#16 November 2023: Crypto Is So Back
Your monthly filter for economic data & insights that matter.
A Note From the Redbud VC Team
It’s officially spooky season, and the public and private markets are definitely playing a part. 👻 Hopefully, turkey season will refill our appetite. VC data continues to deflate as deal sizes shrink, valuations drop, and growth stage stalls. IPO performances have been lackluster, and acquisitions are taking big haircuts on prior valuations. Bankruptcies have started rolling in as debt maturities reach fruition without the option to refinance or consolidate due to the increased rates. Good companies like Berkshire Hathway have stockpiled cash, but many public companies have not — watch out for surging layoffs as new debt costs companies 5x more. Treasury yields are at 16-year highs, and the Fed still may raise rates once more as they try to inch inflation to 2% (can our economy take another hike?). The housing market is still looking grim as prices and rates continue to rise. 🏃🏼♀️ Crypto seems to be sneakily moving from frenzy to synergy, but who can trust it when anyone can be an expert in crypto? All this said, when the market is scared, there is no better time to take advantage of opportunities, which is why we’ve added another company to our portfolio this month. ✨
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The ROI for Boomers selling their homes is unparalleled. Meanwhile, Millennials are saving every last penny to scrape together a 10% down payment and get approved for a loan with a 7% interest rate.
🔥 Burning question of the month 🔥
Crypto is soo back babyyy, or is it? 🎭
Although regulations still haunt crypto, it is currently undergoing a maturation phase and increasingly integrating with existing financial plumbing. Digital dollars – also known as dollar stablecoins, or cryptocurrencies pegged to USD – are the "first successful tokenization implementation," constituting 97% of all tokenized assets. Analysts are estimating a $10T market by 2030.
In addition, the iShares spot Bitcoin exchange-traded fund (ETF) proposed by investment firm BlackRock has been listed on the Depository Trust & Clearing Corporation (DTCC). Assuming the SEC clears this it will be the first crypto ETF, boosting crypto investing. Sam Altman is already calling crypto the next step for tech, but what do you think?
Will crypto become a significant aspect of our financial system?
📈 Macro Trend Report
HOUSING | Last month, we shared the outlook that the housing market isn’t getting better, and we hate to be the bearer of bad news, but it’s not. Home prices are still rising, even as real estate transactions are decreasing. According to a new report from the National Association of Realtors, the number of home sales has decreased by 15% from a year ago. With the outlook remaining grim, we can’t imagine what the stats will look like a year from now. The chief economist of the NAR, Lawrence Yun, took aim at the Fed, stating that "The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.” First-time homeowners have been hit the hardest as transactions near historic lows, accounting for only 27% of all sales. (Translation: first-time homeowners need a truckload of raspberries to buy a home 🚚) Zillow is piloting a new program in Arizona to help qualified homeowners with their down payment in hopes of enticing new buyers into the market. Zillow is aiming to give grants to qualified homebuyers worth 2% of the purchase price, lowering their down payment to as low as 1%. While Zillow is offering down payment assistance, builders are lowering interest rates for buyers by “buying down” mortgage rates. Only time will tell if these creative solutions have any payoff, but we’re willing to take what we can get!
M&A | Atlassian, a B2B productivity software, acquired Loom for $975 million, a 36% haircut off its last price.😬The deal seems to be manifesting the speculation from earlier this year that startups would be acquired at hefty discounts. Meanwhile, California’s Attorney General is contemplating suing Kroger for their proposed deal to buy rival Albertsons for $24.5B. While a decision has not been made, the Attorney General did state, "Right now, there's not a lot of reason not to sue." It seems one of the largest acquisitions in history is about to go through after Microsoft’s $69B acquisition of Activision crosses last UK hurdle. Watch out Google and Apple, Microsoft has entered the gaming chat 🕹
CONSUMER FINANCE | The US received a C+ in retirement from the Mercer/CFA Institute Global Pension Index released this month. Hey, a C is passing … The C+ rating means that America's retirement system "has some good features but also has major risks and/or shortcomings that should be addressed; without these improvements, its efficacy and/or long-term sustainability can be questioned." Outside of retirement, Americans are falling behind on their taxes and car payments. American’s owe $688B in unpaid taxes in 2021 alone and yes that’s a record high. The share of borrowers who are currently off track with their car repayments hit an almost 3-decade high in September, as 6.1% of Americans with subprime car loans fell 60+ days behind on their dues.
VENTURE CAPITAL | It has been quite a busy month for VCs! With Q3 data fresh off the press and waves of new legislation, we have lots to cover this month!
Ecosystem Rankings: Pitchbook’s Global VC Ecosystem rankings have San Francisco being named the most developed VC ecosystem in the world by a considerable amount (no surprise there). Ecosystems in the US and Asia account for 85% of the top 20, and a host of midwest cities, Detriot, St. Louis, Indianapolis, and Raleigh, made the top 20 list for growth! That’s right, the Midwest is growing on a global stage. 📈
VC Downturn: Things aren’t looking as bright on the investment front as deal activity has continued to slow, and raising capital continues to be grueling. Even VC firms themselves are having a tough time raising funds; Greycroft cut 5 investors after missing their initial fundraising target by 40%. Deal count in Q3 is up only 1% from Q2, and so far this year, 19% of venture rounds are down rounds. IRR is continuing to tumble as a result of VC funds marking down late-stage portfolio companies in Q4 2022. The markdowns are due to rising interest rates, with expectations of a more modest decline as cash returns (DPI) gain importance amid low IPO and merger activity.
Valuation Slump: We have seen a few IPOs play out this year, and investors are hoping the data helps reset valuation expectations at all funding stages. Valuations at every stage, excluding the pre-seed (up 8%), took a hit this quarter. While all of VC has hit a 5-year deal value low, Pre-Seed has remained somewhat stubborn with a 1-year low. Valuation and deal sizes remain at record highs for Pre-Seed — maybe this is why a16z is setting out to raise its largest early-stage fund ever. At Seed, valuations declined by 8.4% to $21.7M, Series A valuations also declined by 8.4% to $76.7M, and Series B valuations declined by 2.6% to $216M. The Series A “silence” has been crippling as many Series A and multi-stage funds are managing the largest funds they’ve ever raised, and the pressure is on to source companies that will have exits that matter. 😔
Diversity Law: Capital deployed to female founders is up 2.8% in Q3, comprising 13% of all capital deployed. In an effort to increase transparency regarding diversity in VC, California Governor Gavin Newsom signed SB-54 into effect this month. Starting in 2025, any VC firm operating in California must report a variety of demographic factors, such as race, disability status, gender, and sexuality, pertaining to the companies they back. The bill notes that disclosing information is voluntary, and founding teams won’t be penalized for not answering. The bill also requires firms to collect and release their diversity data to the public.
💰 Micro Trends
GENZ AT WORK | The dialogue about Gen Zers in the workplace has sparked lots of recent debate on whether GenZ is lazy or not. Deloitte's 2023 Gen Z and Millennial Survey suggested that many young professionals felt exhausted or disengaged at work. Surveys have also found that Gen Zers are less likely than their elders to go along with long hours, overbearing bosses, or a lack of boundaries between the personal and the professional. Instead, GenZ is actively pushing back on the behaviors that make the workplace a “toxic environment.” There are also questions about if young employees have major skills gaps in the workplace. A recent survey by Adobe found that over 48% of Gen Z respondents expressed a desire for more training in hard skills at work, in contrast to the 33% who felt the need for additional soft skills training. Outside of the workplace, LinkedIn has become the new favorite social media for students and young employees. LinkedIn reported a 41% increase in the volume of content posted between spring 2021 and spring 2023. “Gen Z is one of the fastest-growing demographics on LinkedIn.” 👩🏽💻
BANKRUPTCY | Hello Bello, a diaper and baby products brand founded by Kristen Bell and Dax Shepard, filed for Chapter 11 bankruptcy. The company allegedly owes $22 million to its largest creditor. There’s speculation if Hello Bello is the first of many about to file since businesses can’t refinance or consolidate with the increased rates. Rite Aid has also filed for bankruptcy and plans to sell part of its business as it attempts to restructure while dealing with losses and opioid-related lawsuits. Rite Aid has posted annual losses for several years. Maybe it’s bad karma for calling off a merger with Albertsons, which is currently trying to merge with Kroger (see the M&A section). 🔮
RENEWABLE ENERGY | There has been lots of buzz and billions deployed into renewable energy this month. The Biden administration has announced the recipients of $7 billion in new federal funding distributed to renewable hydrogen hubs across the US. Massachusetts-based Electric Hydrogen announced the successful completion of an oversubscribed $380M Series C financing, carving out the company as the 1st first green hydrogen electrolyzer startup to reach unicorn status. VCs are betting big on hydrogen as $2.5B has been deployed across 187 deals so far this year. The White House also announced the designation of 31 Tech Hubs across the US, with one category being “Accelerating Our Energy Transition.” And, of course, Missouri made the list with 2 designated tech hubs in the state 😉
📰 Flyover Headline of the Month
Through a $7.5 million federal grant, Columbus State Community College will launch a new center focused on creating and scaling up the high-demand training needed to fuel the country’s technology-enabled economic growth. With this grant, Columbus State CC has received 16 NSF awards since 2013 – more than any other individual college in the country. 🔥
💰 Flyover Deals
There was lots of funding spread all across the midwest this month, from rural Iowa to the Dakotas and over to Chicago; lots of capital was deployed in the region 🥳
UPDATE, check out the 353 flyover deals for over $3.3B in funding we tracked here.
Columbus-based Layer announced a $3 million seed led by Drive Capital to produce an AI copilot
It was a big month for early-stage startups in Chicago 🌃
and … a new fund was closed 💰
Michigan’s Grand Ventures announces a $50 million early-stage fund targeting Fintech, Supply Chain, and DevOps companies.
🐄 Flyover vs. National Macro Trends
The data is in, and inflation is rising but definitely slowing! In September, inflation rose at 3.7%, the same as in the prior month but slower than 8.2% a year ago. The Federal Reserve’s goal of raising interest rates has been to bring inflation to near 2%. We are slowly but surely inching there, but who knows how the market can hold on? 😐
🧠 This Month's Recommendations
📚 What We’re Reading
Tech journalist Rebecca Fannin, who is known for reporting on the Chinese innovation boom, has returned to her hometown in Ohio with a new book, Silicon Heartland, on the tech startups and ecosystems revitalizing Middle America’s rust belt.
We just wrapped up “How to be a Founder,” and it was stellar - if you want to be a founder, are one, or are an investor, this book is a must-read! Check out the “How to be a Founder” website or buy the book!
Breakups suck, but co-founder breakups suck more, and they’re becoming more and more frequent. 💔
Just like your brain → ChatGPT produces better insights when it has time to think
🎧 What We’re Listening To
The New Yorker’s new podcast Critics at Large has been one of our favorite recent listens! The Myth-Making of Elon Musk examines how, in recent years, the idea of the unimpeachable Silicon Valley founder has lost its luster. [42 min]
How to find customers who aren’t being served in this HBR podcast, The Strategy Mistake Too Many Startups Make. [25 min]
Big fans of the 20VC podcast here!👋🏼
Beezer Clarkson from Sapphire Partners offers some very candid insights on what it takes to raise a fund today, misaligned LP incentives, and GP/LP relationship dynamics. [60 min]
From founder to investor and everything in between, Anna Barber, Partner at M13, shares her story and essential fundraising tips on The Girls Table Podcast. [35 min]
Watching 👀: Sequoia’s Roelof Botha chats with Bloomberg about Venture Capital Ambitions, AI, and Backing X. [13 min]
📆 What We’re Doing
We are actively counting down the days till MidxMidwest! Can’t wait to connect with more emerging Midwest founders and friends 🥳
Lots of activities in our backyard as SMB owners and operators come to Colimbia for the Main Street Summit, and we are excited to attend! ⚡️
Thanks to our friends at InvestMidwest for the wonderful reception in KC earlier this month!
We had way too much fun with our friends in Chicago at the M25 Summit! 🥂
Between exploring the city and meeting great founders and fellow investors, we couldn’t be more excited about the growth of startup activity in the Midwest! 🔥
🎮 Flyover Picks of the Month
White-label point-of-sale working capital financing platform for suppliers’ buyers.
Automates the entire web or mobile app localization process end-to-end with AI.
🚀 Redbud Portfolio Company Highlights of the Month
Meet our investment in Public Grid! Public Grid is transforming how residents at multifamily properties interact with their electricity providers by aggregating energy supply.
Check out why Redbud VC is beyond excited about the “energy” Public Grid creates. ⚡️ 💡
Big Announcement! Greylock Edge is a tailored startup program for pre-idea, pre-seed, and seed founders, offering personalized support without any ownership requirements!
Thinking about starting something? Check our Entrepreneur First and their programs + insights!
Check out Carta’s Q3 Data on SAFE rounds by round size and region! Love to see transparency on what companies are currently raising at.
Building in NY? - check out this cafe where crazy connections happen
GPs/LPs in VC, this thread contains insights for over 100 GP/LP interviews 🤯
Got laid off or just looking for something new? Here’s 120+ tech job boards to help you land your dream role
Don’t gloss over the pain point/problem in your pitch - great tips from First Round Capital
Take a look at these 37 grants for women in tech startups 💅🏽
1000+ Pitch Deck Examples - yep, literally 1000 of them
Investor-Ready or Not? A Founder’s Guide to Venture-Backable Businesses
Early-stage micro-fund VC 101: Here’s what Investors, Founders, and Scouts should know
A guide to decoding term sheets because sometimes it feels like a different language 🔎
Check out the must-have VC tech stack from goingVC
If you’re an early-stage founder, you have to check out this list of 1,000+ early-stage check writers
Resource page for founders we made here 📒
🤝 Collaborate with funds & founders in our Flyover Tech community
The information provided in this newsletter is intended for general understanding and educational purposes only, not as a guide to investment decisions. The authors, publishers, and distributors of this newsletter are not licensed financial advisors and are not providing financial advice or investment advisory services.3