Georgia has a lot to live up to in 2022.
Last year, startups in the state set a record by raising over $4 billion, doubling the amount raised in 2020. It was the second consecutive year Georgia startups, most of which are concentrated in Atlanta, doubled their venture capital raises.
However, a few metrics indicate the state might not be able to beat its record a third consecutive year.
The $922 million Georgia startups raised in the first quarter of 2022 was a decrease from the $1.1 billion raised in the last three months of 2021. The state also hasn't seen any startups have exits, public offerings or reach unicorn status so far this year.
Atlanta Inno talked with serial entrepreneur David Cummings, CEO of Atlanta Ventures and founder of Atlanta Tech Village, about why Georgia is lagging its recent achievements.
In the first quarter of 2021, Atlanta’s tech ecosystem saw companies Calendly and Salesloft reach valuations above $1 billion. Why haven't there been any new unicorns in Georgia in 2022?
In the private sector, valuations got way ahead of historic norms. In the last 18 months, we’ve seen some of those valuations get up to 100 times revenue, which would be three to five times more than what a similar company would have been worth a year ago. As we've seen in the public market, some of these smaller but faster-growing companies’ valuations were reset in the past six months, and they’re going down anywhere from 40% to 70%.
Valuations for a lot of these high-profile startups got way ahead of themselves. They're probably two or three years ahead of what their valuations would have been otherwise. Let's say a company did great, raised money at a $400 million valuation and is still on track to be a unicorn, but then that was a number that was two years ahead of itself. Now, the startup has to grow into that valuation. The entire market has generally been put on pause in terms of dramatically higher valuations based on performance because of all this. These are still great businesses, but I think we'll be in an 18 to 24 month drought of new unicorns.
Georgia also hasn't seen any new exits or IPOs this year. Exits have dropped off across the country, with only $33.6 billion in exit value after three consecutive quarters of over $192 billion. Why is that?
It’s between valuations of public companies coming down and the cost of borrowing going up because of interest rates. One of the nuances is that 12 months ago, if you were a public cloud computing tech company and your valuation was at an ultra premium, you would go acquire a company and do it as a percentage of your market cap that was at a smaller percentage of your market cap if you were trading at a dramatically higher valuation. So now, if your valuation has come down 50%, that same company you wanted to acquire, assuming it was in stock and not cash, as a percentage of your market cap has doubled.
A lot of acquisitions that were done in the past 24 months were done where the public company issued a bunch of bonds to raise capital and used the bond market to raise capital at historically low interest rates. Now, interest rates have gone up with the expectation they’re going to go up a lot more. So if you're going to borrow a billion dollars to make an acquisition, the cost of that capital has gone up dramatically.
Unicorn tech companies have lost at least 75% of their value from the highs last year, including Roku, Robinhood and Wish, according to CNBC That pressure on later-stage public companies has been felt for private finance deals. How does this affect Atlanta?
It trickles down to all cities with strong startup ecosystems. The startups that are pre-IPO and later stage, they are all heavily impacted. Early-stage investments are more of a bet on the team, the addressable market and the timing in the market. Later-stage investments are more about analyzing metrics and analyzing spreadsheet data sources.
This year is on track to become a record for the number of new funds in the U.S. The average fund size has also hit a new high. But Georgia only had one fund close: BIP Wealth’s BIP Blockchain Fund. Why is the state lagging behind on new funds?
On the Georgia front, we’ve been really strong on the seed funds and the pre-series A funds. The nature of the venture world is that you typically need a few funds under your belt where you’ve done well before you can raise institutional capital required for larger fund amounts and do more growth state investing. A seed fund might have $25 million or $50 million and take four to five years of investing capital to see the returns. You can do funds in parallel, so if a second fund takes three to five years of investing to see gains on returns.
When you look at all the seed funds raised in Atlanta, almost all were raised in the last three or four years. They’re too early in the process to raise institutional capital and do growth stage investing. We're not going to have new funds because we just haven’t had the prerequisite to do the growth-stage area of the market, and the current seed stage already has enough capital.
