Valuations vs Market Behavior 📊📉📈

Week of November 25th, 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: xAI And Anthropic Headline Big Week For AI (Again) (5 minute read)

1. xAI (artificial intelligence): Generative AI startup xAI raised $5 billion at a $50 billion valuation. This positions xAI as the second-most-valuable generative AI company globally, trailing only OpenAI
2. Anthropic (artificial intelligence): Amazon invested an additional $4 billion in Anthropic, the developer of AI assistant Claude, bringing its total investment to $8 billion. Anthropic has partnered with AWS as its primary cloud provider, utilizing AWS Trainium and Inferentia chip
3. LogicMonitor (IT management): IT observability provider LogicMonitor raised $800 million in equity and debt, led by PSG Equity and Golub Capital. The company is now valued at $2.4 billion
4. Cyera (cybersecurity): AI-powered cybersecurity startup Cyera secured a $300 million Series D, doubling its valuation to $3 billion. Led by Accel and Sapphire Ventures, this brings Cyera’s total funding to $760 million since its 2021 founding
5. Kong (enterprise software): Cloud API technology provider Kong raised $175 million in a Series E round led by Tiger Global and Balderton Capital, valuing the company at $2 billion. This funding reflects growing demand for API solutions driven by AI business applications

Yes, stocks are crazy expensive right now. These charts show just how extreme valuations have become (5 minute read)

U.S. large-cap stocks are currently valued at elevated levels, with metrics like the CAPE ratio, price-to-sales ratio, and forward price-to-earnings ratio showing that valuations haven’t been this high since 2021, approaching dot-com bubble territory. For instance, the S&P 500's CAPE ratio reached 38.11 in November, its highest since late 2021, and the forward price-to-sales ratio hit 2.98, nearing the 2000 peak. The Buffett Indicator, which compares stock market capitalization to GDP, also reflects a historically high level of stock valuation

• Despite these high valuations, strategists caution that expensive stocks can still rise further, as valuations don’t always predict market behavior
• However, some analysts argue that current valuations might be justified due to factors like the technology boom, wider profit margins, and stable earnings growth of major companies like Microsoft, Apple, and Nvidia
• While stocks appear expensive, smaller-cap stocks and certain sectors like healthcare and real estate still present potentially better value

INDUSTRY

Among Biggest Startup Funding States, California Gains While Massachusetts Declines (4 minute read)

U.S. venture funding has risen in 2024, driven by a generative AI boom centered in Northern California, where startups like OpenAI, xAI, and Anthropic raised over $15 billion collectively. California saw the largest funding growth. In contrast, Massachusetts funding dropped 23%, totaling $10.7 billion, with notable rounds like Form Energy’s $405 million and Kailera Therapeutics’ $400 million

• Texas also saw a decline, with $4.8 billion raised compared to $6.2 billion in 2023, despite deals like Fervo Energy’s $244 million and NinjaOne’s $232 million
• New York funding edged higher, helped by Wiz’s $1 billion round, while Florida and North Carolina remained relatively flat
• Silicon Valley maintains its dominance, reflecting its unmatched deep-tech talent, capital resources, and universities, which continue to attract the majority of venture capital

How Federal Programs Effect Venture Capital Investment In Tech (5 minute read)

The U.S. government has significant potential to drive innovation in technologies critical to national interests, but its current approach is not fully optimized to attract private venture capital. While there are promising federal programs, such as those from the Defense Advanced Research Projects Agency and the National Science Foundation, these could do more to engage private investors

• Government personnel systems and the lack of business development expertise among researchers hinder the transition from research to startups
• Programs like the National Science Foundation’s Innovation Corps and pilot collaborations with external investment partners are making progress in overcoming these barriers
• Government contracts can be a powerful catalyst for innovation, as seen with historical examples like NASA’s support for semiconductors and the early contracts awarded to SpaceX
• To address these challenges, the government has launched initiatives like the Advanced Research Projects Agency-Energy and the Small Business Innovation Research program. However, many venture firms undervalue these efforts due to low commercialization rates

Five Critical Venture Capital Trends To Watch In 2025 (5 minute read)

The venture capital landscape in 2024 saw a 15% decline in overall investment, but several key trends are shaping the market for 2025:

1. Mega-Deals and Unicorn Surge: The number of unicorns has skyrocketed from about 142 in 2015 to over 1,200 in May 2024. Mega-deals involving these companies are rising, with some reaching hectocorn status (valued over $100 billion), like ByteDance
2. Strong Investment in AI: In Q3 2024, AI startups attracted $18.9 billion, or 28% of global venture funding, reflecting its continued importance for growth and innovation
3. Zombie Venture Firms: The number of unique venture capital investors in the U.S. dropped from 15,300 in 2023 to around 11,400 in 2024, indicating a significant decline in active participation in the market. Zombie VCs are entities that are operational but unable to make new investments or grow
4. Generative AI Maturation: AI is evolving from quick responses to more deliberate, reasoning-based systems, opening opportunities in sectors like law, medicine, and software development
5. Democratization of Venture Assets: Equity crowdfunding is gaining momentum, with significant growth forecasted, democratizing access to capital and broadening investor participation

Nvidia-backed AI chipmaker Enfabrica raises $115M Series C (4 minute read)

Enfabrica, an AI chipmaker focused on creating semiconductors for data centers, has raised $115 million in a Series C funding round led by Spark Capital, with participation from existing investors like Sutter Hill Ventures and Valor Equity. This brings the company's total funding to $263 million. Enfabrica, which emerged from stealth in September 2023, specializes in chips for the large-scale computing demands of generative AI, particularly data centers that host AI models and GPUs in the cloud

• Investor interest in AI and ML semiconductor startups is rising sharply, with funding increasing 145% in Q3 2023, reaching $2.7 billion
• This trend reflects the growing demand for new solutions beyond Nvidia’s popular GPUs, as startups innovate in areas like light-based processing and silicon wafer design
• Other companies, such as Lightmatter and Halo Industries, are also securing large investments to develop next-gen AI hardware, while AI chipmaker Cerebras has filed for an IPO

🏦 ECONOMIC SNAPSHOT

Fed December Interest Rate Decision Hangs On Economic Data (4 minute read)

The Federal Open Market Committee (FOMC) will announce its interest rate decision on December 18, with a slight market expectation of a rate cut. The FOMC aims to lower rates gradually, guided by economic data, with projections from September suggesting rates may remain near the current 4.5% to 4.75% through 2024. Chair Jerome Powell emphasized that inflation is nearing the Fed's 2% goal but requires further efforts, warning against adjusting policy too quickly or too slowly

• October’s CPI showed annual inflation rising slightly to 2.6%, reflecting persistent challenges in achieving the 2% target
• Housing costs, which account for 37% of the CPI, remain a significant factor, with slower-than-expected declines in shelter costs, despite falling rents and rising home prices
• The likelihood of a December rate cut hinges on upcoming data, including the November CPI and jobs report
• While markets anticipate lower rates, the pace of easing remains uncertain, influenced by inflation trends, labor market resilience, and housing dynamics

Trump and Fed Chair Powell could be set on a collision course over interest rates (5 minute read)

President-elect Donald Trump and Federal Reserve Chair Jerome Powell may face policy conflicts in 2025, particularly if inflation rises and the Fed slows its interest rate cuts. Trump, known for criticizing Powell during his first term for not easing policy enough, is likely to advocate for faster rate reductions, potentially clashing with the Fed’s commitment to independence

• Trump’s proposed fiscal policies, including tariffs, tax cuts, and increased spending, could create inflationary pressures, prompting the Fed to adopt a cautious monetary approach
• Analysts warn this could lead to political tensions between the White House and the Fed, particularly as the Fed seeks a "neutral" interest rate while Trump’s policies push for growth-oriented measures
• Despite potential conflicts, Powell's term ends in early 2026, which might lead Trump to await his replacement. Additionally, economic impacts of Trump’s policies may take time to manifest, reducing immediate pressure on the Fed in 2025

The U.S. economic year ahead: Regime change, growth and rising interest rates (10 minute read)

The U.S. economy is undergoing a structural transformation characterized by higher interest rates, industrial policy shifts, and increased foreign capital, ushering in an era of faster growth, low unemployment, and elevated inflation. Forecasts for 2024 predict a GDP growth of 2.5%, supported by household spending and expansionary fiscal policies, with a 55% probability assigned to this baseline scenario. Inflation is expected to stabilize around 2.2%, enabling the Federal Reserve to gradually reduce rates to 3.5% by year-end

• However, risks such as overheating, tariff wars, or restrictive immigration policies could disrupt this outlook, potentially triggering wage inflation or slower rate cuts
• Housing affordability remains a challenge due to higher mortgage rates and insufficient supply, with the market short by approximately 3.8 million homes
• This imbalance, exacerbated by fiscal expansion and limited new construction, keeps upward pressure on prices
• A shift toward a more resilient, less financialized economy emphasizes domestic industrial production, reshoring, and reduced reliance on global supply chains, creating a robust yet more expensive operating environment

10-year Treasury yield slips as investors weigh state of U.S. economy (5 minute read)

The 10-year Treasury yield dipped to 4.412%, down 2 basis points, while the 2-year Treasury yield rose slightly to 4.377%, as investors digested mixed economic data and Federal Reserve signals. Treasury yields generally moved lower, with the 30-year yield seeing the largest drop, down 5.9 basis points to 4.536%

• Economic indicators painted a mixed picture: PMI surveys showed improvement, while the University of Michigan’s consumer sentiment gauge fell short of expectations
• Initial jobless claims declined to 213,000, signaling a steady labor market, but continuing claims rose to 1.908 million, and the Philadelphia Fed's manufacturing index declined to -5.5, indicating regional economic weakness
• Federal Reserve officials, including Austan Goolsbee and Michelle Bowman, suggested rate cuts may continue, though the pace could slow amid concerns that progress in reducing inflation has stalled

🌱🌎 Impact & Climate Resilience

The Cost of Deporting America’s Illegal Immigrants (2 minute read)

Deporting 11 million undocumented immigrants from the U.S. in a one-time operation would cost an estimated $315 billion, covering arrests ($89B), detention ($168B), legal processing ($34B), and deportation ($24B). If phased over 11 years at a rate of 1 million deportations annually, the total cost would escalate to $1 trillion due to higher administrative and operational expenses

• President-elect Trump has proposed declaring a national emergency to execute these deportations
• Beyond fiscal costs, mass deportations could reduce the annual GDP by 4.2% to 6.8%, equating to losses of $1.1 trillion to $1.7 trillion annually, per the American Immigration Council

Despite DEI Pushback, New Report Shows Companies Stay Committed To DEI (5 minute read)

Since 2022, anti-DEI activists have criticized DEI goals, talent programs, and supplier-diversity initiatives, prompting some major companies like John Deere, Lowe's, and Harley Davidson to pivot their DEI strategies. Despite this pushback, corporate support for DEI remains strong

• Teneo’s “The State of Sustainability in 2024: DEI Will Survive” report highlights that 43% of companies still maintain and promote quantitative, time-bound DEI goals, with 80% of these goals unchanged from 2023
• Additionally, 67% of companies have targeted talent programs for diverse talent, and 70% have supplier-diversity programs
• While some companies have adjusted their DEI messaging in response to the current risk environment, such as shifting focus to "inclusion" and "belonging," they continue to prioritize DEI in their actions, with the use of DEI language in sustainability reports remaining high

Latino Wealth Gap Persists Despite Their Growing Role In The U.S. Economy (6 meinute read)

The Latino economic story in the U.S. is marked by both significant contributions and ongoing financial struggles. Latinos play a crucial role in the economy, with their labor force participation accounting for 80% of U.S. growth. Between 2010 and 2022, the Latino labor force grew nearly eight times faster than the non-Latino workforce, and Latinos were responsible for 41% of U.S. real GDP growth since 2019

• The Latino economy, valued at $3.6 trillion, would rank as the world’s fifth-largest economy if it were a separate country
• The wealth gap between Latinos and whites remains stark, with the typical white family being five times wealthier than the typical Latino family
• Latinos have a per capita income of $26,124, significantly lower than whites, and a third of Latino workers earn less than $17 per hour
• A case study of a Latino worker family illustrates how even with a combined household income of $131,000, economic security remains fragile, and one job loss could lead to losing their home

🚀 IPO & Exits

Will Exit Market Open Up For Crypto Startups As Market Surges? (4 minute read)

The crypto market has surged post-election, with optimism over former President Trump's win boosting Bitcoin by 40% to $94,000 and Ether by 25% past $3,000. Stocks of crypto companies like Coinbase and Robinhood have also risen significantly, by 60% and 40%, respectively, potentially revitalizing M&A activity as higher valuations make stock-based acquisitions more attractive

• M&A in crypto has historically been limited, with only 36 deals in 2022
• This year, over two dozen deals have occurred, including Robinhood’s $200 million acquisition of Bitstamp
• Meanwhile, venture funding in the sector has plummeted to $3 billion across 500 deals in 2024, compared to $21.5 billion in 2021
• With dwindling capital, many startups may turn to acquisitions as a survival strategy, positioning the current moment as a potential catalyst for crypto M&A growth

🗞️ 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 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.

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

Happy reading,

AI8 Ventures’ Research & Investment Team