

1. X-energy (energy): The Maryland-based nuclear startup raised $500 million in a Series C-1 round, led by Amazon. X-energy focuses on developing advanced small modular nuclear
2. Lightmatter (data centers): the startup uses light for chip connections and AI calculations. It secured $400 million in a Series D round led by T. Rowe Price, valuing the company at $4.4 billion
3. Splitero (fintech): Based in San Diego, Splitero raised $300 million from Antarctica Capital. The fintech company offers homeowners a lump sum of cash in exchange for a share of their home's future value, aiming to simplify access to home equity
4. Terray Therapeutics (biotech): The Los Angeles startup raised $120 million in a Series B round led by Bedford Ridge Capital and NVentures. Terray focuses on developing small-molecule drug therapeutics
5. Path Robotics (robotics): This Ohio-based robotics company raised $100 million in investments, led by Drive Capital and Matter Venture Partners. Path Robotics uses AI in robotic welding systems for manufacturing and has two products on the market

INDUSTRY

VCs are rewriting the opportunity fund playbook—or scrapping it entirely (4 minute read)

The demand for venture capital opportunity funds is shifting as investors see many of their top portfolio companies as overvalued and overcapitalized, with no clear path to an IPO. Traditionally, GPs ran opportunity funds to provide additional capital to standout companies nearing profitability or an IPO, but this strategy has lost appeal due to the IPO slowdown

• VCs are now scaling back or repurposing their opportunity funds
• In 2021, at least 120 opportunity funds were raised, amounting to $12.1 billion, but by 2023, this has dropped significantly, with only $3.4 billion raised—less than a third of the 2021 total
• In contrast, sectors like generative AI are still ripe for opportunity-style investments, as large language models require substantial capital

Ten Years of AI Venture Capital Deals and Exits (5 minute read)

Over the past decade, AI startups have raised over $650 billion in global venture capital. While average deal values grew significantly from 2013 to 2021, they have seen a decline in recent years, with a slight increase in 2023. Average exit values have also dropped

• Returns for AI venture capital over six-year holding periods vary widely, with the most substantial return of 7,140% for investments from 2013–2019
• As a result of recent drops, AI venture capital firms are likely to become more selective, focusing on high-quality investments with clear use cases and scalable monetization strategies
• In early 2024 AI investments accounted for over 60% of growth in U.S. venture-backed valuations

Generative AI startups get 40% of all VC investment in cloud amid ChatGPT buzz (5 minute read)

Generative AI startups are receiving 40% of all venture capital funding for cloud companies. In 2023, venture funding for cloud startups in the U.S., Europe, and Israel is projected to reach $79.2 billion, marking a 27% annual growth and the first increase in three years. This is a 65% rise from $47.9 billion raised four years ago

• OpenAI raised $6.6 billion recently, pushing its valuation to $157 billion
• Two-thirds of funding for generative AI startups globally is concentrated among the top six companies, with OpenAI leading at $18.9 billion raised in 2023-24
• Overall, the U.S. leads in generative AI investment, with 80% of the $56 billion raised globally in 2023-24 going to U.S. firms

INDUSTRY WORLDWIDE

Startup Funding Downturn Continues Despite AI’s Ascent (10 minute read)

In Q3 2024, global venture investment continued its prolonged slump, with declines across all major regions except Latin America, which saw a modest uptick. Overall, venture funding fell 16% quarter over quarter to $66.5 billion, primarily driven by a sharp decrease in large late-stage deals. Despite this downturn, AI remains a dominant force, securing $19 billion in funding, accounting for 28% of total venture dollars

• North America saw a 10% drop in funding, although late-stage investments grew
• In Asia, venture funding hit a 10-year low, with a 44% year-over-year drop, and Europe’s startup investment reached a multiyear low, falling 39% YoY
• Other sectors, such as cybersecurity, experienced dramatic declines, with cyber funding plummeting 51% QoQ

EU joins up with venture capital firms to boost region's tech sector (3 minute read)

The European Union launched the "Trusted Investors Network" to increase tech investment, partnering with 71 venture capital firms managing over €90 billion ($97.6 billion). This initiative aims to strengthen Europe’s deep-tech sector and address concerns that the region is lagging behind the U.S. and China

• The project aligns with a report by Mario Draghi, calling for larger and quicker investments to boost Europe's economic competitiveness
• EU Commissioner Iliana Ivanova highlighted the urgency for bold actions, as recent AI deals have pushed U.S. venture capital to a two-year high

🏦 ECONOMIC SNAPSHOT

America's new 'economic supercycle' (6 minute read)

The U.S. economy is transitioning from a 15-year "supercycle" of weak demand and near-zero interest rates into a new phase characterized by higher growth, inflation, and geopolitical instability. From 2022 to 2024, the Federal Reserve raised interest rates from 0.5% to 5.5%, reshaping investment patterns and making borrowing more expensive while rewarding savers. This shift signals the end of an era where GDP growth rarely exceeded 3% and inflation stayed under 3.9%, despite risk-taking fueled by cheap debt

• The new supercycle will see higher rates forcing businesses to make more thoughtful financial decisions, while inflationary pressures, driven by economic and geopolitical volatility, will alter supply chains and spur industrial policy focused on national security
• Geopolitically, the U.S. is expected to outperform as it attracts more foreign investment
• In Q2’2024, foreign investors increased their holdings of U.S. Treasury bonds by 7.3% to $8.2 trillion and boosted investments in U.S. corporate bonds and equities by 9.8% and 23%, respectively

US Interest Burden Hits 28-Year High, Escalating Political Risk (7 minute read)

The U.S. debt interest costs reached a staggering $882 billion in the fiscal year 2024, the highest since the 1990s, reflecting 3.06% of GDP. This spike is driven by massive budget deficits from rising Social Security, Medicare, and COVID-related spending, compounded by inflation-fueled interest rate increases. The burden of debt servicing now surpasses defense spending and could limit future policy flexibility for the next administration

• Even if interest rates fall, the Treasury faces sustained pressure, as low-interest debt matures and is replaced with costlier bonds
• U.S. debt has surged to $27.7 trillion, near 100% of GDP, and this fiscal strain threatens future reforms
• The debt issue is politically significant, affecting future tax and spending policies, as seen during President Biden’s term

A key source of America’s economic power strengthened last month (3 minute read)

US retail sales rose 0.4% in September, significantly stronger than August’s 0.1% increase. Gains were led by specialty stores (+4%), while gas station sales fell 1.6% due to lower gas prices. Excluding gas, retail spending jumped 0.6%. Electronics and appliances saw the biggest decline, falling 3.3%

• Consumer spending, which accounts for 70% of the US economy, remains strong despite inflation and elevated interest rates
• Unemployment benefit applications fell by 19,000, the largest weekly decline since June 2023, reinforcing the strength of the job market
• With the Federal Reserve having cut interest rates by 0.5% last month, there is doubt over whether additional cuts will come next in the upcoming policy meeting on November 6-7

Nvidia shares hit record high, poised to surpass Apple in market valuation (4 minute read)

Nvidia's shares hit a record high of $138.07 last week, bringing its market value to $3.39 trillion and positioning it close to surpassing Apple as the world's most valuable company, which stands at $3.52 trillion. Nvidia's stock rose 2.4% amid strong demand for its AI processors, benefiting from competition among tech giants like Alphabet, Microsoft, and Amazon in the growing AI sector

• Nvidia's rise positively impacted the S&P 500, which closed up 0.8% at a record high
• Together with Apple and Microsoft, these three companies account for about 20% of the S&P 500’s weighting
• Despite its strong performance, Nvidia faced a significant setback in September, with a 9.5% stock drop erasing $279 billion in market value following a disappointing quarterly outlook

🌱🌎 Impact & Climate Resilience

Why It’s Harder for Women Founders to Get Venture Capital Funding (3 minute read)

Research by Yale SOM’s Heather Tookes explores how gender bias affects venture capital funding for repeat entrepreneurs. Women comprise only 16% of first-time VC-backed founders, 9% of second-time founders, and just 4% of third-time founders. While failures of women-led firms reduce future investment, successes don’t increase the likelihood of investing in women

• Women-led startups show no worse outcomes in terms of exits, suggesting that the funding gap is not due to business quality
• After a startup failure, women are 30% less likely to raise VC for a second venture compared to men, and 18% less likely after a success
• In general, VCs tend to give 14% less funding to women founders

🚀 IPO & Exits

Enterprise SaaS M&A Quarterly Update (20 minute read)

Enterprise SaaS M&A through Q2 2024 experienced a notable rebound in deal counts, though valuations remain restrained. VC-backed firms led the charge in the M&A space, representing 62.2% of all transactions with an average deal size of $113.3 million, amounting to $17.7 billion in total value. This is a significant increase compared to the historical average of 38% of transactions being VC-backed from 2018-2024. The increase is attributed to a backlog of exits, as companies have delayed sales during a period of high interest rates and low valuations

• Corporate M&A witnessed a recovery, with 85 deals, projected to rise to 111 as additional disclosures are made
• ERP and CRM software companies have dominated the M&A landscape in 2024, with ERP accounting for 50% of total deal value and 38.2% of deal count
• This focus on profitability and sales growth has been consistent across fundraising and M&A in recent quarters, signaling a shift in the enterprise SaaS market toward more financially disciplined strategies

🗞️ AI8 VENTURES HIGHLIGHTS

Alpha Showcase 2024: Thank you Mexico City!

What an incredible experience at the NAA International Symposium and Startup Pitching Competition!

On September 25th, we hosted the Startup Pitching Competition for the NAA’s first-ever International Symposium in Mexico City. The event featured four exceptional early-stage startups, each selected through a rigorous process, showcasing their energy and innovative ideas to an audience of over 100 allocators and industry leaders.

A huge shoutout to Yoel Gavlovski and the entire Quash team, congratulations on your well-deserved victory! The competition was fierce, and every participant truly brought their A-game to the pitches. Thank you all for making this such a memorable event!

About the NAA: Founded in 1999, the New America Alliance is dedicated to advancing the economic development of the American Latino community. We believe that Latino business leaders have a special responsibility to lead the way in building the forms of capital crucial to Latino progress – economic, political, human, and philanthropic. Through coordinated philanthropy and strategic public and private collaboration, we aim to drive investment in our community.

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

Beyond Survival: Opportunities in Climate Change.

It all started in 2010 after a great conference with Mr. Al Gore. I was in Mexico City attending an event where Mr. Gore presented what the climate would look like if we did not act quickly and reduce our carbon emissions. That day, Mr. Gore’s team made his “models” available for everyone to study and play with. He told me that the largest desert in the world would be what used to be Mexico, California, Nevada, Arizona, New Mexico, and Texas, all the way to the State of Mexico. He didn’t know if Mexico City would be a part of it because of its altitude. That day, we walked several miles to our dinner because of the bad news.

Take a look at the complete blog post of our managing partner, Carlos Ochoa, on 8 Wealth Creation Essentials.

Introducing: Climate Resilience Technology

Alpha Impact 8 Ventures is pleased to announce that we are adding a third investment vertical to our thesis: Climate Resilience Technology.

Climate Resilience Technology encompasses digital solutions designed to help communities, businesses, and ecosystems adapt to and recover from the impacts of climate change. We're looking for scalable technologies addressing existing problems caused by climate change.

Our focus areas include:

• AgFinancing: Integrating advanced technologies and tailored financing solutions to improve access to capital for agricultural growth and trade, enhance food security, boost productivity, predict disruptions, and optimize logistics.
• Water Management Systems: Utilizing advanced technologies and financing solutions to address water scarcity and inefficient water use exacerbated by climate change.
• Energy Management and Optimization: Implementing advanced technologies and financing solutions to tackle increased energy demand and grid instability due to extreme weather conditions. This includes smart grids, microgrids, energy management software, and demand response systems that optimize energy use, integrate renewable energy sources, and enhance grid resilience.
• Data, Analytics, and Predictions: Companies that utilize data and advanced analytics to predict and mitigate disruptions and climate-related events. These solutions provide crucial insights and foresight, helping communities and businesses to prepare and respond effectively to climate challenges. Advanced technologies and artificial Intelligence to enhance supply chain visibility, predict disruptions, and optimize logistics ensure continuity and efficiency.

Alpha Impact 8 Ventures is disrupting the industry, generating wealth, creating technology, providing access, leveling the play field, reducing systemic barriers, and building a resilient world.

Become part of the our revolution.

If you have any comments or feedback, just shoot an email!

Happy reading,

AI8 Ventures’ Research & Investment Team