Crunchbase Macro Update | Surprising VC Narrative Violations & AI's Big Break

0:00The most interesting trend that we saw in Q2 was that AI funding massively picked up. It doubled quarter over quarter. And also Euro by year almost 24 billion. And these are global numbers. The US was around 70 billion. So we saw a lot more than a lot of a year. pick up. We did see proportionally more dollars go into AI. We saw that globally. We saw that in the US market. But it's almost like six quarters after that launch that you see the massive uptick. And I think what that shows is within the private markets, it takes time for those companies to grow. It takes time for those investors to find those targets.

0:47A lot of these companies have raised multiple fundings over this time. And they're now at the point where they're raising those very, very large rounds. So, you know, AI as a sector represented 30 % of all investments globally. So pretty noticeable. And obviously the biggest one was Elon Musk's XAI, which was a$6 billion round. But there were a lot of other companies in the sort of AI sector that raised super large rounds.

1:19Welcome to Sorcery. I'm your host, Molly O'Shea, founder of sorcery. Today, we have Janae Teer, Crunchbase News' senior data editor. Janae conducts strategic research to explore and report on trends within private company data. She focuses on global venture funding trends, artificial intelligence, fintech, and gender equity in venture in tech. This is a fun conversation because it's around Labor Day, coming back from the VC slumber, when tech markets are very quiet and people are out on the beach. So hopefully we can provide some perspective for macro trends and a bit of a refresh on what we do.

2:00Hi, Janae. It's great to have you on. Hi, Molly. Great to be here. Thanks for inviting me. Of course. I'm so excited. So you are a senior data editor at Crunchbase News, and you have all the data on the markets. So I would love to just go deep into this and this will be airing right before Labor Day. So it's going to be a good nod to all of the VCs who have been in the Hamptons, who've been on the Mediterranean or wherever they like to hide for the summer. But that being said, I'd love to just get back into it and understand what do we need to know coming back to work? Sure. And just, you know, looking at Crunchbase and sort of where I've been, I've been at Crunchbase a very long time.

2:48And my work at Crunchbase has always been focused on the data and working with the data. I used to run a lot of our data teams and data projects. And that has massively ramped up since I've left that team. And then I started reporting in 2015 on what was happening from the data. So when you work with data all the time, you want to do something useful with it. And one of the first reports I did was looking at women, female founder trends, just because we realized we have this great founder data set. There was a whole discussion taking off in Silicon Valley about equity for women. And I thought, hang on a minute, we could look at this.

3:23And so we were the very first data set to add gender to the data set and then really report on some of those trends. And I know we'll talk about that a little bit later. So I feel, you know, very privileged because I get to look at the data and there's a lot. you know we follow industry leaders we talk to a lot of analysts we talk to vcs we talk to founders we get a good sense of what's happening from talking to people in the market but then it's always super interesting to look at what the data is saying alongside that and whether the data fits with the narrative that people are seeing or whether there's different things happening in the data and i feel like i'm always i have this advantage because i'm always discovering and seeing things because you can look back and sort of understand what does this all mean and i think from a venture perspective, you know, we are, broadly speaking, we're two years into a venture slowdown.

4:09And so we really saw the slowdown kick off in Q3 2022. It started in Q2. Q1 was very strong in 2022. So we're two years into the slowdown. And what we've seen is from Q3, funding came down. This was 2022, two years ago, funding came down Q3. It came down quite significantly. And since then, it's sort of been bumping along. So it looks like it fluctuates. And the fluctuations quarter over quarter, which is how we do our sort of best tracking, is really based on large rounds. So if large fundings come in in that quarter, you will see funding pick up a little bit, and then it'll go down. And so for the last quarter in Q2, it was around 79 billion globally.

4:53And typically, more than half of that is, or around half of that is for the US market, which is the largest market. So we're kind of on a sort of 79, 80 billion market track. That was up quarter over quarter. But if you look at this year for the half year, it was sort of flat or a little bit down from a year ago. So not a big shift, but the quarter was up. And, you know, one of the questions we're asking is with the quarter up a little bit, is that a good signal for the venture markets? and is that up year over year or just this year um it's up if you look year over year and also at the quarter um and i think the the main or quarter of a quarter and i think the main reason it's up what we could see is again those larger rounds so there was some big mega rounds that happened um as well as funding to ai companies so that was the two kind of trends that we saw And we also saw some of the more active venture investors that have really been holding back, dive into the market a little bit more.

5:56And so increasing their pace a little bit. Some of the key large multistage investors seem to be leaning in a little bit more. So that is a glimmer that there's a little bit uptick. But these investors at the same time can step back. And we're going to be coming out with our Q3 report soon. And as you say, everyone's been off over the summer. So things might have just sort of fluctuated down a little bit. It'll be interesting to see. There was one data request that we asked your team, and it was so great. You guys came up with this custom report. But we wanted to see quarter over quarter the last, like, 18 months, how many deals were done and how much capital was deployed within each stage.

6:40So in Q2 2024, there was a huge dislocation in the amount of dollars invested and the number of deals getting done. So one would extrapolate from that that most of the money is coming from later stage. That's where the money would be swelling. So it's like a really interesting scenario because I feel like that's been most of the narrative this year is tiling all of this capital into later stage rounds for AI, for hardware, for really capital intensive businesses, just based on the current trends. And I'm curious, are you seeing that? Is that what the narrative is? Yeah. I think the most interesting trend that we saw in Q2 was that AI funding massively picked up.

7:29It doubled quarter over quarter. And also Europe, a year almost to 24 billion. And these are global numbers. The US was around 70 billion. So we saw a lot more money go into the AI sector this past quarter. And I think what's interesting about that is when, you know, ChatGPT launched, for all of 23, we did see AI funding pick up, we did see proportionally more dollars go into AI, we saw that globally, we saw that in the US market. But it's almost like six quarters after that launch, that you see the massive uptick. And I think what that shows is within the private markets, it takes time for those companies to grow.

8:08It takes time for those investors to find those targets. A lot of these companies have raised multiple fundings over this time. And they're now at the point where they're raising those very, very large rounds. So AI as a sector represented 30 % of all investments globally. So pretty noticeable. And obviously, the biggest one was Elon Musk's ex-AI, which was a$6 billion round. But there were a lot of other companies in the sort of AI sector that raised super large rounds. And are you and your team, are you reporting these numbers based on the date of funding or the date of the announcement? So we do it largely based on the date of the announcement, because that's when the press release comes out or when the news comes out.

8:51That's sort of the most definitive moment to know. And if we did it based on when people invested, the data would shift all the time. But we also look at, we have founders who report data directly to Crunchbase. And a lot of that will be the seed or the seed stage fundings, which don't typically get announced. And sometimes those get added way after a quarter or a year, just because you raise your series A, and then you go and put your seed funding in. But typically, it's the announced date. But we also track, you know, we work with investors on a monthly and quarterly basis to update if we're missing deals that they've done as well.

9:25So there might be some that come in that way. We also track the SEC. So there's a whole host of ways in which we go after that data. But I think the announced date is really, you know, most of the data is really around that announced date. In terms of the amount of dollars deployed and the number of deals, I want to go back to that and dissect it a little bit more. So you mentioned XAI was a pretty large component, a$6 billion round. That's huge. Did you see concentration into other companies too? And what were those companies? We saw companies like CoreWeave, which is also in the AI space, Wave, Scali, and then also Zara Therapeutics, which is a stealth company that launched.

10:12They raised a billion dollar in funding. They're sort of in the healthcare space using AI models. So a lot of those very large rounds that we saw this past quarter went into the AI sector. Is there any way to predict them? Like how do we continue monitoring this going forward? Is this going to be another surprise every quarter? You know, I think what it demonstrates is that, you know, and some of this funding is not just coming from the venture community. Some of it is coming from private equity and the private equity space. These are very, very large fundings and also from companies themselves are investing.

10:51We've seen Microsoft, Google, you know, and Amazon invest quite heavily in the space. So I think it'll be, you know, one of the things that I did look at is in the AI sector, how does that compare to other sectors by stage? And what I found is that, you know, when you look at seed and early stage, it was sort of in line with what you see broadly. For AI, it was sort of in line proportionally with those markets. But when you look at late stage, it was fewer companies raising very, very large fundings. And so there are these companies that are really sort of breaking out on the AI side. I think there will be more, but I think they're very competitive, these deals.

11:31And there are fewer of them that are really breaking out is what I noticed for the AI sector. Have you started to track the investors that are most active? Most of the investors that I talk to will say that the sort of foundation model layer companies are not venture backable. They have to raise so much money and it's such a competitive space. And if you when you have Google and Meta and Microsoft and Amazon all playing in the space as well, these are not really venture backable companies. You know, having said that, there are some venture backers who've gone into those sort of foundational model companies.

12:04I think where most investors are looking for opportunities is in the sort of infrastructure layer, which is all the companies needed to kind of manage the data and process the data and manage those models. So that's where the sort of infrastructure, the tooling layer. And then the other area where investors are focused is on the application level. So I think the foundation level companies, there are investors investing in those, but the amount that needs to go in is so big that they're not necessarily diving in, but definitely at all other levels of AI. And I think what's interesting there on the application level is that there are new companies that will come out.

12:45And I think Clio and Harvey are a good indicator of this. I don't know if you saw Clio raised a$900 million round. It's in the legal tech space. It's a Canadian company. It's almost 16 years old. And I think that round of 900 million really represents the promise that AI can bring to their technology. They have a lot of market share already. They have a lot of customers and bringing AI in will bring much more benefit to those customers. And so you can justify such a large round. And then if you look at Harvey, Harvey just became a unicorn as well. That's a new company specifically focused on professional services and legal services using AI.

13:21And so I think the interesting thing that we're going to see kind of fight it out or measure it out is the incumbent companies who are layering in AI to existing customers, which do have an advantage, and then the newer companies who come out and building from AI right out the gate. You mentioned earlier, because you're watching this data over time, and you're observing it, you're making analyses, you track different narratives. And so I'm sure you catch wind of something that might be happening, or might also not be true. Have there been any narrative violations that you've seen throughout the last year and a half that just aren't aligning with what people are talking about?

14:10I think the biggest one is the kind of AI narrative and how quickly that took off because of the launch of ChatGPT and everyone got focused on it. And everyone kept on saying this is going to change the funding data massively. And even though AI was a growing sector, it wasn't as significant as I thought it would be. It didn't really change the overall trajectory of the funding slowdown. So that impact of AI as a technology and AI as a thesis for investing, it kind of took some quarters for that to kind of play out. Everyone, you would have thought everyone was going to throw a lot of money immediately.

14:47And obviously, OpenAI did raise that$10 billion round right out the gate. but I think what was interesting is to see that it took some time for that kind of momentum to build within the ecosystem. Hey, we'll get right back to the conversation after a word from our sponsor. Sorcery is brought to you by Archer. I'm genuinely amazed at what Archer has been able to accomplish. Archer's goal is to transform urban travel, replacing 60 to 90 minute car commutes with estimated 10 to 20 minute electric air taxi flights. They're safe, sustainable, low noise, and cost competitive with ground transportation.

15:21Archer's Midnight is a piloted four-passenger aircraft designed to perform rapid back-to-back flights with minimal charge time between flights. Learn more about how Archer is set to open up a new world of opportunity for passengers by providing safe and efficient access to people, places, and events across the communities they live. Visit archer.com. I also think, you know, looking back at, you know, In a way, the venture markets react more slowly, obviously, than the public markets. But I think what was interesting is Q1 2022 was a very, very strong quarter. And I think, you know, in a way that was because if you look back at COVID, when COVID started happening, what we saw in our data is there was an immediate small pullback.

16:06And then venture was off to the races again, as everyone realized if you're sitting at home and everyone's kind of trapped digital services are going to become way more important. and so more fun and it took almost a year 2020 um one was the biggest year 2020 we were starting with covid but the biggest year for funding was 2021 it doubled year over year and i think the same thing happened in q1 2022 there was the sense of you know is this a blip is this going to be more sustained how do we react in q1 22 was incredibly strong and then i think quite quickly in that quarter there was a realization that was going to be this was not going to be a blip this was going to be much more sustained, that the markets were shifting quite dramatically, tech stocks dropped dramatically.

16:50And so the pullback happened, but you started only seeing it in Q2. So I think for me, it's the venture markets take a little time to react, and it's not always immediate. Yeah, that's a fair analysis. I know for a fact, being on the investing side, it was not the most fun period. uh it was a cascading event of a lot of dramatic things um and a lot of different elements like a we had massive over valuations on companies that had zero to like minimal revenue but got really great multiples um and so that's one element another element uh svb collapsed and so So that created more fear and panic within the markets of like, what is truly stable?

17:43Is anything stable? Like what is VC built on and this tech hype? And then, you know, throughout the last year, we had a real, I think like, if anything, the chat GPT moment was amazing because it then gave everyone at least some like revitalization and excitement to be like, oh, this is our job. We have to go find the innovation and now apply it. And this is our time to shine. And so that was good. It got some energy back in the system. But there were so many different things happening that were bringing a much needed just rebalance of the system. And then we still have a hangover effect of the high valuations and there's going to be shutdowns continually.

18:32I think Carta announced that there's like a 60 % increase into like, I think Q1, maybe not sure. But those are going to increase. And then, yeah, it's been a wild ride. So I would say it's not bad that we have this good moment and we can continue to find companies and back this next innovation cycle that's kind of taking off. Another thing that I wanted to mention within that is we have a big conflict with antitrust and the M &A markets, which are really pulling back exit opportunities. Not only are the IPO markets shut, but the M &A markets, it's been really hard to get large transactions over the line.

19:19I'm curious from your standpoint, is this a cohesive narrative? Like, are we seeing most of M &A shutdown? Or is it really large M &A transactions? I think definitely the big tech acquirers are, you know, are very concerned. And obviously, these deals that we've seen around acquiring, doing licensing deals and acquiring talent within the AI companies is very much a reaction to the regulatory environment. And I think, you know, what we've seen on M &A is that it has picked up a little bit. This year, it's picked up a little bit this quarter, but not as much as people have expected. Obviously, if you lay it in those AI deals, I think we would have been off to the races and M &A would have been back.

20:06But, you know, in speaking to analysts, the expectation is that the IPO markets this year will still, there'll be some that come out, there'll be some brave companies that decide to kind of test the public markets. But broadly, they see possibly next year, the IPO market's coming back a little bit more. And it's been so low that coming back, you know, who knows what that looks like. But definitely the expectation wasn't this year. And I think a lot of people focused on the M &A markets are going to be a lot stronger this year. So I think there has been some pickup. We've seen, you know, I was just looking at who are the most active acquirers.

20:41And there's obviously the private equity folks. If prices have come down and there's attractive targets, they're going to be looking. and two stood out for us, EQT and KKR, have both been quite active this year. And then there's also the public tech companies, NVIDIA and Cloudflare have been more active. Again, if prices are coming down and there's technology that you want to bring in, this is a good time. And then also privately highly valued companies are also seen to be, you know, companies will go out and acquire because for a lot of founders out there, if they're not going to go, be able to go, if they're growing, but they're not going to be able to go public in the next three to five years, they might think, well, looking at an acquisition target might be, you know, a comfortable fit.

21:23And so we've also seen Airtable and Zapier were two that were sort of more active this year as well. So I think the expectation is we'll see a lot more activity. It hasn't quite happened. But as I say, if these AI acquisitions hadn't been acquisitions, it would have been pretty strong. So I think there is some pickup on the M &A front, but not quite as much as people were hoping or expecting. Are there any particular categories within M &A that are going well right now? Is it software? Is it industrials? Is it specific to tech? Or are we seeing other categories? Yeah, I think the companies that have stood up, there's some in the cybersecurity space because there's so much demand there.

22:07We've also seen some in the cloud kind of technology space, obviously in AI as well, because there's a lot of players, not just the foundation model companies. So I think we've seen a bunch in that area. So I'd say those are the areas that dominate on the software side. And then in biotech and health, there's a lot going on. It's less my area of expertise, but there's a lot of activity on the funding side in biotech and healthcare. Since the market has slowed, we've seen that sector still stay strong. Everything's down, but relatively speaking, that's been one of the strongest sectors, both for investment and for M &A.

22:41There's another interesting outcome with exit markets being shut, or at least very hard to get through. And that's these large companies staying private much longer. Within that, we have like Stripe, we have Anderol, we have these really large companies. From your perspective, have you seen any specific kinds of transactions happen within them? Are they doing more secondary sales so employees can receive some compensation from their stock. What have you been seeing within those companies and which companies are they? I think what's interesting is we're definitely seeing the secondary sale phenomenon that you talked about.

23:22And I think Revolut just announced a secondary sale quite recently. And we've also seen, you know, there were a few others that also did secondary sales. I think Rippling was one of them. Applied Intuition was another. And I think that these companies who are doing secondary sales, what it looks like to me is that these are some of the stronger companies who are possibly planning to go public in the next time period, whatever that looks like. And, you know, for Revolut and some of these other companies, it makes a lot of sense to give employees, you know, existing and some who've left, but to give them some liquidity now.

23:58Because I think if you do go public and these employees have been locked up for a very long time and really need this equity to kind of build their own lives. The lockup period for most of these employees is about six months after going public, and that will impact the stock price at that six-month mark and is not good necessarily for those companies. So I think if you're a strong company, as Revolut is, you're growing your revenue, you're profitable, you're looking to go public, and there are lots of these private equity investors who'd like to get their hands on some of that stock in advance of an IPO, it seems like a very good solution to give employees some of that liquidity so that when the company goes public and then when that lockup period opens up, they've already taken some of that risk off the table and then can make decisions based on how the stock's doing and how they think the company is doing and not sort of be forced to sell at that point.

24:50So I think we're going to see more of this, but it's really, it's less the sort of M &A targets. I think it's more the companies that are thinking about going public and would like to, and as I say, are strong and have private equity investors who'd like to purchase some of the stock. That's a good point. That's really interesting. So we talked about AI. We talked about the current state of the markets. We talked about M &A. I kind of want to take another macro step and talk about the power laws within VC since you've been covering it for so long. We covered this a little bit within the really late stage private companies that haven't really had their exit moment yet.

25:34But I'm just really curious, over the last couple of years, what percentage of capital has been deployed to only a few number of companies? And what are those companies? One of the things that is interesting is when you looked at the kind of market growth in 2021, every single stage was up like seed was up early stage was up late stage was up but late stage was up the most and because there were these very large dollars going into these sort of high growth companies we saw more unicorns than we've ever seen before join the unicorn board in that year and so the whole story even though every single stage went up which makes sense because if you're investing at seed and you think your company whoever you invest in is going to be able to raise that next round quite quickly at a better valuation you're going to be more inclined to invest.

26:20So everything went up, but it was late stage. And then when the market pulled back, it was late stage that came down first, the most dramatically, then early stage. I sort of saw it quarter by quarter. And then seed funding was sort of the last to kind of start pulling back as well. And I just looked at, you know, the top 30 companies specifically just in the US that raised in 2024. And I think what's interesting, and I don't know if late stage has come back, But, you know, we mentioned Q2 late stage was up. These largest rounds was up. But when I looked at 2024, 30 % of capital went to the, in the US, the top 30 companies that was raised this year so far.

26:57So that's the first half. If you look at 23, that was also high. That was around 28%. And in 2022, that was 12%. So you can see the sort of in the last few years, the shift to those kind of larger companies or larger rounds are eating up a higher price. And I haven't really thought about why or what's happening because I've been so focused on late stage coming down. But it is interesting to note that in some ways in this downturn, and we have been hearing this across the board, that round sizes haven't necessarily come down, that people are being more careful about where they place their bets.

27:37They're being more concentrated, so they're investing in fewer companies. And sometimes when they are investing, they're not investing less in this market. just because companies are going to take longer to get to the next round, possibly, or are going to need more money to shore themselves up. And so there has been this trend towards fewer investments, fewer companies, but in fact, larger rounds. And I'm just working on analysis where we see rounds come down in 2023 a bit. They're not as high as 21, but they're way above 2020. And now we've seen for the first half of the year, it's sort of come up again.