Navigating the Turbulent VC Waters: H1 2023 Insights and The Rise of Secondary Markets
― By Luke Carroll & Benoît Turbé
Summary of The Key H1 2023 VC Highlights
🐌 Considerable slowdown in exit activity to a decade-low. IPOs for unprofitable businesses are less favored
🤝 VC dealmaking has slowed to a level not seen in a few years
⏳ VCs are restructuring startups internally and extending runways due to limited funding
💰 Some portfolio company valuations have been reduced but there is still TVPI at risk
🚪 Corporate acquisitions and M&A are the primary exit options, with LBOs declining
📉 Fundraising is subdued; H1 2023 saw €8.9 billion raised in Europe, predicting a 36.7% drop from 2022
👨💼 The focus has shifted from rapid growth to cost management, leading to layoffs and hiring freezes
💸 European VC dealmaking dropped 60.8% in H1 2023 compared to H1 2022
📈 Macroeconomic factors like high-interest rates and tough fundraising conditions have impacted VC market growth
🔄 Public markets are recovering in 2023, hinting at a potential private market recovery
VC Landscape Overview
VC is undergoing significant changes, leaving LPs uncertain about portfolio performance. There’s a growing discrepancy in TVPI valuations, with many firms valued based on cash reserves rather than true worth. Coupled with a stagnant IPO market and reduced investment pace, there’s rising concern about the direction of private markets.
Adding to the growing uncertainties, LPs are requiring many managers to provide DPI before they would be willing to deploy capital in their new vintage. This is both a factor of liquidation expectations but also constraint on the LP part as private investments remain bloated compared to public markets.
However, due to this slower exit environment, GPs are now under pressure to explore alternative liquidity solutions for LPs in the secondary market. This LP pressure, the gap between public and private valuations, and macro uncertainty is presenting unique opportunities to access top performing companies at favorable pricing.
Secondary Market Spotlight
The secondary market is in a state of adjustment, with notable price spreads for certain companies. Our research indicates top-tier firms that even raised in 2022 are trading at roughly a 30% discount to their previous valuations. This showcases a lag in market price adjustments not only 2021 but 2022.
However, there’s a silver lining for GPs and LPs. Companies like Instacart, Klaviyo, and ARM are gearing up for significant IPOs, which could set the tone for market interest in VC-backed entities. Successful IPOs from these giants could trigger a 2024 IPO wave.
Reference Capital on Secondary Market Prospects
The secondary market’s potential is evident. Numerous firms, including Sequoia Capital & Brookfield’s $2 billion fund and Stepstone’s $2.6 billion Fund V, are capitalizing on this. Even funds such as a16z, are also actively securing large secondary positions, finding them more appealing than some primary market opportunities.
As any good Marxian economist would say, “supply and demand will influence the price of a commodity” and VC secondaries are no different. Too much supply in the secondary market may lead to an overcorrection in valuations and may see secondary investors price more optimistically when there is still considerable uncertainty, reducing the risk-reward profile of these secondary opportunities. We anticipate a brief window of opportunity which might close sooner if market conditions improve and IPOs rebound. Recent moves by top IPO contenders reflect this:
💳 Stripe’s private round aims to sidestep volatile public markets, with secondary shares trading around the $50B primary round mark.
🧱 Databricks is negotiating a new funding round at a $43 billion valuation, while secondary trades occurred at $31–33 billion. Source
⧼ Ramp secured $300m at a 28% discount from its last round, valuing it at $5.8B, while secondary trades hovered between $4.9–5.5B. Source
Despite these positive moves, macroeconomic challenges remain. For instance, Adyen’s recent performance dip (source), often used as a benchmark for Stripe, suggests potential overvaluation for recent Stripe trades.
In conclusion, while uncertainties persist, savvy investors can capitalize on current market conditions as seen in the case of Databricks and Ramp. As GP secondaries are on the rise, Reference is leveraging its network to stay active in identifying promising opportunities in the space. For those interested, please let us know and we can keep you updated on our findings.
Read more on the topic ⬇️
Ten Upcoming IPOs To Watch — Forbes
LPs’ demand for liquidity drives VCs to secondary markets — Pitchbook
In case you missed it…
General Technologies 🚀
🔬 Advancements in Embryonic Research
In many countries, human embryo research is restricted to the first 14 days.
Exception: Cambridge scientists are crafting ‘embryoids’ using stem cells for insights on genetic disorders and failed pregnancies.
Challenges: These embryoids blur current legal lines.
Solution: Leading biologists propose a new legal framework: “Human cells evolving in a womb-like environment,” moving away from traditional fertilisation-focused definitions.
🌡️ The LK-99 Superconductor Rollercoaster
In early August, the scientific community was abuzz.
Why? South Korean scientists announced LK-99, a purported room-temperature superconductor.
The catch? Turns out it failed. LK-99 boldly declared that they had achieved the elusive state of superconductivity at room temperature, a feat in stark contrast to prevailing technologies confined to super-low temperatures. History has shown that previous proclamations of comparable scientific breakthroughs have frequently stumbled when subjected to rigorous scrutiny. Read the full rise and fall of Lk-99 here.
🌕 Moon Landing Chronicles: Success & Setback
This week witnessed a cosmic ballet — two giants aimed for the moon with contrasting outcomes.
🇮🇳 India’s Chandrayaan 3 gracefully touched down, notably near the lunar south pole. India now proudly stands as the 4th nation to achieve this lunar feat, following USSR, US & China. Mission objective? Delve into lunar soil & scout for water ice.
🇷🇺 Russia’s Luna-25 on the other side faced an unfortunate twist, crashing on August 20th during its landing attempt.
Sustainability 🌍
🌲 Carbon Offsets Controversy: Unveiling Real Impact
Britain’s watchdog overseeing corporate marketing raises concerns.
What? According to a Science Journal, a large portion of the 89 million carbon offsets, rooted in forest preservation, don’t result in true emission reductions.
So what? The credits bought by companies including Eni SpA, TotalEnergies SA, British Airways Plc, and Nespresso are valueless.
Reaction:
✈️ British Airways charts a path to net-zero emissions by 2050, strengthening its pledge with sustainable aviation fuel investments.
☕️ Nestle Nespresso realigns its strategy, moving beyond carbon offsets. Their aim? Reach net-zero by reducing emissions and applying carbon removal measures across the board.
💨 Asia-Pacific Rises as Global Leader in 2022 Offshore Wind Market, Outpacing Europe
According to the Financial Times
What?
🌍 Europe held 47% of the global capacity.
🌏 Asia-Pacific, predominantly driven by China, clinched the lead with 53%. China’s massive contribution stood at 49% alone.
Why this shift? According to the Global Wind Energy Council:
⬆️ Rising operational costs
📦 Supply chain disruptions
📉 Post-pandemic high interest rates
🌍 Geopolitical events, notably the Russia
Looking ahead?
🇪🇺 Europe’s projected offshore wind capacity for 2023–2027 is now 34.9GW (a downward revision).
🌏 Asia-Pacific is set to soar with a forecast of 76.1GW, where China’s staggering contribution is 84%.
The bigger picture looms:
🎯 For us to hit net-zero targets, a whopping 2,000 GW by 2050 is needed.
Blockchain & Crypto 💸
📈 Market Update:
👨⚖️ From the regulatory side:
- Grayscale triumph: The SEC was defeated by Grayscale in court, paving the way for the potential launch of the first Bitcoin ETF
- Singapore’s MAS unveils comprehensive stablecoin regulation
- US Federal Reserve introduces stablecoin guidelines for bank members
⭐️ From some of the key innovators:
- Coinbase launched their own permissionless Layer 2 called Base
- Sei, Layer-1 Blockchain optimised for trading launched their mainnet beta
- Microsoft teams up with Aptos Labs to bridge financial firms with Web3 ecosystem
- Worldcoin started trading… and already faces investigations
- PayPal just launched their own dollar-backed stablecoin PYUSD
📈 From the crypto exchanges:
- Binance has been granted its first full crypto exchange license by El Salvador
- Revolut suspends crypto services in the US over regulatory uncertainty
- Nomura’s crypto division obtains operating license approval in Dubai
- FTX sets sights on rebooting its global crypto exchange operations
🔎 Research:
⛓️ Exploring the pros and cons of modularity versus integration in crypto with Kyle Samani (Multicoin)
Spotlight on the complexities of modular systems and advocation for integrated systems for a better developer and user experience. Find out more here.
🛍️ Deep dive into the transformation of brand-consumer dynamics in the web3 domain by Karen Shen (Collab+Currency)
How leading corporations utilize blockchain to cultivate richer interactions and community involvement. Click here to know more.
🎙️ Podcasts:
🎧 Why VCs suck — Bankless
🎧 Comeback on Curve’s hack — Bankless
🎧 Meet Hootie (Hash3) & Evan (Portal VC) — Two emerging figures among solo-GP investors focused on seed-stage crypto projects.
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