Written by ChriS Walsh, Partner @ 7GC

As we showcased in our VC market insights in September, there were only 5 technology IPOs in 2024. Cerebras adds another to the count and is particularly interesting given they sit squarely in the "pure play AI" cohort, which stands out given the lack of exposure in the public markets. Cerebras doesn't shy away from this - mentioning in their S-1 "AI" 137 times and "GPU" 118 times, Nvidia's chip technology. While Cerebras' IPO will be insightful on a standalone basis, the IPO is exciting as it relates to broader systemic issues that continue to hang on VC as an asset class. While funding levels remain relatively healthy compared to historical averages, exits (defined as cash returned to investors) have fallen to pre-COVID levels.

Annual VC Exit Value ($B)

Liquidity events are the core of any major asset classes, and VC assets have struggled to gain a foothold post-ZIRP, with total exit values below 20-year averages for three straight years. This lack of liquidity can be attributed to the challenges across the three traditional exit paths, which Thomas Laffont, founder of Coatue, highlighted well in his presentation at the All-In conference:

• PE Buyout:

  Private equity is extraordinarily sensitive to interest rates, and there is a direct correlation between the FED rate hike policy and deal execution. Despite record amounts of dry powder for the asset class, deal flow remains subdued.

• M&A:

  President Biden appointed Lina Khan as Chair of the FTC in March 2021. Under Khan's leadership, she investigated over 800 acquisitions by the five largest U.S. technology companies (Alphabet, Amazon, Apple, Meta, and Microsoft). Regulation has had a chilling effect on the entire technology ecosystem and continues to stifle innovation - if large companies cannot buy smaller companies, this dramatically impacts the underwriting thesis and ultimate exit scenario planning for VC and PE investors. Historically, small companies can create true urgency for big companies because there is a fear that a competitor could buy this company –This dynamic is dead currently.

• IPOs:

  Despite over 1,400 private unicorns, many of these companies do not have the scale, growth, and profitability story to go public today. 56% of all 2021 unicorns have yet to raise new capital based on the reset that would likely occur to the company's valuation. U.S. market indices continue to march to new highs, but these gains have been heavily tilted toward large-cap technology. Large-cap not only brings economies of scale but are growing in excess of 15% coupled with powerful free cash flow while being at reasonable earnings multiples. The bar is high.

VC Distributions as a Share of NAV are at Record Lows

No liquidity means that the cash flow engine and VC business model have been stymied these past 36 months – with money going into the machine and nothing coming out. While distributions were at all-time highs during the ZIRP era, distributions continued to fall through FY23, representing lows that have not been seen since the global financial crisis in 2008.

As we have previously discussed in our semi-annual discussion, this glut remains at large in unicorn land, with over 1,400 unicorns still private. Financing structuring continues to deteriorate the market further, with many of these companies continuing to raise private capital via bridge rounds and down rounds. These private rounds inevitability kick the can for price discovery to some point in the future with no precise end date.

Private Round Dynamics Continue to Show Cracks

It hasn't helped that VC-backed IPOs since 2020 are net negative as a cohort, with around ~$84B in market cap created versus $225B lost. The median IPO offer-to-current is down 43% on average. These outcomes haven't exactly warmed private company's management teams and/or boards. However, focusing on VC-backed IPOs in the past 12 months, the story has been materially different.

VC-Backed 2023-2024 IPO Performance

While 2021 and 2022 VC-backed IPOs dealt with severe overpricing and massive multiple compression, post-ZIRP IPOs continue to fare well and have exacerbated the fact that public-market-ready assets can go public today. This, in our view, has slowly set the stage for what is to come next, and a strong cohort of private companies have been identified as businesses in a position to go public in the near term.

According to Sapphire Ventures, there are more than 20 of these companies have surpassed $200M in ARR, a scale that would have made them strong public market candidates in previous periods. Coincidentally, this number aligns with the historical average of 30%+ public market growers from 2015-2022.

Estimated ARR for Private VC-Backed Software Companies

Extrapolating based on public press releases, these companies are trading on a trailing 22.9x ARR multiple and assuming a linear year-over-year 20% de-acceleration of current growth rates, the cohort set would trade at ~15.4x forward ARR average. This multiple would be comparable to the top 10 public SaaS average today. Most of the private companies listed should eventually enter the public markets, lifting the sector growth rate in the process – median revenue growth across this cohort set stands at 60% YoY.

As more platform and application companies show tangible value from A.I. investment, investors should get more excited about the potential to see re-accelerating growth rates, which will lift broader SaaS. There is some evidence of this already occurring with businesses like Palantir and C3.AI over the last twelve months, and this will likely continue with a new cohort set in FY25. Application software companies are the last beneficiaries in computing cycles, starting with Infrastructure → Platform → Application.

A.I. companies offer a golden boon, given their incredible growth and the size of the market opportunity. There is a continuously scaling list (shown above) of prospective companies that should be in a solid position to continue to creak the IPO window open. This "macro bigger picture" creates an ideal spotlight for the news that Cerebras filed to go public in 2024, which should draw significant demand from the public and retail markets alike.