Making Sense: February Q&A

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. On Tuesday, February 18, 2025, Phil Neuhart, Director of Market and Economic Research, sat down with Eli Oftedal, the lead researcher on Silicon Valley Bank's State of the Markets report. This report focuses on private markets, especially venture capital dynamics. It leverages Silicon Valley Bank's proprietary data, as well as its relationships with investors, to provide a unique perspective on the innovation economy. The information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

Phil: Eli, thanks so much for being with us. For those who aren't familiar with you and your team, can you give us a brief introduction on your area of focus and particularly the State of the Markets report?

Eli: Certainly. So Phil, thrilled to be here. Thanks so much for having me on to talk about the 29th edition of SVB's State of the Markets report. A little bit of background on our team. We cover the innovation economy, and that is essentially innovative tech and healthcare companies that are typically venture capital-backed, and you know, what is happening in terms of their fundraising and investment.

We do about 20 reports a year at various depths in terms of what sectors we're looking at and what themes, but State of the Markets is really our broadest look at the tech innovation ecosystem.

We cover everything from fundraising, investment, company operations and exits as well. And it's from the earliest stage of company all the way through exits and IPOs.

Phil: Thank you for that, Eli. And speaking of the innovation economy, artificial intelligence remains a massive theme both in your world and also in public markets as well. Can you discuss where we are in the AI cycle in your perspective and its impact on venture investment?

Eli: Certainly. So I think it's really important to kind of level set where we are in the innovation economy right now. So venture investment witnessed the most significant decline between 2022 and 2023 that we have seen since the dot-com bubble burst in 2000. And so we are certainly in an environment of recalibration and recovery for the innovation ecosystem. So amid that, what we see is that AI has emerged as the driving force behind US venture capital investment. In 2024, about 50% of investments went to companies that leveraged AI in some way, shape or form. So if we were to, you know, strip out AI from overall investment levels, what we would see is a recovery that mirrors the prolonged recovery after the dot-com bubble burst.

So for AI specifically, it's in its early days, certainly. It's the driving force of investment currently, but there's a lot of disruption potentially to come. You know, we don't have to look very far for companies that are potentially changing the paradigm already, such as DeepSeek, which is potentially taking the cost of training a model from, you know, billions of dollars and making it in the millions of dollars potentially.

So those types of advances really change where capital may be allocated. And, you know, what I'll say is that a lot of AI companies at this point do have real revenue and real traction, so we do have quite a bit of optimism for where we're headed.

Phil: So beyond that, the dominance of AI, artificial intelligence, what other dynamics are important to the venture capital landscape today?

Eli: Certainly. So I think, you know, just a simple supply-and-demand model can actually go a long ways in kind of understanding what has happened in the ecosystem.

So as I mentioned, you know, VC investment has fallen substantially since 2021. We were at about a $350-billion-per-year run rate. Now we're at about a $200-billion-per-year run rate. At the same time, the demand for capital has increased. So about 50% of US VC-backed tech companies need to raise in the next 12 months. And while that might sound high, it's not actually that far out of touch with what we have seen historically.

So typically saw between mid 40% to upper 40% for the number of companies needing to raise in the next 12 months. But what has changed is that there are a lot more companies today in the innovation ecosystem. So demand for capital is far higher. And what that means is that the benchmarks are higher for companies raising capital today.

So revenue growth rates, excuse me, the amount of revenue companies have, especially at the early stage, is significantly higher. So we see about a 75% increase from 2021 levels in terms of how much revenue the typical Series A company has.

And, you know, we also see other changes as well. So fewer companies making it from one round to the next, or lower graduation rates. We also see compression in valuations at the price of companies and the multiples, in terms of revenue multiples. So we're certainly in an environment where we're seeing recalibration. AI is a growth story, but, you know, there are definitely challenges for many tech companies raising right now.

Phil: Well, certainly, it's a show-me environment within the innovation economy. Looking at other fundamentals that might be drivers in 2025, there's a lot of focus and even cautious optimism for M&A activity this year and the potential for initial public offerings to pick up. What are your expectations for both M&A and IPO activity in 2025?

Eli: Certainly. So I'll start off with IPOs. And, you know, we don't expect the IPO window will swing open in 2025.

That said, there are a lot of companies looking for liquidity right now, but many of those companies don't necessarily have the revenue, have the revenue growth or the profitability to really be a compelling story in public markets at this point. The bar is higher for companies to exit, and so we think that a handful of companies that are well positioned to IPO will do so in 2025. We expect, about 10 IPOs.

Some of the headwinds there are of course inflation and interest rates potentially not falling or as quickly as we thought they might at the beginning of 2024.

But, you know, if we aren't expecting as many IPOs, maybe some of those companies will turn to an M&A transaction, especially, you know, with a looser regulatory environment at the FTC, leading to larger players stepping in to kind of fill some M&A deals that could potentially be on the scale of a smaller M&A or excuse me, IPO transaction.

So, ultimately, you know, there are headwinds to the market. We do expect less activity than we saw in 2021, but the exit window is beginning to crack open and we are starting to see some positive tailwinds there.

Phil: Well, fingers crossed we see a pickup in 2025 at least relative to 2024, which admittedly was quite a low bar.

Eli, thank you so much for joining us today. I really appreciate the work you and your team provide. To our listeners, be sure to check out SVB's State of the Markets report, which you can access with the QR code on the screen. Eli, thank you so much for joining.

Eli: Phil, it was a pleasure. Thank you.

Stay Informed on FirstCitizens.com/Wealth

Making Sense

Webinars | Join us at the end of each month for an in-depth discussion, Q&A included.

In Brief | Outlook for the week ahead in 90 seconds.

Q&A Videos | Answers to top questions from clients.

Breaking Financial News | Topical, market-moving events and considerations.

Brent Ciliano, SVP

Chief Investment Officer

Phillip Neuhart, SVP

Director of Market and Economic Research

Disclaimers

The views expressed in this report are solely those of the authors and do not necessarily reflect the views of SVB.

This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable but which has not been independently verified by us, and, as such, we do not represent the information is accurate or complete. The information should not be viewed as tax, accounting, investing, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing related to the material should construed as a solicitation, offer or recommendation to acquire or dispose of any investment, or to engage in any other transaction.

All non-SVB named companies listed throughout this document, as represented with the various statistical, thoughts, analysis and insights shared in this document, are independent third parties and projections or analysis should not be viewed as factual and should not be relied upon as an accurate prediction of future results.

Investment Products:

Are not insured by the FDIC or any other federal government agency | Are not deposits of or guaranteed by a bank | May lose value

Authors

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Eli Oftedal | Senior Analytics Researcher

Market Insights | Silicon Valley Bank

eoftedal@svb.com

Important Disclosures

This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.

Your investments in securities and insurance products and services are not insured by the FDIC or any other federal government agency and may lose value.  They are not deposits or other obligations of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amounts invested.

About the Entities, Brands and Services Offered: First Citizens Wealth^™ (FCW) is a marketing brand of First Citizens BancShares, Inc., a bank holding company. The following affiliates of First Citizens BancShares are the entities through which FCW products are offered. Brokerage products and services are offered through First Citizens Investor Services, Inc. ("FCIS"), a registered broker-dealer, Member FINRA, Opens in a new tab and SIPC, Opens in a new tab. Advisory services are offered through FCIS, First Citizens Asset Management, Inc. and SVB Wealth LLC, all SEC-registered investment advisors. Certain brokerage and advisory products and services may not be available from all investment professionals, in all jurisdictions or to all investors. Insurance products and services are offered through FCIS, a licensed insurance agency. Banking, lending, trust products and services, and certain insurance products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, Opens in a new tab, and an Equal Housing Lender, and SVB, a division of First-Citizens Bank & Trust Company.

FirstCitizens.com/Wealth/Disclosures

SVB.com/Private-Bank/Disclosures/Form-ADV, Opens in a new tab