Founders shell out equity to AI engineers

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The Weekend Pitch

April 14, 2024

Presented by Masterworks

(Joey Schaffer/PitchBook News)

Historians often trace the start of the California gold rush back to an entrepreneur, Samuel Brannan, walking through the streets of San Francisco shouting: "Gold! Gold! Gold from the American River!"

One hundred and seventy-six years later, engineers are shouting a similar verse: Just swap out "American River" for "machine learning Ph.D."

Deep learning AI researchers and engineers are in higher demand than ever as corporations and startups compete for a dwindling pool of qualified talent.

Tech companies are taking drastic measures to win the AI talent wars—see Microsoft's recent talent grab from Inflection AI and Elon Musk's xAI poaching Tesla engineers. "Salaries are approaching, in some cases, seven digits. It's becoming insane," said Jonathan Userovici, a general partner at Headline.

Plenty of engineers are abandoning Big Tech for the startup world, not wanting to miss out on joining a transformative AI startup—where even a small employee-owned stake could pay extraordinary dividends.

But when it comes time for offer letter negotiations, founders are suddenly finding themselves on the back foot: Machine learning experts, aware of how in-demand their skill sets are, are asking for significantly more equity —even 3x more—than what an early employee would typically see.

This is The Weekend Pitch, and I'm Rosie Bradbury. You can reach me at rosie.bradbury@pitchbook.com or @_RosieBradbury on X.

Trivia

According to the latest PitchBook-NVCA Venture Monitor, how much deal value was generated by US venture investors in Q1?

A) $36.6 billion
B) $28.4 billion
C) $47.9 billion
D) $66.1 billion

Find your answer at the bottom of The Weekend Pitch!

What could precipitate a PE exit rebound?

(Alvaro Medina Jurado/Getty Images)

PE exit activity had a sluggish start to the year: Total US exit value declined 19% quarter-over-quarter in Q1, even after Leonard Green & Partners' sale of SRS Distribution for $18.25 billion.

GPs increasingly employ secondary strategies such as continuation vehicles in search of liquidity, and our analysts expect more than 100 exits through continuation funds this year.

How soon will the PE industry break the exits logjam and ramp up its deal machine? Our Q1 2024 US PE Breakdown dives into the data and current market trends.

Where does VC go from here?

For LPs, distributions are what matter, and our data shows how low those realized returns have dropped during the market slowdown. Our newest PitchBook-NVCA Venture Monitor shows that just $9.3 billion in new fund commitments were closed in Q1, only 5% of 2022's annual high.

With little capital to recycle into the market, LPs have come under further pressure in navigating their exposure to VC. While the IPOs of Reddit and Astera Labs grabbed the spotlight during the quarter, total exit value reached just $18.4 billion—dampening the outlook for an increase in distribution rates.

Europe supersizes its PE funds

(Capelle.r/Getty Images)

CVC Capital Partners raised a €26 billion (about $28 billion at today's conversion rate) buyout fund in 2023. Is a €30 billion vehicle up next?

The short answer is probably not. Our analysts don't expect CVC's record to be broken anytime soon as interest rates remain high and GPs work to prove they can deliver returns at such large sizes. But mega-funds are still on the rise in Europe, and our analysts expect to see many more in the €1 billion to €10 billion range.

Quote/Unquote

"It was serene and peaceful in 2023. A lot of capital was sidelined. Venture funds had trouble raising. 2024 is all-around pretty different."

—Nic Carter, partner at Castle Island Ventures, describing the crypto investment landscape after investing in blockchain developer Monad Labs' $225 million Series A.

Stay tuned

Keep an eye out for these insights and research reports coming out this week:

Q1 2024 Fintech & Payments Public Comp Sheet and Valuation Guide
Q1 2024 European Venture Report
Q1 2024 European PE Breakdown
2024 Annual Artificial Intelligence & Machine Learning Overview

Trivia

(Weiquan Lin/Getty Images)

Answer: A)

US VC dealmaking generated $36.6 billion in value in Q1, a slow start to the year. You can read more about the latest VC trends in the Q1 2024 PitchBook-NVCA Venture Monitor.

This edition of The Weekend Pitch was written by Rosie Bradbury, Madeline Shi, Jacob Robbins, and Samantha Steele. It was edited by James Thorne and Samantha Steele.

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Founders shell out equity to AI engineers

Trivia

What could precipitate a PE exit rebound?

Where does VC go from here?

Europe supersizes its PE funds

Quote/Unquote

Stay tuned

Trivia

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Emerging GPs dominate impact fund counts

Where does VC go from here?

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