A Note From the Redbud VC Team

The year flew by; many probably felt they barely reached 2024. We left a down market behind (maybe), brought a war with, and have a leap year, yikes. That said, every year, advancements in technology and medicine pave a brighter future for all, and we are excited to support these efforts at the embryo stage. It was a big year for the Redbud VC team; we raised our Fund II, re-branded to Redbud VC, saw Brett Calhoun make the Forbes 30u30 list, Willy and Jabbok Schlacks’s company EquipmentShare raised $440M in equity and $1B+ in debt, and added 12 companies to our portfolio. This year marked a time of big strides forward and lots of learnings from our team. We have some major goals, events, and exciting things coming in 2024, including our well-known Missouri Startup Weekend (April 5-7th) 💪 

2024 predictions:

• AI hype will cool.

• Capital deployment will rise significantly in H2 of 2024 after capital pools swell and rates decrease.

• The prestige of educational institutions will decrease.

• VCs will add “dividend investments” as a new class of venture.

• Middle America will have an increased rate of capital invested due to the appetite for profitability and decreased deal flow on the coasts.

• Multi-stage funds will continue to eat market share, and emerging fund managers will struggle to raise subsequent funds.

• Crypto investing will make a comeback, but not at pandemic levels. Progress will be made toward deregulation, but hurdles will carry this into 2025 and 2026.

Lessons learned in 2023:

• 99% of what matters to founders is a) Network Effects and b) Filtered Insights (relevant battle-tested feedback from operators). Between May and December, we made 145 introductions for our 12 companies in Fund II. We want to double those numbers in 2024 and continue building a successful fund in Middle America. Our advisors have built multi-billion dollar companies like EquipmentShare and Zapier.

  

• The number of VCs has tripled, increasing the push to increase social capital decreasing accelerators’ differentiation and talent pipeline.

• No one can predict market dynamics or a founder's success, but this can be mitigated.

• Big tech expertise and/or prestigious degrees enhance network effects but do not correlate to a person’s ability to be a better founder.

• The macro environment is down, but funds deploying capital are up with decreased competition and an increased rate of founders who can build through adversity.

• Hype or “pressure” rounds are dumb and generally led by funds who rushed diligence and expect everyone else to do so.

• The decreased velocity of capital, increased decentralization of VC, and increased innovation outside of the main tech hubs are opportunities to build collaborative funds in Middle America, investing coast-to-coast.

• The unpopular “unhealthy lifestyle” of founders working nonstop is a superpower.

• Charlie Munger’s quote, “A great business at a fair price is superior to a fair business at a great price,” applies to VC. Ownership matters to an extent, but what is most important is backing the best founders. Paying a premium price for a deal with more upside might be a discount in hindsight.

Redbud VC invests monetary ($50k-$150k) and social capital in early-stage tech founders. We bring monthly Redbud VC, tech, and economics updates. - We've filtered thousands of sources for our 14k+ readers, so you don't have to. Enjoy🥂

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We are doomed… FYI, the Inverse Cramer Index has outperformed the S&P 500 almost every month since 2017.

🔥 Burning question of the month 🔥

📈 Macro Trend Report

• HOUSING | It’s no secret that the 2023 housing market was one for the record books. Median home sale prices, mortgage rates, and cash buyers all soared this year. 2023’s average median sale price was higher than any previous year in history, rising from $407,000 in 2022 to $409,000, and there’s no sign of a decrease coming in 2024. 75% of homes were out of reach for America’s middle class. This summer saw a surge in mortgage rates, which breached 8% due to record inflation, dissuading both buyers and sellers from entering the market. Without new entrants, the market grappled with a scarcity of new listings, plummeting to the lowest level on record at 5.4 million and a substantial 16.4% drop from 2022. Home sales dwindled by an alarming 18.3%, with just 4.59 million homes sold through November. Regardless of dwindling home sales, cash was king this year. 1 in 3 homes sold this year were all cash transactions, the highest since 2014. Midwestern metros saw the biggest influx of cash sales, with cities like Clevland, Milwaukee, and Cincinnati selling 51%, 33%, and 44% of their homes sold in all cash, respectively. Despite the overarching negative trends, there was a promising glimmer in the form of shrinking year-over-year declines, dropping from -37.5% in January to a more optimistic -4.8% in November, hinting at a potential recovery in the housing sector as 2024 approaches.

• AI | Generative AI has defined the 2023 startup and tech scene. There were lots of new developments and shakeups this year, and it was hard to keep up with it all. The year kicked off with Microsoft investing $10B into OpenAI. Google entered the fray with its BARD chatbot in February, while Microsoft introduced AI into the Bing search engine, solidifying their partnership with OpenAI. Meta introduced Llama 2 in July, challenging ChatGPT, and Amazon invested a hot $4B into Anthropic. Lots of models were released this year, including Google’s DeepMind, Apple’s Ferret, Russia's GigaChat, and HuggingFace's HuggingChat. NVIDIA had its comeback year as it reached a $1 trillion market capitalization and affirmed its spot as a top chip manufacturer. Lawmakers grappled with how to govern AI as new legislation was slow. The European Parliament deliberated on the EU AI Act, and President Joe Biden signed an Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence. That said, prominent VC a16z stated they will lobby to deregulate AI and crypto. As 2023 concludes, anticipation builds for GPT 5 and beyond.

• VENTURE CAPITAL | The VC and Startup worlds underwent significant shifts in 2023. Here’s a recap and some of our favorite stats + insights on what went down this year. If you don’t want to read, Peter Walker from Carta published everything you need to know about 2023 in 45 charts.  📊 

  • Summary: Rohit Yadav, the author of The Big Book of Venture Capital, said it best: 2023 can be summarised in three words: low, limited, and lopsided (‘LLL’ environment). Low - valuations of startups in most stages went through their lowest levels. Limited - capital availability and deployment became limited to only the best opportunities. Lopsided - the power remained in the investor’s corner in 2023. It was lopsided towards the capital providers; on top of that, 38% of VCs disappeared from dealmaking in 2023. 🔎

  • Down Rounds and Markdowns: VC portfolios experienced mark-downs, leading to a reduction in valuations for startups in many holdings, especially affecting older funds. Down rounds surpassed 15% for the first time in five years, raising concerns about value erosion between funding rounds. Q1 2023 set the pace when down rounds nearly quadrupled in number compared to the previous year. 17% of all deals in Q3 2023 were down rounds - the highest in a decade. 🙃

  • Startup Closures: This year marked the most difficult year for startups in over a decade. Carta alone saw a 14% increase in startup closures from 2021 through Q3 2023. Of the startups that closed this year, 50% did so without raising any VC rounds. Within the cohort that had raised from VCs, 90% of the shutdowns were either Seed or Series A startups. There wasn’t a clear path to exit for many startups. Year to date (as of Sept. 30), there have been just 752 exits. Last year, there were 1,375, and in 2021, VCs saw exits from 1,979 companies. 📉

  • Industry Highs and Lows: Some industries saw record highs in capital deployment, and others saw record lows as it was clearer than ever where VCs were placing bets. VCs have steadily increased their positions in generative AI, from $408M in 2018 to $4.5B in 2022. Angel and seed deals have also grown, with 107 deals and $358.3M invested in AI in 2022 compared to just 41 and $102.8M in 2018. In fact, one out of every $4 invested in startups in 2023 went to AI. Proptech took an especially hard beating this year, dropping 42.4% YoY. 👷‍♂️

  • Valuations: Despite challenges, early-stage valuations remained robust, influenced by large investors and an increase in early-stage VC funds, while late-stage valuations faced significant declines, showing signs of recovery in Q4. The market activity saw an uptick as investors re-entered due to lower investment costs, with optimism for a recovery in deal-making and a potential lagged reflection of the public market rebound in the startup sector by mid-2024. Later-stage investors who amassed unicorns in 2020-2022 radically decreased capital deployment in 2023 and will likely continue to do so in 2024. 🦄

  • M&A: The failed Figma acquisition by Adobe has many investors down badly. Maybe not as bad as Adobe, who loses a billion to cancelation fees. That said, this will certainly affect M&A in early 2024 and how investors view future acquisitions in perpetuity.

💰 Micro Trends

• AUTONOMOUS VEHICLES | Maybe robots are better drivers than humans 🤖 Waymo's recent safety research reveals that its autonomous vehicles have significantly reduced police-reported and injury-causing crashes compared to human drivers. Over 7.1M miles, Waymo experienced 17 fewer injuries and 20 fewer police-reported crashes than if human drivers had covered the same distance with the benchmark crash rate. In California alone, autonomous vehicles logged nearly 5.7 million miles in the previous year, with Waymo leading the pack at approximately 2.9 million miles. While the majority of these miles involved a safety driver, it’s crazy to think that self-driving cars drove from LA to NY more than 500 times this year.

• CONSUMER SPENDING | The holiday season spending was in full swing despite persistent economic stressors like elevated interest rates, reduced savings, and persistent inflation. Cyber Monday ushered in an increase in consumer spending of 9.6% year over year, amounting to $12.4B total spend for the day. Between Nov. 1 and Nov. 27, shoppers spent $109.3B online, up 7.3% from last year. An influx of BNPL (buy now, pay later) services and diverse spending options on consumer apps like TikTok, which became the first non-game app to break $10B in consumer spending, have Millenials and GenZ ignoring economic conditions and spending at record levels, leaving experts “mystified.” 

📰 Middle America Headline of the Month

Lewis & Clark AgriFood, a St. Louis-based growth-stage food and ag-tech firm, closed a $70M Fund III this month. Seeing the influx of VC dollars being aggregated in Missouri-based firms and startups is exciting. 💰

💰 Flyover Deals

• Check out the 253 flyover deals for over $1.8B in funding we tracked here: a 7% increase in deals but a 17% decrease in funding MoM.

• Tulsa-based Medefy Health closed a $10M Series A to help improve employee health benefits experience.

• Minnesota had some great early funding rounds close and a fund announcement this month ❄️ 

  • VirtualZ Computing raised a $2.2M Seed Round

  • Digital wellness platform BetterYou closed a $6M Series A

  • Rally Ventures announced the close of $240M Fund V 

• Des Moines, Iowa-based content app Hummingbirds raised a $3.3M Seed Round 

• Alphathena, a Chicago-based AI-driven financial advising software closed a $3.9M Seed Round

• Crowda closed a $2M Pre-Seed Round

• Blockchain startup NodeKit, based in Ames, Iowa, wrapped up $1.2M in Pre-Seed funding

• Austin-based fitness app Ladder completed a $12M Series A

• Chicago-based Baird Capital closed Fund VI, their largest to date, at $218M 

🐄 Middle America vs. National Macro Trends

Good news on the inflation front 🎉 In November, the CPI slightly increased by 0.1% after staying the same in October. Looking at the broader picture over the past year, prices for various goods and services increased by 3.1%, which aligns with what economists expected and good news for the economy. We will see in March if the Fed has a rate cut in its back pocket ✂️

• Unemployment in Missouri rose slightly this month to 3.2%, but still well below the steady national average of 3.7% and marginally above the Midwestern average of 3.1% ✅

• The Midwest Consumer Price Index was at 3.0% this month, slightly below the national rate of 3.1% ✅ 

🧠 This Month's Recommendations

📚 What We’re Reading

• Pattern Ventures shares its insights on the appeal of small venture funds to founders, LPs, and GPs alike

• 2024 predictions from USV’s Fred Wilson and Canvas Ventures Rebecca Lynn

• I want to get off the VC Train (decoupling startup success from raising venture rounds) → what do I do? 🚂

• America’s startup boom beyond Silicon Valley, a look into the Atlanta tech ecosystem and areas outside the valley

• The fallacy of the “first mover advantage”

• Techcrunch shared a list of the top startup stories of 2023

🎧 What We’re Listening To

• Ever thought someone could go $0 to $100M in three years selling cold plunges??? —> listen here how 🧊

• Our very own Aasiyah Abdulsalam, CEO and Founder of The Renatural, shares her scrappy approach to marketing, finding her first thousand customers, the process of patenting a new product, and her experience with raising capital on the Female Startup Club Podcast. [40 min]

• One of our new favorites is the Why I Passed Series on the Full Rachet Podcast — Our friend Joe Kaiser at Mercato Partners is on this episode [8 min]

• Listen to how to embrace the benefits of stress on Think Fast, Talk Smart by Stanford GSB [25 min]

• Watching 👀: Safety in Numbers: Keeping AI Open with Arthur Mensch, co-founder of Mistral [39 min]

📆 What We’re Doing

• The team spent time in December reflecting on the year and gearing up for a busy 2024 🎄

  • Prepping for Missouri Startup Weekend on April 5-7, 2024, stay tuned for details 👀 

• Serving as a channel partner to InvestMidwest, April 17-18, 2024 🗺

• We are making our way to Chicago on January 26th for a Venture Crawl with capital allocators from across Middle America 🍾

🪝 Middle America Picks of the Month

🚀 Redbud Portfolio Company Highlight

Start 2024 by saving 2-4x on radiology care by onboarding your company to OneImaging. OneImaging is the nation’s leading comprehensive radiology network, reducing the cost of medical imaging by as much as 80%.

🛠️ Resources

• Gumroad is looking to buy pieces of cash-flowing businesses directly from the founders in exchange for a % of future dividends. Check out what they’re looking for here 🥳

• DocSend data on 100k+ pitch decks and the must-have slides!

• Closing rounds in 2023 and into 2024 can be a year-long process → check out John Li’s must-know info for all founders raising in 2024

• 📣 Calling all excellent Midwest talent: Arch Grants are adding to their team focused on cultivating relationships for their portfolio companies

• One of our favorite GTM explanations from Missouri’s very own Wade Foster, CEO and Co-Founder of Zapier

• Cowboy Ventures is looking for early founders thinking/building across B2B & B2C in fintech, health tech, longevity & consumer!

• Here’s how to make LLMs go fast 🏃🏼‍♀️

• VC terms can be confusing, convoluted, and complex → check out the CB insights glossary of 180+ VC terms and their meanings

• Four weeks? 10 weeks? 115 weeks? Here’s what timelines to maybe expect when you are fundraising

• Headline VC’s 4 Key Trends of 2023 detailed here!

• 41 one-liner startup lessons from a programmer who built a $230B startup (for those who don’t like to read, this one is good)

• How to write LinkedIn posts that drive revenue 💰

• Here’s how NOT to ping an investor

• Resource page for founders we made here 📒

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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