This year is wrapping up with no shortage of energy and optimism, but still plenty of market intricacies putting pressure on many dimensions of the startup and VC ecosystem.
We presented to our investors about these unique market dynamics in the Fall, alongside where we’ll invest next, how our companies are positioned, and what opportunities are keeping us up at night (in the best way).
Today, we’re sharing an excerpt of that presentation, so builders across industries can have insight into our research on the state of early-stage funding, the exit market, and consumer AI.
TLDR: We’re in a time where there is lots of experimenting, building in tandem with interdependencies, and an early rush to the most addressable needs or more obvious opps. The important thing to remember: the biggest opportunities are not yet known, and certainly not the most obvious.
For more on our perspectives on this messy, creative stage and where we’re focusing next, see our recent piece on our latest early-stage fund.
Some highlights from the data and our perspectives:
The state of early-stage
- VC funding is still off the 2021 peak, but ahead of levels 5 years ago — and 5x the market 10 years ago. In our view, this correction feels balanced.
- This year will match or slightly beat 2023 in terms of VC dollars invested, but with lower deal count. This relates to AI companies fetching higher valuations and the companies raising successfully having stronger unit economics (“a flight to quality”).
- Seed deals are down 55% since 2022, but Series A deal count is down even more so. In many cases, we’re seeing seed and series A round become more or less synonymous in terms of company progress. The lines are blurred.
More on the state AI investment
- As foundations are being laid to power the AI transition across markets, it's no surprise the early majority of AI-focused series A dollars (95%+) have flowed to enterprise and infrastructure.
- Overall, AI-forward companies are capturing a 20%+ premium, in part based on competition for the rounds and a greater expectation of follow-on interest.
- Big Tech has more than doubled its AI investment since 2020. This makes sense if you believe the new guard of AI companies pose some existential risk to them.
- Once the AI infrastructure is in place, the consumer opportunities unfold — a turn we’re starting to see now.
The state of IPO market
- This year started with high hopes for a breakout IPO year. Now, that's a 2025 topic. There have been some offerings this year that were well-received, at least initially. In terms of after-market performance, Tempus and Reddit are the standouts.
- Bankers continue to unilaterally state a high bar for IPO success, from Rule of 40 to market dominance. This is sobering, but clarifying.
- There’s $303B in VC dollars in 270 US-based companies that are in aggregate valued at $1.9T. Not all of these will go public. But, there will undoubtedly continue to be big winners ahead. The new tech cycle has us more convinced of this than ever.
The state of M&A market
- The data shows M&A off its lows in 2020, and even up vs. the previous year. That said, it’s still anemic relative to where it once was, and the forwardlooking outlook is tempered.
- Most of the M&A activity is happening at the early-stage. There always is a market for acquiring new capabilities and growth, but the asset must improve the acquirer's business without much risk.
- At Forerunner, we keep our focus on underwriting to IPO potential.
The consumer AI opportunity
- Rarely are first movers, when it comes to the application of new technologies, the ones that ultimately win (see: search and social with Infoseek queries and Friendster). The same was true with mobile — early apps came and went. But eventually, the right solutions to real problems play out. We're arguably still in this era with mobile.
- Most of the emerging consumer AI solutions of today have gained traction because they optimize around what models already do inherently well. This next chapter will be led by companies that apply these advantages in less/non-obvious ways to meet the consumer where they need it most.
- Today, we see AI opportunities falling into three categories:some text
- AI-Boosted: refers to essentially most companies. Companies working smarter, not harder, with AI and benefitting from real efficiency gains: Leland, Fora, Fay, and Joy - to name a few.
- AI-Enabled: companies that are now uniquely possible with AI, such as Duckbill, Daydream, Juni, Alma, and Topline Pro. This really is our sweet spot.
- AI-Led: where LLMs live, but it’s more than that — it’s the enabling technologies that make LLMs useable and actionable.