It was a pleasure to host “Build with Nixon Peabody” a lively and informative panel discussion about the outlook for the startup and venture capital ecosystem in 2024. The event featured speakers from Carta (Peter Walker), BCP Ventures (Roger Lang), 500 Global (Clayton Bryan), Inspiration Ventures (Gady Nemirowsky), and Woodside Capital (Chris Abato). The panelists shared their insights about the trends, challenges, and opportunities for founders and investors in the current market, which can be summarized as a “tale of two cities.”
On the one hand, San Francisco remains a strong hub for innovation and entrepreneurship, especially in the AI sector, attracting significant capital and talent. On the other hand, many startups face limited funding prosespects and increased valution pressure, competition, and, in certain cases, regulatory scrutiny, which is causing a greater percentage than “normal” of company failures, down rounds, and bridge rounds (and in many cases the investors are asking very tough questions about where the bridge rounds lead to, with greater concern about these bridge rounds “leading to nowhere.”)
As the leader of Nixon Peabody’s West Coast Emerging Companies and Venture Capital Team, I advise founders and investors about navigating these complex and dynamic market conditions. Here are some of the key takeaways from the panel discussion that I think are relevant for anyone in the startup and VC world.
- Pre-seed funding is mostly done through SAFEs, and in many cases, with side letters granting additional rights to investors. Founders should be aware of the implications of these terms, and in particular the “stacking” of different SAFE rounds and how they might affect their future fundraising and exit options.
- The median time between Series A and B rounds is at its longest period, which means founders have to be more prudent with their capital and focus on product-market fit and revenue generation. Investors are looking for clear evidence of traction, scalability, differentiation in the market, and a realistic path to profitability or exit.
- Down rounds are coming, and startup failure has increased, but this also creates opportunities for new startups to emerge from the talent pool and for existing startups to gain market share and customer loyalty. Founders should be prepared to adjust their expectations and strategies accordingly, and investors should be ready to support their portfolio companies and identify new opportunities in the market.
- Regulatory oversight is a growing issue, especially with CFIUS affecting exits and valuations for startups with foreign investors. Founders and investors should know the potential risks and compliance requirements involved in cross-border transactions and seek legal counsel when necessary.
- M&A activity is expected to increase as strategic acquirers look to buy technology and innovation from startups, rather than invest internally. Founders should build value and consider increasingly focusing on financial metrics (revenue, EBITDA, etc.)
- IPOs are still rare and challenging, and topline revenue is not enough to impress the public markets. Founders and investors should be realistic about the probability and timing of an IPO, and consider alternative exit options, such as SPACs, direct listings, or secondary sales.
These are some of the main themes that emerged from the panel discussion, but there was much more to learn and share. We appreciated having our panelists and the attendees for their participation and engagement and look forward to our next event.