Atman Capital — April 2024 Market Update

Dear Limited Partners and Founders,

We hope this message finds you all well. As we transition into the second quarter of 2024, it is vital to reflect upon the significant trends and developments that have characterized the venture capital landscape at the beginning of the year.

The first quarter has witnessed a considerable adjustment in venture capital dynamics. Despite lingering optimism from previous periods, real activity within the sector has not met expectations, indicating a cautious approach from investors. An analysis of the number of deals and round sizes in the U.S. suggests that the market is still searching for a new equilibrium. Based on these observations, further challenges are anticipated.

An unprecedented number of startup wind-downs have been observed, highlighting a growing imbalance between the supply of startups and the capital available, particularly affecting late-stage companies. These companies currently face a demand for capital that far surpasses what the market can offer; the crunch is happening from seed to growth stages.

Acquisitions at high discounts have persisted and are likely to continue. This means investors, especially late-stage investors, are unlikely to generate a positive return on their investment. Last week it was announced that Lacework, last valued at $8.3 billion post-money in its last funding round, is going to be acquired by Wiz for around $150 — $200 million. The week prior, Nomane, last valued at $1 billion, was in talks to be acquired by Akamai for $500 million.

In light of these conditions, 2024 may become the year when bootstrapping and achieving initial traction become strategic choices for founders aiming to minimize equity dilution during early funding rounds. Venture capitalists are increasingly focusing on companies demonstrating a clear path to cash flow profitability and a swift approach to breaking even.

According to the NVCA and PitchBook’s 2024 Q1 Venture Report, the seed investment space has contracted sharply. This downturn, described as a ‘winter’ for seed investors, has been felt across the board, except in sectors like AI and Machine Learning. Current projections suggest that if this trend persists, the market could revert to activity levels last seen in 2018, in terms of both capital deployment and deal count.

The pace of market correction in the private sector remains slow, indicating more extended timelines for achieving significant milestones, especially for Series A funding stages. Data from PitchBook shows that approximately 55% of U.S. startups that secured funding between 2020 and 2021 are still navigating toward an exit or subsequent funding round. The median time between funding rounds has notably extended, emphasizing the need for strategic financial planning.

Stabilization is on the horizon

Despite increased efficiencies and workforce adjustments, many founders now face stringent terms for new financing rounds, including structured terms and potentially less favorable conditions (down-rounds). There is also a record number of startup shutdowns, with emerging platforms like Sunset or SimpleClosure providing necessary services for simplifying closures. Carta has also introduced a competing service, underscoring the critical need for such support in the current ecosystem.

Given the persistent challenges, companies must prioritize profitability alongside growth. In recent quarters, each unicorn undertaking an IPO has either moved towards EBITDA positivity or achieved net profits in the periods preceding their listing. While concerns about a recession are diminishing, they have not disappeared entirely. Demonstrating growth and a trend toward profitability remains crucial in maintaining investor interest in a company’s prospects. In comparison to previous years, VC-backed companies have not generated as much value post-IPO in the last few years.

As we continue to navigate these times, staying informed and adapting to the evolving market conditions is more important than ever. Our commitment to providing insightful analysis and support remains steadfast.