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Liquidation preferences put VCs into conflict

Plus: Weight loss drugs dirsrupt sector, rightsizing the next fund, VC snaps a losing streak & more
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The Weekend Pitch
October 8, 2023
Presented by the U.S. National Science Foundation
(Drew Sanders/PitchBook News)
Venture capitalists are waking up to a new and uncomfortable problem: typically collaborative investors are finding themselves at odds with each other when portfolio companies move to exit or raise new funding.

The complications involve liquidation preferences for different share classes—seed, Series A, B and C, and so on. Shares sold in later rounds, the ones further down in the alphabet, are known as senior shares because they are at the top of the liquidation preference stack and should be worth more. When a company's value drops below the total capital invested, backers in the latest round get their money back first—assuming the company has a standard structure of liquidation preferences.

None of this mattered much during the boom times. Back then, just about everyone was feeling optimistic about their portfolio companies growing into massive businesses. Investors didn't spend a lot of time thinking about their downside protection.

All that ended when the US Federal Reserve turned off the money spigot by raising interest rates. Comparable company valuations dropped, growth slowed and now, more than 18 months into the downturn, some portfolio companies are worth less than the money they raised.

This complicated economic picture is colliding with convoluted share structures. The result is that various share classes may now root for competing outcomes as portfolio companies seek liquidity or new rounds of financing.

This is the Weekend Pitch and I'm Marina Temkin. You can reach me at marina.temkin@pitchbook.com or @MTemkin.
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A message from the U.S. National Science Foundation  
Invention to impact
Docugami uses their own specially-trained large language models and generative artificial intelligence to help businesses analyze documents, extract information, and assist in writing contracts and agreements. Docugami (NSF-2233508) is one of hundreds of deep tech startups funded annually by the U.S. National Science Foundation (NSF), a government agency that plays a central role in accelerating discoveries into the marketplace.

Each startup can receive up to $2 million to support translational research & development. By investing more than $200 million in startups annually, NSF helps teams navigate the earliest stages of technology translation. In the past five years, these companies have gone on to raise billions in follow-on capital, and the portfolio has had 300+ exits.

Learn more about NSF funding at seedfund.nsf.gov
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Watching weight-loss drugs' disruption
(Peter Dazeley/Getty Images)
As adoption of drugs like Ozempic and Wegovy rises, Walmart's CEO said this week that their customers who take the medications are buying less food.

Beyond groceries, many other sectors and businesses could face disruptions from the popularity of GLP-1 drugs linked to weight loss. Our new Emerging Tech Research, Q3 2023 Healthcare Future Report: Weight Loss Drugs, explores how the trendy drugs could impact biopharma, digital health, healthcare services, medtech and healthcare IT.
 

Finding the Goldilocks fund size
(Daniel Grizelj/Getty Images)
Declining valuations and scarcer capital have made it more challenging for VCs to determine the just right size for their next fund.

New tools that use predictive modeling and data analytics take out some of the guesswork. And diversifying funds by strategy can allow firms to fine-tune their funds' size to the market's needs. Our analyst note on sizing a VC fund explains how this works.
 

VC snaps a losing exit streak
(gguy44/Getty Images)
The value of all US VC-backed companies that exited in Q3 was $35.8 billion, more than the three prior quarters combined, according to our first look at the PitchBook-NVCA Venture Monitor.

But a handful of IPOs doesn't spell relief yet. VC deal value fell again to $32.7 billion in Q3, the lowest level since Q2 2018.
 

Trivia
PitchBook's latest Emerging Tech Research, Q3 2023 Healthcare Future Report: Weight Loss Drugs, lays out how these immensely popular medications could shift the VC landscape. Still, most of these drugs are not explicitly approved for weight loss. Which of the following is the only one approved for weight loss?

A) Wegovy
B) Mounjaro
C) Ozempic
D) Rybelsus

Find your answer at the bottom of The Weekend Pitch!
 

Quote/Unquote
(Photo by Michael M. Santiago/Getty Images)
"He had wealth, he had power, he had influence. But all of that was built on lies."

—Assistant US Attorney Nathan Rehn at the opening of the trial of Sam Bankman-Fried, shown above, the disgraced head of cryptocurrency exchange FTX.

Recommended Reads
Getty Images CEO Craig Peters has a plan to defend photography from AI. [The Verge]

Michael Lewis doesn't do villains, and his new book about the crypto mogul Sam Bankman-Fried has the writer under a microscope. [The New York Times]

Daniel Lurie started tech's favorite charity. Can he save its favorite city? [The Information]
 

Stay tuned
Keep an eye out for these insights and research reports coming out this week:
  • Q3 2023 PitchBook-NVCA Venture Monitor
  • Q3 US PE Breakdown
  • Analyst Note: VC City Ecosystem Index
  • Emerging Space Brief: Fusion Energy
 

Trivia
Answer: A)

Only Wegovy is approved for weight loss. You can read more about these medicines and their effects on the VC ecosystem in our Q3 2023 Healthcare Future Report: Weight Loss Drugs.

This edition of The Weekend Pitch was written by Marina Temkin, Rosie Bradbury and Emily Burleson. It was edited by James Thorne and Ron Prichard.

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