What Will 2025 Hold for Triangle Startups? Startup Community Calendar Update.
In Startupland, once Thanksgiving rolls around, we start thinking about the next year. In that tradition, this article looks forward to 2025 on the macro level and how that will impact the Triangle.
This week’s issue of the Triangle Tweener Times is sponsored by:
EisnerAmper (formerly HPG) - One of the world’s largest business consulting firms, with a dedicated technology practice offering outsourcing, accounting, tax, and advisory services. Our experienced professionals serve more than 2,000 technology companies, from early-stage startups to public enterprises. Discover how EisnerAmper’s stage-specific solutions and industry expertise can help you achieve your milestones whether startup, international expansion, M&A, or IPO: eisneramper.com/tech.
Bank of America – BofA’s Transformative Technology Group helps game-changing tech businesses and founders realize their boldest ambitions across a wide range of technology sectors. With hands-on support, world-class resources, and an extensive network – BofA provides the stability and scalability that tech companies need to rapidly grow today and into the future.
Smashing Boxes - A Durham based lean design-centric digital transformation company.
Robinson Bradshaw - A full-service business law firm with a passion for supporting the Triangle entrepreneurial ecosystem. Learn more about Robinson Bradshaw’s startups and venture capital practice here.
What Will 2025 Hold for Triangle Startups?
Markets hate uncertainty and elections are uncertain. Post the 11/5 election, public and crypto markets have been ripping. The ‘animal spirits’ are running wild with the Bulls running rampant and the Bears hibernating.
The ‘Setup’ Going Into 2025
But what does this mean for private companies? Before we go forward, we have to look back to 2022-2024. What we care about most in Startupland is three things: Venture funding, M+A and IPOs. Why? Here’s a quick recap:
Venture Funding - In the Triangle, we track the top 300 up-and-coming startups - over 2/3 of them are venture backed. Once you take venture capital, a company most likely is on a bit of a ‘venture treadmill’. You go from pre-seed to seed to series A to series B to series C to series D and so-on. Some companies can get to profitability along the way, but most venture-scale companies need at least a A/B. Since the end of the 2020-2021 Zero Interest Rate Policy, or ZIRP, 2022 forward, venture funding has gotten very ‘tight’. What’s happened is the two common exit events: M+A and IPOs have slowed and thus, Venture Funds’ investors (called LPs) have slowed investing in VCs. This has put sand in the gears and things have been slowing down at the later stages.
M+A - M+A stands for Mergers and Acquisitions - these have been at a standstill because the current administration is anti M+A. The FTC has blocked big and small M+A putting a freeze on the market. The famous ones you’ve probably heard of are Kroger/Albertsons, Adobe/Figma, Amazon/iRobot, and many many more.
IPOs - The IPO market has also been extremely challenged. Going public used to be a great goal for founders and now due to the shenanigans of hedge funds and the surge of programmatic investing, the whole market has changed (a topic worthy of its own X-part series), and the result is founders of great companies that would have previously gone public 5-10 years ago like Epic Games, SpaceX, Fanatics,Stripe, Databricks and a very very long list of great companies that public ‘retail’ investors like me, would love access to, but they remain locked in the private markets. Plus their venture investors are also ‘locked’ in these investments. The expectation was ~10yrs and now it’s stretching to 15+.
This chart from Pitchbook summarizes things nicely→
Because of these factors, the last 2 years have been the worst setup for the three pillars of startups I’ve seen in 30 years of doing this. It’s created an ‘un-virtuous cycle’: No M+A/IPO → No liquidity→ LPs locked up → LPs not investing in VCs → VCs not investing in startups → startups starving off→ no M+A/IPO (rinse and repeat).
That’s the Past, Let’s Look Forward to 2025
I’m no economist, but I do read a lot of the reports out of the top macro-economists and many of them are employed by the big investment-banks. To understand what’s going on, at the Tweener Fund, we hosted Bank of America Managing Director Phil Ianniello, last week for our > 130 Triangle HQ’d startup CEOs and he presented their point-of-view. I’ve read through 5-10 of these so far post-election and the BofA presentation does a great job of presenting the consensus of what all the Wall St. economists are predicting for 2025. All of the graphics in the newsletter are from BofA unless otherwise denoted.
BofA: M+A
Here we see that largely the M+A $ have been up but driven by these big PE companies taking public companies private - that’s great but doesn’t solve any of the private-company problems as none of that capital flows back into the system.
Scot’s M+A Prediction
Phil mentioned from their position in advising buyers and sellers in M+A and I’ve heard this from many other bankers, there has been a 2-3x increase in activity in Q4 of 2024 that is going to result in Q1 of 2025 being LIT AF 🔥🚀. M+A is what we’re going to feel first. This M+A wave in Q1_25 is going to largely be driven by PE, then in Q2/Q3 we’ll see the strategics come back into the market.
How this impacts the Triangle
Right now there are 4+ Tweeners in the Triangle under various stages of M+A process. These are all > $50m type deals in a time when we haven’t seen that much activity for two years. When the strategics wake, I think Pendo is the obvious choice for the likes of Salesforce/Adobe/Microsoft and the megacap cloud companies. It’s going to be interesting to see if Todd and the investors there take the M+A or the IPO path.
If you want to learn more about Pendo, it was the subject of the first Tweener Times here.
BofA: IPOs
All investment banks basically are messaging that the IPO market starting Q1 2025 is going to be wide open. It’s going to be interesting to see who chooses to go public and their scale. The first one out of the gate was announced last week and it’s called ServiceTitan. Here’s a look at their revenue trends:
To that end, BofA had a lot of content around the IPO back-log and what-not, but I thought the most interesting slide was this one:
This basically says to go public in 2025, a startup will need:
Line of site to $300m top-line revenue
Growing 30-50%
Positive but small (2%) EBITDA
Not on this slide, but in the SaaS category, the market loves usage based pricing which is juicing the Net Revenue Retention or NRR and that needs to be > 100% regardless of pricing.
We only have one company that is in that zip code and yep, it’s Pendo.
Scot’s IPO Prediction
ServiceTitan is going to be the harbinger of things to come and I think it has been carefully chosen by the IBs to bring forth the best company out there across the above dimensions to start and everyone is 100% aligned on this one going well. I’ll be watching it very closely and reporting on what we see. I’m also excited to see their roadshow when they hit the road - I think it’s next week or week after, and will report some highlights from that.
My prediction is that it’s going to go very well and open up the window and we’re going to see an IPO surge unlike anything we’ve seen since maybe the internet boom.
As this happens, in 2026/2027, when the backlog is cleared, the appetite for IPOs will remain and the requirements will lower. Maybe we’ll get back to $100m/yr type companies getting out which I think would be a good thing if the public market system problems can be fixed.
How this impacts the Triangle
On the IPO side it all comes down to Pendo, will they go in 25 or wait, will they do M+A? But it’s important to note, if there can be a healthy round of IPOs even outside the Triangle, because all of the Triangle’s later stage funding is from outside the area, this will benefit us through ‘pin action’. That maybe hard to imagine, but here’s an example to tie it together.
ServiceTitan has raised $1.5b in venture featuring names like:
ICONIQ Growth
Bessemer Venture Partners
Battery Ventures
TPG
Index Ventures
Tiger Global
Sequoia
Dragoneer
Almost all of those companies have invested in the Triangle before. They have $1.5b tied up in this - if the company goes public at a $10-20b valuation, let’s say they get 3x on this investment - that’s $4.5b that goes back to LPs and generates an amazing return for them from being in the venture category. they take some of that for liquidity - let’s say $2b and invest the other $2.5b into venture funds which then invest in startups.
BofA: Venture Funding
Here, you see that 2021 was clearly an abnormal datapoint, but instead of ‘reverting to the mean’, it’s caused venture to be flat to down in 2023/2024.
This isn’t just because that 2021/2022 surge pulled all the $ out of the system, it’s because of the previously mentioned lack of liquidity.
2025 VC Prediction (Macro and Triangle)
This is my prediction, but the setup and directional information from BofA, Goldman, JPM and more is that there is a ton of VC sitting on the side-line waiting to come into the market. They’ve been sitting on the sidelines because their LPs are basically telling them to slow down capital calls. If we see 2025 loosen up M+A first, then IPOs second, the ‘un-virtuous cycle’ I mentioned will reverse and go back to the virtuous cycle that ends up with more VC:
Un-virtuous cycle: No M+A/IPO → No liquidity→ LPs locked up → LPs not investing in VCs → VCs not investing in startups → startups starving off→ no M+A/IPO (rinse and repeat).
Virtuous cycle: M+A and IPO go bonkers→ Massive liquidity and returns → LPs happy→ LPs invest MORE in VC → VCs have to find companies for that flood of $$ - > Startups get tons of funding→ Startups grow rapidly → M+A/IPO markets continue (rinse and repeat).
It’s going to take time - we may not see this come until late 2025, or even 2026, but we’ve been going the wrong way for 2 years so just going the ‘right way’ is going to cause everything to not only feel better, but release the animal spirits into the private markets.
Putting it all together: Scot’s 2025 Prediction for Triangle Startups
I think here’s how we’re going to see this play out. Note my prediction requires no new black swan events like pandemics or wars. I think it comes in three phases:
Phase I: M+A Frenzy - Full Year 2025 - On this prediction I have a bit of an un-fair advantage, because I can already see a bit beneath the access, but I think what’s in process now is just the start. If you look at Tweener List data I’ve been maintaining since 2015 (data below) and the max M+A we have seen was 2018 at 17. I’m going to say we will see ‘closing’ in 2025 15-20 deals and we’ll challenge that 2018 record. If Pendo is going to be acquired, we will know by October.
Phase II: VC’s Are Back Big - Q2-Q4 of 2025 - Again looking at the data, you’ll see in the Tweener co-hort our max investment uyear was $700m in 2021. I don’t think we’ll see that in 2025, but I do think we’ll be more in the $400-500m range which would be a huge step up from 22/23/24.
Phase III: To IPO or not to IPO - Q4 2025 - While other regions will be celebrating IPOs, the Triangle will sit this out, but I predict by Q4 2025 we’ll know squarely where Pendo is going to be. Some wild-cards in here are Phononic, Epic, SAS, Prometheus and Pryon.
In summary, Triangle startups are coiled like a spring -we have more Tweeners than ever before. We have a great mix of different categories and stages. On top of that, this co-hort of next-gen AI startups I’ve been writing about are growing at an incredible pace.
TL;DR: I predict we’ll look back at 2025 as the beginning of a ‘Golden Age’ for Triangle startups.
Bonus: SaaS valuations
Most tech companies in the Triangle are SaaS companies and this chart is very important for everyone in that world:
On the left side, you had the 2021 correlation between growth and profitability. Public markets (and that always flows down to private) were saying - growth at all cost is fine, the market doesn’t care about profitability.
On the right side, you see the 2024 version of this. Revenue growth is 2.7x more important than profitability, BUT you need to be profitable, not being profitable isn’t an option in today’s world.
For a private SaaS company, the best strategy from this is as you scale, maybe between rounds, you get to FCF or neutral or very close, to ‘prove’ that your model works. Raise a round, and then go back to burn mode, then land the plane, etc.
Triangle Tweener Startup Community Calendar
New: Do you use Google Calendar, you can subscribe the Triangle Tweener Community Calendar here.
Dec 3 (Tu), 5:30-9pm, NC Tech Gala and Awards Ceremony, Raleigh Convention Center, 500 S. Alisbury St., Raleigh, NC 27601, Register here.
Dec 6 (Fri), 4-6pm, LiLa Holiday Social, 5600 Primary Dr. Morrisville, NC 27560. Details here.
Dec 6 (Fri), 6-8pm, NC State Product Innovation Student Showcase, North Street, 509 W North St, Raleigh NC 27603, Details here.
Dec 10 (Tu), 5-7pm, Wake Forest Founders Startup Pitch Competition + Showcase, Downtown Wake Forest NC 27587, Details here.
Dec 11 (Wed), 8-9am, Centennial Coffee Hour, 321 Coffee - 930 Main Campus Dr. #151, Raleigh, NC 27606. Details here.
Dec 11 (Wed), 2:30-6pm, Fidelity Center for Applied Technology (FCAT) demo day, Carolina Theatre for pitches , with Reception starting at 4pm at the Durham Hotel Rooftop bar. RSVP here.
Dec 17 (Tue), 8:45-10am, The Morning Grind - Lindsay Wrege of 321 talks about a variety of business topics with guests, Partners I - NCSU, 1017 Main Campus Dr., Raleigh, NC 27606. Details here.
Dec 18 (Wed), 5-6:30pm, Founder’s & Cocktail Power Hour, The Museum at Car Space, 5200 Greens Dairy Rd., Raleigh, NC 276016. Details here.
Dec 18 (Wed), 6-8pm, Founders Local Practice Pitch Night, Raleigh Founded - North Street, 509 W North St, Raleigh, NC 27608, Details here.
🦃Have a great Thanksgiving everyone! 🦃
-Scot and the entire Tweener Team!