The last several years featured high valuations in late-stage venture and growth equity induced by the quantitative easing policies of the Fed. This was exacerbated in early 2020 by the extraordinary stimulus put in place to combat anticipated COVID-19 headwinds. Consequently, valuations were more reflective of the monetary environment than underlying company fundamentals. While valuations have since corrected in the public markets, with the Nasdaq down 35% from its 2021 high and the NASDAQ Biotechnology Index down nearly 29% from its peak,¹ we have yet to see this same magnitude of decline in private market valuations. Companies who were beneficiaries of a lower cost of capital, and could endure higher burn multiples as a result, have seen the starkest reversion in valuations.

Private market valuations have begun to temper despite data lag

Source: Pitchbook. Median U.S. pre-money valuation for Series C and later VC deals. 2022 data: YTD through 9/30/22.

The lagging nature of private markets suggests growth equity valuations have yet to fully normalize, and we anticipate further declines in private market multiples over the coming quarters. Many private companies took advantage of the favorable funding environment over the past several years and raised significant amounts of capital, enabling them to preserve their last round valuations in hopes that underlying fundamentals can grow into the new valuation paradigm. Additionally, venture capital (VC) fundraising reached record highs over the past year. As of October 2022, VC dry powder is estimated at over USD 290B. The J.P. Morgan Growth Equity teams expect this capital will, in part, insulate private funding markets from major near-term disruption, as dry powder earmarked for funds’ existing portfolio companies delays near-term valuation markdowns. This has already become apparent in late-stage deals, where companies have increasingly raised bridge rounds to preserve optics of valuations and carry them through their now-extended IPO timelines.

Late-stage companies turning to bridge rounds in 2022

Percentage of Series E+ rounds that were bridge rounds

Source: Carta, Q2 2022 State of Private Markets.

Looking ahead, the next 12 months should create more favorable investment opportunities as the extended closure of the IPO markets puts increased pressure on private companies and founders become more receptive to raising capital at flat (or even lower) valuations to extend runway. Within the technology and climate technology growth equity teams, we believe most near-term opportunities will be in the late-stage venture and early growth stage rounds, such as Series B and Series C deals. We also anticipate more structured equity deals to take place with investor-favorable downside protective provisions. The impact of this new environment continues to create attractive opportunities as the gap between founder and investor valuation expectations narrows. Within the life sciences space, we will have the opportunity to invest earlier in the biotechnology company lifecycle by founding novel companies, seeding high-potential clinical assets and leading a syndication of pivotal Series A financings, as other investors allocate focus away from investing in the early-stage biotechnology space and spend time on struggling companies in their existing portfolios.

Late-stage round sizes and valuations are just beginning to reset

Median amount raised and post-money valuation by stage

Source: Carta, Q2 2022 State of Private Markets; data as of 6/30/22. 

Going into 2023, we are focused on several trends we believe present the greatest growth opportunities:

• Technology, including the modernization of logistics and generative AI.

• Climate technology boosted by corporate commitments, technology and regulatory changes.

• Life sciences, driven by innovation within the biotech industry and increasing demand for new medicines by large pharmaceutical companies

Technology Growth Equity trends: Logistics and Generative AI emerge as top themes of focus

Modernization of logistics

The logistics industry has seen a massive increase in data flows over the last few years, partially driven by the rapid deployment of sensors, cameras and other internet of things (IoT) devices across the supply chain to enhance visibility, manage fleet and drive down costs. This has led to the rapid emergence of cloud-based software as a service (SaaS) companies built on top of these data flows to optimize supply chains and drive operational efficiencies. The logistics and supply chain management software space is estimated to have reached USD 20B² of revenue in 2022. With roughly half of the largest importers in the United States still using spreadsheets to manage their supply chains³ and many existing software products representing on-premise solutions, there is significant opportunity for disruption in the industry.

The most innovative logistics software companies automate manual processes to reduce costs and drive better operational outcomes. In particular, Growth Equity Partners (GEP) has seen opportunities emerge in the freight audit and pay space. The historically tedious invoice audit process can be abstracted in a way that not only reduces time to completion but also minimizes errors. The freight brokerage software space also presents opportunity for tech disruption, where companies are offering targeted solutions for legacy brokers to digitize the historically manual capacity management and pricing processes, while building out a stronger carrier network. GEP understands that the logistics market is massive with many opportunities across workflows, transportation modes and customer types, such as brokers, shippers and carriers. We are carefully evaluating each segment of the market to identify disruptive companies with demonstrated traction, differentiation and large market size potential in their respective verticals.

Generative AI: Focus on infrastructure and differentiated vertical solutions

GEP is closely tracking developments in generative AI and evaluating relevant companies in this space. Driven by breakthroughs in machine learning techniques, new foundational models now enable the generation of text, images, video and other content with remarkable quality. Whether assisting developers with coding recommendations, sales reps in drafting follow-up emails or enabling marketers to quickly generate robust content, applications built on foundational models promise to significantly enhance productivity in several sectors. 

The potential size of this economic opportunity is massive, as evidenced by early traction for products built on leading foundational models. OpenAI’s viral ChatGPT reached one million users in five days,⁴ and Stable Diffusion’s photo generation tool has accumulated over 10 million users since its launch in September 2022.⁵ The virality of these platforms will create billions of dollars of value through both direct spend on AI products and the efficiency gains achieved by various enterprises as they adopt AI in daily workflows.

In terms of investment opportunity, generative AI presents multiple vectors of value creation: companies creating foundational models, products built on top of foundational models to provide vertical-specific solutions and infrastructure powering the space, including streaming data players and machine learning operations (MLOps) companies. We are excited about the opportunities within generative AI, but approach the space with a level of caution regarding valuations. Several companies are raising rounds at very high valuations relative to their commercial traction thus far; GEP remains disciplined in following its valuation framework rather than hype around industries, even if they are conceptually interesting. Valuations aside, the business models of several companies within generative AI may be pressured once the space matures. Many of the foundational models are open source, mandating that companies create moats through incremental – and sometimes vertical-specific – models. GEP is closely evaluating such companies and will look to invest in players with sustainable differentiation.

Climate Technology trends: Structural industry changes create attractive investment opportunities

Corporate commitments boost investments in efficiency

About one-third of the largest 2,000 publicly traded companies worldwide have committed to net-zero emissions.⁶ This is in response to several drivers, particularly climate security concerns, a changing regulatory landscape and evolving consumer preference for sustainable alternatives. With increasing focus on Scope 3 emissions, corporations are doubling efforts to reduce carbon intensity across their supply chains. We expect that corporate sustainability commitments will continue to grow and evolve in 2023, creating a tailwind for climate technology companies. We expect that companies with solutions that deliver both cost savings and emissions reductions will be best positioned to gain traction given the macroeconomic backdrop. We believe that the food and agriculture, real estate, industrial and transportation sectors, which represent 80%+ of global greenhouse gas (GHG) emissions,⁷ show the greatest potential for sustainability-focused technology deployment. This next stage of addressing climate change will create a significant annual market opportunity for resource efficiency and adaptation solutions across all these industries.

Only a fraction of the capital required to decarbonize key sectors is being deployed today

Annual global spend required to decarbonize key sectors vs. actual spend

Sources: Climate Watch, Our World in Data, World Resource Institute, J.P. Morgan Asset Management. See footnote 7 for additional details. Source for annual spend needed: Climate Finance Markets and Real Economy, December 2020; represents annual global investment required for resource efficiency and resiliency, excluding investments in renewables and conventional energy infrastructure. Source for recent spend estimates: Climate Policy Initiative, Global Landscape of Climate Finance 2021; represents 2020 spend on resource efficiency and resiliency, excluding investments in renewables and conventional energy infrastructure.

Technology driving greater proliferation of accurate and reliable data

Data availability and consistency continue to be key bottlenecks to implementing ESG and sustainability initiatives. We expect new data infrastructure, software-driven tools and machine learning-driven insights to enhance data reliability and accessibility in 2023 with the ESG and sustainability data ecosystem benefiting significantly. Reliable, real-time data will play an important role in helping companies and investors measure and calculate Scope 1 and Scope 2 emissions, enabling companies to monitor, report and act on true carbon emissions and, ultimately, take informed actions toward achieving their climate commitments.

Regulatory tailwinds

We have seen growing regulatory trends toward decarbonization globally. In the United States, we view the Inflation Reduction Act (IRA) as the most positive policy change in recent history that further advances the low-carbon transition. The IRA provides meaningful incentives for private investment, as the majority of the USD 369B earmarked for energy and climate funding is in the form of tax credits.⁸ Climate technology companies that support onshoring of manufacturing – especially connected to battery technology and the automotive and utility sectors – will likely be the most immediate beneficiaries. At the same time, we expect demand for renewable energy to accelerate, lowering prices even further and making renewables increasingly cost competitive versus traditional fossil fuels. The evolving energy landscape will, in turn, bolster technology solutions enabling electrification, integration of renewables and grid resilience. Final implementation of the IRA is expected from the Treasury Department in Q1 2023, which we expect to spur accelerating private investment.⁹

Life Sciences trends: Three trends converging to create an unusually good time to invest in life science

Explosion of innovation

Within just the last decade, the remarkable innovation capacity of the biopharmaceutical industry has yielded the first FDA approvals of novel therapeutic modalities with great potential, representing an unprecedented expansion of the biopharmaceutical toolkit that physicians have at their disposal to treat and cure disease. These new modalities are, for the first time, allowing physicians to engage historically undruggable targets in the body, creating opportunities to dramatically impact diseases that were previously difficult to treat.

FDA approval of novel modalities

Source: FDA, J.P. Morgan Life Sciences Private Capital analysis; as of 12/31/22.

We have also seen firsthand the transformative impact that biomedical advances offer to patients at all stages of life. The speed of new product development is increasing. In recent years, novel small molecule drugs have essentially cured thousands of people of Hepatitis C and cystic fibrosis and have transformed the lives of patients with rare orphan diseases, such as sickle cell disease. Immunotherapies have transformed the lives of patients with cancer, and promising technologies – such as targeted protein degradation and gene editing – are not far behind. The future rewards from our biopharmaceutical engine will be greater still.

Increasing acquisition demand by large pharmaceutical companies

While new technologies enable more companies to pursue unique and impactful medicines, these companies do not need to take their medicines through FDA approval and onto the market to create significant value. Instead, big pharmaceutical companies, the traditional buyers of biotechnology companies, have an increasing demand to acquire new medicines. In 2021, the largest 16 pharmaceutical companies derived 71% of their revenue from acquisition and partnering with small venture-backed companies.¹⁰ Compounding the need for large pharma to acquire new, high-potential assets for their pipelines: 15 of the top selling drugs will lose patent exclusivity in the next decade, resulting in a USD 100B+ revenue loss that companies will need to fill.¹¹ Since 2018, there have been 56 biotechnology companies acquired for greater than USD 1B.¹²

Attractive competitive landscape

The biotechnology market has seen a substantial expansion and correction in the past five years. During the period from 2018 to 2019, the total capital raised for private biotechnology companies in seed through Series C deals averaged ~USD 2B per quarter.

In 2020, the total capital raised per quarter jumped to an average of USD 4.4B and throughout 2021 peaked at an average of over USD 10B per quarter.¹³ This corresponds to the boom in valuations seen in public biotechnology where the XBI Biotechnology Index increased in value by approximately 40% between December 2018 and February 2021.¹⁴ Since then, however, both public and private valuations have corrected significantly with the XBI Index selling off approximately -47% from February 2021 to December 2022 and the quarterly capital raised by private biotechnology companies declining to USD 5.3B and USD 5.0B in Q3 2022 and Q4 2022, respectively. Consequently, many of the generalist “tourist” investors in biotechnology have pulled back. 

The gap in the market now is talent: finding investors who know how to build companies from the ground up, recruit and support excellent management teams and make the early strategic decisions that set a company up for long-term clinical success. As other investors have pulled back, the value of experienced investors and company builders has increased.

We are excited about the biotechnology investment landscape in 2023 because the accelerating scientific innovation that drove much of the 2020-2021 boom in biotechnology valuations will continue to drive major value creation in the future. Simultaneously, biotechnology valuations have corrected materially, and many generalist investors have chosen to exit the space, leading to an increased appreciation for tenured investment teams with deep company formation, scientific and commercialization experience.

In summary, we are excited about the opportunities that lie ahead within the growth equity space, across the technology, climate technology and life science sectors. We believe that the recent reset in valuations will afford significant opportunities across each of these areas and we are confident in our ability to leverage the J.P. Morgan platform to win attractive deals, drive scale for new solutions and deliver attractive returns for our clients.

¹ Nasdaq Composite performance represents drawdown from peak (11/19/21) through 12/31/22 and NASDAQ Biotechnology Index performance represents drawdown from peak (8/30/21) through 12/31/22.
² Gartner Software Market Insights: Logistics and Supply Chain Management (SCM).
³ McKinsey, 2021.
⁴ Greg Brockman, President of OpenAI.
⁵ Bloomberg, “Stability AI raises seed round at USD 1B value.”
⁶ Climate Action Tracker, as of September 2022.
⁷ Climate Watch, Our World in Data, World Resource Institute, J.P. Morgan Asset Management. Greenhouse gas emissions include CO2, methane, nitrous oxide and fluorinated greenhouse gases. CO2 equivalent tons standardize emissions to allow for comparison between gases. One equivalent ton has the same warming effect as one ton of CO2 over 100 years. Emissions data is as of 2016.
⁸ ESG Alert: Takeaways of the Inflation Reduction Act, J.P. Morgan Equity Research.
⁹ Alternative Energy and Services 2023 Outlook, J.P. Morgan Equity Research.
¹⁰ Deloitte. Measuring return from pharmaceutical innovation 2021. Company press releases. n = 16 large cap pharmaceutical and biotechnology companies.
¹¹ Fiercepharma.com “The top 15 blockbuster patent expirations coming this decade,” July 12, 2021.
¹² J.P. Morgan Asset Management analysis; as of 9/15/22.
¹³ Pitchbook. Deals > USD 10 million in seed to Series C in privately held companies during 2019 – 2021; filtered for “biotechnology” industry.
¹⁴ S&P CapitalIQ.

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