Dear Reader,
Yesterday we had a look back at the public markets and reflected on what a remarkable year – not in a good way – 2022 turned out to be. The combined stock/bond performance was the worse seen since 1871.
Today, we’ll look back on the traditional initial public offering (IPO) market for last year. Not surprisingly, there wasn’t much activity at all.
The chart above paints a pretty stark picture. There were only 71 deals raising a mere $7.7 billion last year. That’s the least amount of IPO activity in more than thirty years. And only 16 deals raised more than $100 million.
Worse yet, the average return from the IPO offer price was a negative 31%.
None of this comes as a surprise given the inflationary environment, the very aggressive stance of the Federal Reserve, and geopolitical concerns with Russia/Ukraine and China/Taiwan. It’s resulted in what may very well be the worst market conditions last year of our lifetimes.
No executive team wants to go public in an environment like we had last year. Those that did go public last year almost certainly had an underlying need to do so.
This point is exemplified by looking at how private capital dealt with last year. Venture capital and private equity have longer time horizons than that of an individual company, which often has shorter term funding needs.
Venture capital backed IPOs were down 92% year on year, bringing just 14 IPOs to market responsible for $1.7 billion of the total $7.7 billion
Even more telling was that there were ZERO private equity backed IPOs last year
The second point is really telling. That’s the first time in more than 20 years that there wasn’t a private equity backed IPO. And the reason for this is valuations.
Private equity firms like to purchase companies at attractive valuations and take them public at much higher valuations. In 2022, we saw, and continue to see, extremely compressed valuations. In some cases, valuations are ridiculously low or even negative enterprise valuations for high quality tech/biotech companies.
No private equity firm is going to be looking to exit their investment in a market like this. VCs don’t want to either, unless they are really looking to exit just to get a holding off their books.
And there was all but nothing happening in the tech sector last year, with one notable exception – Mobileye. Intel acquired Mobileye back in 2017 for a large sum at the time – $15.3 billion. Mobileye was known for its semiconductors for advanced driver assistance systems (ADAS), which is basically a form of smart cruise control, not autonomous driving.
Mobileye (MBLY) went public in October last year at a $17 billion valuation, which was quite an embarrassment for Intel as it originally intended to take the company public at a $50+ billion valuation. Mobileye raised $990 million which made up almost 13% of all IPO funds raised for the entire year.
The IPO was a rare success for last year. The stock rose from its IPO price of $21 to just under $30, where it sits today. But while I like Mobileye’s technology, I wouldn’t be recommending the company today.
Mobileye is currently trading at more than 10 times forecasted 2023 sales, which is very rich for this environment. And the company’s 180 day lockup expiration window is on April 24. I expect a lot of selling between now and then, and I believe that the stock will decline much lower after the lockup. In fact, I expect we’ll see the enterprise value drop well below $15 billion.
Share prices are going much lower, which will likely present a great opportunity in the future to pick up shares at an incredible price.
While it was a very slow year for IPOs last year, that only means one thing… the backlog of companies looking to access the public markets has grown. Perhaps on Monday we’ll take a look at the pipeline of exciting companies that I expect will go public in 2023.
With that said, I predict that the first four to five months of this year will continue to be very slow for IPOs. Until the Federal Reserve changes course, we’ll continue to see unfavorable market conditions for IPOs.
When we hear about investments in clean energy and electric vehicles (EV), its often about EV battery companies. It’s not surprising as investors envision millions of units of product being manufactured and shipped.
But that overlooks one of the most exciting areas for investment in the EV space, which is in EV materials. A company called Group14 just raised $614 million to close out its Series C venture capital (VC) round. This was one of the largest raises in energy technology of 2022 and the last major deal of the year.
One of Microsoft’s venture arms heavily backed Group14’s Series C round. The start-up also received a $100 million grant from the U.S. Department of Energy (DoE). Those funds are to help fund the build-out of a factory in Washington state.
What’s so exciting about Group14 is that it doesn’t manufacture electric vehicle (EV) batteries itself. The company is using silicon, which has 10 times the capacity of graphite by mass, to develop a proprietary battery material known as SCC55.
This material is made of carbon and silicon and can be blended in with graphite to improve battery performance. A simple example is if a battery manufacturer blends in 20% of SCC55, it can improve battery energy density by 30%.
These kinds of material improvements in battery performance are beneficial to EV manufacturers in two ways.
Group14’s material can be used to extend the range of an EV with the same battery size that’s standard today. Or the silicon-carbon material can be used to produce smaller, less-expensive batteries that can provide EVs with the same range they currently have.
Pure silicon or silicon metal battery companies have struggled to commercialize their technology. None have been employed in EVs to date. Group14’s approach is an interesting compromise.
It can enable material performance improvements and a faster path towards commercialization, which is exactly why we’ll be keeping a close eye on this private company.
Yesterday, we had a look at an incredible and heartwarming story of how CRISPR genetic-editing technology was used to cure a teenager’s leukemia. Well, CRISPR now has its sights set on Alzheimer’s disease.
We’ve known for a long time that Alzheimer’s patients have an abnormally high level of amyloid plagues in their brain. These are clumps of proteins, and they’re produced by the amyloid precursor protein (APP) gene.
And that’s where CRISPR comes in…
A few weeks ago, researchers at the University of California, San Diego conducted an experiment on mice. The mice were genetically modified to develop characteristics of Alzheimer’s disease by the time they were two months old.
The researchers used CRISPR to modify the APP gene in these mice such that it reduced the production of amyloid plague. The hope is that this would also slow the progression of Alzheimer’s disease. And that’s exactly what they found.
The mice treated with CRISPR had 44% less amyloid plagues in their brain compared to the control group of untreated mice. The treated mice demonstrated significantly lower levels of neuroinflammation as well.
If this were a human trial, this would be the most encouraging development around Alzheimer’s we’ve ever seen. I can’t overstate just how promising this is.
Of course, the challenge is optimizing this technique so that it can be used in humans. If CRISPR can slow the production of amyloid plagues in humans, there’s a good chance this approach will result in a breakthrough therapy for Alzheimer’s.
We’ll be watching to see which biotech company picks up this research with a goal of moving towards clinical trials and ultimately FDA approval.
We’ll wrap up today with another big development in the biotech space. This is something that’s created a lot of buzz in the industry in the last few weeks.
A company called Avidity Biosciences (RNA) just released promising data from a Phase 1/2 clinical trial utilizing what’s called siRNA technology. The “si” stands for “small interfering.” Some refer to it as “silent RNA.”
Now, I suspect many readers are familiar with the messenger RNA (mRNA) technology that’s used in the COVID-19 “vaccines.” The application of mRNA is used to coax our bodies into creating the toxic spike protein which then elicits an immune response.
siRNA is a different form of RNA medicine. The use of siRNA can silence specific genes. It can be used to stop the production of certain proteins.
Avidity Biosciences employed this approach in a therapy targeting an aggressive form of muscular dystrophy called Myotonic Dystrophy Type 1 (DM1). DM1 is linked to the overproduction of the DMPK protein.
What has the industry so excited is that this approach demonstrated a meaningful reduction in DMPK in 100% of the trial participants. The mean reduction in DMPK was 45%.
So the early results suggest that siRNA technology can work to tackle some very difficult-to-treat diseases like muscular dystrophy. That’s why the industry is so excited about this technology.
While the efficacy and safety of mRNA technology as applied to vaccines has been a huge disappointment, it has raised awareness of RNA technology in general which has resulted in increased investment in biotech companies working in this space.
As will all therapies, it is a matter of matching the most suitable biotechnology with each respective disease and then optimizing each therapy for both safety and efficacy.
Historically, this process has usually been a decade-plus venture, but now with the most recent breakthroughs in protein science and computational biology, we’ve entered a period where these therapeutic development cycles will be compressed into much shorter timeframes with far less time being spent on tedious experimentation.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
