VCs Get Creative on Distributions...Private-to-Private Deals in Vogue...Obvious Ventures in the VC Directory
Plus, how non-exclusive licensing can deter antitrust probes
The Main Item
Scarcity of Exits Challenges the Venture Industry
Venture firms’ limited partners are hungry for cash.
But portfolio company exit opportunities have been scarce.
It’s an understated crisis in the venture industry. The best companies don’t need to exit and everyone else can’t figure out how to.
“The traditional VC model is broken, as shown by Stripe doing non-dilutive financings every year. Stripe doesn't need to ever go public. But, LPs need liquidity for this model to work,” Miles Dieffenbach, managing director of investments at Carnegie Mellon, wrote in a post.
Only 15 venture-backed technology companies went public in 2022 and 2023 combined.
Big acquisitions like Visa’s purchase of Plaid and Adobe’s purchase of Figma were derailed by antitrust investigations.
Exits haven’t been that lucrative so far this year, either. According to PitchBook’s latest NVCA venture monitor report, less than $30 billion in exit value–including IPOs and M&A— was generated to send back to LPs in Q2. Results have been mixed for the four biggest tech IPOs of this year—Reddit, Astera Labs, Ibotta, and Rubrik—with only Reddit trading above its debut price today.
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M&A has also been torturously slow, with the shadow of government review hanging over most deals that do take place. This year, about $19.4 billion in M&A value was generated for VC-backed companies by the end of Q2, PitchBook reported, an uptick from the same time frame in 2023 but still the second lowest in a decade. A growing chunk of M&A exits are from earlier stage companies, which don’t exactly promise fund-returning money to their investors.
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If startups aren’t going public and the trillion-dollar market cap hyper scalers are afraid to buy them, what do they do?
Madeline and I have spent the past few days talking to venture capitalists, lawyers, and bankers about the state of venture-backed startups’ M&A options.
Sell to Another Private Company
As private venture-backed companies have gotten larger and larger, private-to-private acquisitions have become more important.
Here are a few notable ones:
Databricks has acquired two companies for over $1 billion – MosaicML and Tabular.
Health startups Athelas and Commure merged to form a $6 billion company.
Orna Therapeutics bought ReNAgade Therapeutics in May.
OpenAI has purchased some small AI companies.
As a private company Uber was famous for these types of deals. Uber sold its China business to Didi and sold its southeast Asia business to Grab.
These acquisitions are still relatively rare but could increase.
“We anticipated a groundswell of private to private M&A which has already begun and will only increase here on out,” one former head of technology banking at a top bank who now works in venture told me.
One key advantage of a private startup buying another private startup is that they can avoid the difficult task of reconsidering what they’re actually worth. As long as the two companies can come to an agreement on their relative value to each other, then a primarily stock deal allows both companies to continue believing in their potentially inflated valuations if they want to.
Look for deals in cybersecurity, health tech, data infrastructure, and other markets where there’s a lot of competition.
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Exceptional Deals Like Wiz
The prospect that Google is going to buy cybersecurity company Wiz for $23 billion has everyone excited. It would be a huge exit for Index and Sequoia which own 11% and at least 10% respectively, according to The Information.
“I think it’s an exception,” said Jai Das, president at Sapphire Ventures. “Wiz has always been an exceptional company even when it started.”
My former banker source mused that despite the eye-popping reported acquisition price, the number was still underwhelming relative to hyper scaler companies like Alphabet, Microsoft, and Amazon’s market capitalizations.
Alphabet is worth $2.2 trillion so the Wiz deal would be about 1% of Alphabet’s market cap. Compare that to Microsoft’s $26.2 billion acquisition of LinkedIn. At the time Microsoft’s market cap was around $360 billion so the deal represented about 7% of Microsoft’s total valuation.
We’re just not getting many of the truly transformational deals that provide major windfalls to investors even at Wiz’s scale.
(Wiz itself had reportedly considered buying other cyber security companies, including Laceworks and SentinelOne.)
Chris Donini, a partner at the investment bank Raine Group, is skeptical we’ll see a big pickup in M&A activity this year.
“For the rest of the year you’re not going to see a tremendous amount of M&A, especially large scale M&A. Large scale you’re not going to see unless people have a real comfort that what they're acquiring is regulatory neutral. I think most people will wait until after the election.”
Many 2020 and 2021 vintage unicorns are still coming to terms with the fact that they aren’t worth what they think they are — and all the cash they have in their bank accounts isn’t helping.
“Some of the strongest companies raised an obscene amount of money and raised it at extraordinary valuations and the truth of the matter is that things that typically drive people into M&A are either one, a crisis, or two an opportunity to capture value and economic outcome that people are very excited about,” Donini said. Many unicorns that might otherwise be pressured to sell have “an obscene amount of cash on their balance sheet,” Donini said, and so they have don't have a nearing “negative catalyst” to force a sale.
Non-Acquisition Acquisitions
Microsoft’s deal with AI unicorn Inflection was eyebrow raising. Atreides Management managing partner Gavin Baker posted after the deal was announced: “If the Microsoft/Inflection deal stands, then this is the roadmap for every large tech company to make acquisitions.”
And indeed a few months later, Amazon struck a similar deal with AI unicorn startup Adept.
In those deals, the general structure as we understand it is that the public company hires the top talent at a startup while striking a partnership deal with the startup itself that pays back investors for what they put into the company. And then the startup continues to exist, and could theoretically be a successful business and return more money to investors.
According to antitrust and M&A lawyers at Cooley, a key part of this deal structure is that the license that the public company receives to use the technology from the startup is non-exclusive.
That way, the startup could still hypothetically contract with other partners, even if in reality many of the people that built its products are now gone. “The reason why a non-exclusive license can work is because the talent is often the thing that actually makes the technology work, rather than the license,” says Garth Osterman, a partner at Cooley who specializes in M&A.
A non-exclusive license also means that the deal doesn’t have to be reported to regulatory agencies, said Cooley antitrust partner Kathy O’ Neill, but it’s not a surefire way to avoid an FTC or DOJ investigation. In similar deals, startups are seeking to negotiate contract language that puts the risk of any future scrutiny on the acquirer. (The FTC is investigating Microsoft’s deal with Inflection, along with an inquiry into Microsoft’s investment in OpenAI. The FTC has also reportedly launched an informal inquiry into Amazon’s deal with Adept.)
These types of deals feel unique to foundation model companies. For one, AI talent is so valuable that a contrived acquihire that costs hundreds of millions or more can be justified off the exceptional talent and leadership. Meanwhile on the startup side, the imploding expectations around the value of also-ran foundation model companies mean that investors are content to avoid risking a very plausible zero.
Non-Monopolies & Private Equity
Of course there are valuable public companies that are less afraid of attracting antitrust scrutiny.
In addition to its investment spree, NVIDIA has made several recent acquisitions, including purchasing Run:ai for $700 million and Deci for $300 million.
Private equity firms like Thoma Bravo and Vista Equity Partners buy private technology companies, though they are often more wary of overpaying than strategic acquirers. (In one strike against the private equity appetite to buy startups, Vista wrote off the entire value of its $3.5 billion acquisition of tech learning company Pluralsight in May.)
Limited Partners Selling Their Shares in Private Transactions
This one isn’t M&A. Really it’s a third prong of its own after IPOs and mergers and acquisitions: Private investors selling their shares to other private investors.
We learned this week that Sequoia Capital is allowing its limited partners to sell a portion of their Stripe holdings to Sequoia. The venture capital firm wrote to its investors:
We know that each of you has different goals for liquidity and portfolio management. We are contemplating a transaction where new purchasers, including the Expansion Fund, Sequoia Capital Fund, Sequoia Heritage ("Heritage"), and Sequoia Capital Global Equities ("SCGE"), will commit to buy up to $861 million of Stripe shares held in select Sequoia funds raised between 2009 and 2012 ("Legacy Funds”) at the most recent, July 2024, 403A valuation. We explicitly focused on these Legacy Funds, which were organized over a decade ago, given the normal ten-year life of venture funds.
Sequoia isn’t the only firm trying to facilitate liquidity for long-time limited partners. This has been going on in the private equity industry for some time.
Lightspeed Venture Partners announced hiring Jack Fowler, a former managing director at Goldman Sachs, to lead a private markets practice at Lightspeed. The Financial Times reported that Lightspeed is looking at a $1 billion sale of private positions.
NEA worked with the investment bank Jeffries on a deal to sell a chunk of its startup holdings last year.
These deals worry me somewhat in that they kick the can down the road on having the public markets independently assess the value of a startup. But venture firms don’t have a lot of leverage to force companies like Stripe and Databricks to go public, so allowing investors to sell their stakes, even if a new set of limited partners is on the hook for those investments, allows venture firms to deliver “DPI” (distribution to paid-in capital) to their investors. And it’s those payouts that ultimately make the venture industry run.
Five Notable Deals
Aven, Cardurion Pharmaceuticals, CytoReason, Halo Industries, Kandji
General Catalyst had a busy week, leading big financings at infrastructure startup Kandji and credit startup Aven. A recent string of major biotech deals continued.
Credit solutions provider Aven raised $142 million in a Series D round led by Khosla Ventures and General Catalyst. Other investors included Founders Fund and Electric Capital.
Cardurion Pharmaceuticals, a cardiovascular therapeutics developer, closed a $260 million Series D round led by Ascenta Capital. NEA, GV, Farallon Capital Management, and Bain Capital Life Sciences also participated.
Israeli biotech startup CytoReason, which develops computational disease models, closed an $80 million Series B round with funding from NVIDIA, Pfizer, OurCrowd, and Thermo Fisher.
Kandji, an Apple device management platform, secured $100 million in Series D funding from General Catalyst, half of which was equity and half through a debt instrument.
Saronic, a defense tech startup manufacturing autonomous surface vehicles for the US Navy, raised $175 million in a Series B round led by Andreessen Horowitz, valuing the company at $1 billion. New and existing investors 8VC, Caffeinated Capital, Elad Gil, and NightDragon participated.
Stories We’re Reading
Marc and Ben Donate to Trump, CrowdStrike Tanks Windows, Semiconductors Slump, Meta and Apple Pull Products from EU
Two of Silicon Valley’s most prominent figures, Marc Andreessen and Ben Horowitz, joined a handful of other tech titans on the Trump train this week, announcing they plan to donate large sums of money to political action committees supporting his candidacy. You know what we think of that. Meanwhile Elon Musk chose the assassination attempt as the occasion to formalize his support for the ex-President. Running mate J.D. Vance is also drawing tech investor attention–and cash–due to his Silicon Valley background and network, and we’ll be hearing a lot more about that in the weeks to come.
A faulty CrowdStrike software update caused Microsoft Windows systems around the globe to crash Friday morning, taking down the IT systems for thousands of organizations globally, ranging from healthcare providers to airlines and banks. Over 500 flights were cancelled due to the outage.
Semiconductor stocks, which have been on a tear for the better part of a year, tumbled this week after President Biden and former President Trump discussed foreign policy in China and Taiwan. The Biden administration is mulling severe trade restrictions on China’s ability to manufacture semiconductors, which helped make Wednesday the worst day for the Nasdaq index since December 2022. Trump sent shares of chipmaking kingpin TSMC 2.4% lower on Tuesday when he told Bloomberg Businessweek that Taiwan should pay for its own defense. Shares recovered only slightly later in the week on strong earnings.
Meta announced that it won’t release its new multimodal AI model in the European Union, citing regulatory concerns. The announcement comes as EU regulators finalized their compliance deadline for tech companies under their AI Act. Apple is also cutting its Apple Intelligence rollout for Europe, citing concerns over Europe’s Digital Markets Act.