TheChek News Flow

Genetic testing company 23andMe announced on Friday that hackers accessed around 14,000 customer accounts in the company’s recent data breach.

In a new filing with the U.S. Securities and Exchange Commission published Friday, the company said that, based on its investigation into the incident, it had determined that hackers had accessed 0.1% of its customer base. According to the company’s most recent annual earnings report, 23andMe has “more than 14 million customers worldwide,” which means 0.1% is around 14,000.

But the company also said that by accessing those accounts, the hackers were also able to access “a significant number of files containing profile information about other users’ ancestry that such users chose to share when opting in to 23andMe’s DNA Relatives feature.”

The company did not specify what that “significant number” of files is, nor how many of these “other users” were impacted.

23andMe did not immediately respond to a request for comment, which included questions on those numbers.

In early October, 23andMe disclosed an incident in which hackers had stolen some users’ data using a common technique known as “credential stuffing,” whereby cybercriminals hack into a victim’s account by using a known password, perhaps leaked due to a data breach on another service.

The damage, however, did not stop with the customers who had their accounts accessed. 23andMe allows users to opt into a feature called DNA Relatives. If a user opts-in to that feature, 23andMe shares some of that user’s information with others. That means that by accessing one victim’s account, hackers were also able to see the personal data of people connected to that initial victim.

23andMe said in the filing that for the initial 14,000 users, the stolen data “generally included ancestry information, and, for a subset of those accounts, health-related information based upon the user’s genetics.” For the other subset of users, 23andMe only said that the hackers stole “profile information” and then posted unspecified “certain information” online.

TechCrunch analyzed the published sets of stolen data by comparing it to known public genealogy records, including websites published by hobbyists and genealogists. Although the sets of data were formatted differently, they contained some of the same unique user and genetic information that matched genealogy records published online years earlier.

The owner of one genealogy website, for which some of their relatives’ information was exposed in 23andMe’s data breach, told TechCrunch that they have about 5,000 relatives discovered through 23andMe, and said our “correlations might take that into account.”

News of the data breach surfaced online in October when hackers advertised the alleged data of one million users of Jewish Ashkenazi descent and 100,000 Chinese users on a well-known hacking forum. Roughly two weeks later, the same hacker who advertised the initial stolen user data advertised the alleged records of four million more people. The hacker was trying to sell the data of individual victims for $1 to $10.

TechCrunch found that another hacker on a different hacking forum had advertised even more allegedly stolen user data two months before the advertisement that was initially reported by news outlets in October. In that first advertisement, the hacker claimed to have 300 terabytes of stolen 23andMe user data, and asked for $50 million to sell the whole database, or between $1,000 and $10,000 for a subset of the data.

In response to the data breach, on October 10, 23andMe forced users to reset and change their passwords and encouraged them to turn on multi-factor authentication. And on November 6, the company required all users to use two-step verification, according to the new filing.

After the 23andMe breach, other DNA testing companies Ancestry and MyHeritage started mandating two-factor authentication.

Sometimes November is a slow month for startup deals, as the beginning of the holiday season can shut off the venture funding valve. However, this year the 11th month was strong, with some huge raises. In fact, several $100 million-plus rounds couldn’t even crack the list.

1. Juul, $1.3B, consumer goods: E-cigarette maker Juul leads the way this month. The San Francisco-based company raised about $1.3 billion in funding, according to a regulatory filing reported on by Reuters. Earlier this year, Juul laid off about 250 people to reduce operating costs and agreed to pay $462 million to settle claims by six U.S. states that it unlawfully marketed to minors. Investors were not disclosed for the new round. The company also raised cash in November 2022, after cutting jobs and costs.

2. Firefly Aerospace, $300M, aerospace: Space tech funding isn’t what it used to be, but that didn’t stop Firefly Aerospace from snatching up a $300 million Series C. To be fair, it’s unclear exactly how much the Cedar Park, Texas-based space transportation startup raised last month, but it said it closed the third tranche of what was now a $300 million Series C. The new cash values the company at $1.5 billion pre-money. The round was led by existing investors including AE Industrial Partners, as well as new investors including Mitsui & Co., Ltd. Founded in 2014, the company has raised $572 million, per Crunchbase.

3. Next Insurance, $265M, insurtech: Next Insurance raised a $265 million strategic round from insurance giants Allstate and Allianz’s investment arm, Allianz X. The Palo Alto, California-based startup, which specializes in small business insurance products, says it has now raised more than $1.1 billion since being founded in 2016. The deal forms a new strategic partnership with Allstate and deepens an existing reinsurance relationship with Allianz. Interestingly, Next did not offer a valuation with the new round. The company was valued at $4 billion in April 2021 when it raised a $250 million Series E led by FinTLV and Battery Ventures. Many valuations of startups, however, have dropped since then. Next, which uses AI and machine learning to help with the purchasing process and provide coverages, serves more than 500,000 business owners. The round is one of the largest raised this year in the insurtech industry.

4. Divergent Technologies, $230M, manufacturing: Divergent Technologies raised a massive $230 million Series D to accelerate the commercialization of its digital manufacturing system that uses generative AI and 3D printing. The round was led by Hexagon AB, which invested $100 million of the $230 million total. New and existing institutional and family office investors also participated in the round. The Los Angeles-based firm has developed a software-hardware production system for industrial digital manufacturing that replaces traditional design, manufacturing and assembly solutions. Divergent’s system uses in-house-developed AI-driven generative design software and 3D printing to create the products and structures used in a variety of industries, including the automotive, aerospace and defense sectors. Divergent already works with automotive customers such as Aston Martin and Mercedes-AMG. In the aerospace and defense industry, the company is actively working with six U.S. government contractors. Just last month, another 3D printing startup raised significant cash. 3D metal-printing startup Seurat Technologies locked up a $99 million Series C led by NVentures — Nvidia’s venture capital arm — and Capricorn’s Technology Impact Fund.

5. DataBank, $188M, information technology: Consulting and tech services firm DataBank announced a big raise that most folks likely missed. The Dallas-based firm raised $533 million in a combination of debt and equity to fund the construction of new data centers. The deal consisted of $188 million from existing and new investors, and a $345 million loan to construct a new data center being developed in the Atlanta market. Equity investors were not disclosed. The new financing comes after the company announced a $350 million credit facility in March, and $715 million in secured notes in April. A year ago, Swiss Life Asset Management led a $2.2 billion recapitalization of the company.

6. Infinitum Electric, $185M, industrial automation: This was a big round that may have gone unnoticed by some. Infinitum, which creates light air-core motors, raised a $185 million Series E led by Just Climate. The raise brings the Austin, Texas-based startup’s total funding to date to a whopping $350 million, according to the company. The new cash will be used to expand business and increase production of its motors to help meet decarbonization demand in the industrial sector. New motor tech is important, as the implementation of such in the U.S. industrial and commercial sectors has the potential to save 127 terawatt-hours per year — a cost savings of $14.7 billion, according to the U.S. Department of Energy. Another way to think about that; the equivalent of the annual electricity use of all households in California and North Carolina combined.

7. Terremoto Biosciences, $175M, biotech: South San Francisco, California-based biotech firm Terremoto Biosciences closed a big $175 million Series B. No lead investor was announced, but those taking part in the round include Novo Holdings and OrbiMed. The startup is developing targeted, small molecule medicines for a wide variety of severe diseases. The new round brings Terremoto’s total amount raised to $250 million, per the company.

8. BlueVoyant, $140M, cybersecurity: Managed detection and response startup BlueVoyant announced last month it had closed a $140 million-plus Series E led by Liberty Strategic Capital. The round was used to facilitate the acquisition of Herndon, Virginia-based Conquest Cyber, which protects the nation’s defense industrial base and critical infrastructure sectors. The acquisition is BlueVoyant’s fifth since 2020, and seems to be further evidence of the growing interest in the defense tech industry. Founded in 2017, the company has raised nearly $666 million, per Crunchbase.

9. Enable, $120M, finance: We don’t write about many rebate management platforms on this list, but when you raise $120 million that changes. San Francisco-based Enable raised a $120 million Series D led by Lightspeed Venture Partners that values the company at $1.2 billion. The startup platform helps manufacturers, distributors and retailers manage their rebate offerings to help push growth and optimize sales with automated real-time data and forecasting. Everybody loves a rebate, but companies need to manage what they offer. Founded in 2016, Enable has raised $276 million, per the company.

10 (tied). May Mobility, $105M, autonomous vehicles: Just a couple weeks after Cruise’s announcement it will suspend its self-driving taxi program rocked the autonomous vehicle industry, another AV startup raised big money from some big-name investors. Ann Arbor, Michigan-based May Mobility closed a $105 million Series D led by NTT Group. The new cash brings May Mobility’s total funding to approximately $300 million since being founded in 2017. The company last raised a $111 million round in July 2022. May Mobility develops AV technology and deploys fleets of vehicles to municipal and business customers. Funding to autonomous vehicle startups have been having a rough year to date, raising less than $4.6 billion — which puts the sector on pace for its lowest funding total since 2020, per Crunchbase data. The sector saw a high for funding in 2021 when the industry received $12.5 billion. Last year, that number dropped to $5.9 billion.

10 (tied). RefleXion Medical, $105M, biotech: Biotech was hot last month — especially for companies trying to figure out ways to fight cancer. Hayward, California-based RefleXion Medical announced the initial close of a $105 million equity raise led by The Rise Fund, TPG’s multisector global impact investing strategy. The fresh cash will be used by the company to extend commercialization of its therapy for treating all stages of indicated solid tumor cancers, including metastatic disease. Founded in 2009, the company has raised $675 million, per Crunchbase.

Not surprisingly the largest round abroad went to an AI startup.

UK digital pound could put financial stability and privacy at risk, MPs warn

Treasury committee urges BoE and Treasury to ‘proceed with caution’ over new currency

Backers of a UK digital pound have yet to make a convincing case that its benefits would outweigh risks to financial stability and personal privacy, an influential group of MPs warned on Saturday. 

The House of Commons Treasury committee said the Bank of England and HM Treasury should continue exploring a central bank digital currency, but urged both to “proceed with caution” because of “significant risks and challenges”.

These included questions over how the authorities would use digital pound holders’ personal data, and the possibility of households pulling savings from traditional accounts and converting them in periods of bank stress.

Like authorities in other economies including the eurozone, the Treasury and BoE have been examining the case for a central bank digital currency amid falling cash usage and the threat of competition from Big Tech companies. 

Around the world, 100 countries are exploring CBDCs, while 11 have already launched one, according to the Atlantic Council think-tank.

The idea is to create an electronic alternative to cash that is riskless and universally accepted. Publicly backed digital currencies would sit in wallets on smartphones, fending off the threat that privately controlled digital currencies created by tech groups gain too much traction.

However, officials and politicians around Europe have yet to conclude that the case for CBDCs is convincing enough to outweigh the hazards they could create.

A consultation paper from the Treasury and BoE in February found current trends and technological advances made it likely that a digital pound would be needed by the end of the decade, although the project has yet to be given the go-ahead. 

In its report, the TSC sounded a sceptical note without arguing against continued investigation of the idea. “It is not clear to us at this stage whether the benefits are likely to outweigh the risks,” the committee said. 

Harriett Baldwin, Conservative MP and committee chair, said: “It must be clearly evidenced that a retail digital pound will provide benefits to the UK economy without increasing risks or leading to unmanageable costs before any decision is taken to introduce it into our financial system.”

The committee noted that the UK could become more susceptible to bank runs if people were able to transfer large quantities of savings into digital pounds quickly in times of market turmoil.

It also raised concerns that if enough bank deposits were moved into digital pounds, interest rates on bank loans might be driven up by 0.8 percentage points or more. 

One way of reducing these risks would be to adopt a lower initial limit on the size of individual holdings than the BoE’s proposed £10,000-£20,000 ceiling, the TSC noted. The European Central Bank has discussed a €3,000 digital euro limit per person.

Calling for “strong privacy safeguards” to address concerns that government authorities could snoop on digital pound users, the TSC said it was vital any CBDC did not worsen financial exclusion by accelerating the demise of cash.

In a joint statement on Saturday, the Treasury and Bank of England said they would respond formally to the report in due course.

“We will also shortly publish the response to our consultation paper setting out the next steps,” they said. “We have always been clear [that] a digital pound would only ever be introduced alongside cash and that protecting individual privacy is paramount in any design.”

Thames Water faces prospect of fresh parliamentary inquiry into finances

Concerns growing over financial health of UK’s biggest water company

Thames Water is facing the prospect of a fresh parliamentary inquiry after being accused of misleading MPs over the state of its finances.

Sir Robert Goodwill, chair of the cross-party environment, food and rural affairs committee, said the panel was considering a fresh investigation after the Financial Times revealed that Thames Water had presented a loan from its shareholders to its parent company as fresh equity.

Alastair Cochran, finance director of Thames Water, told a hearing by MPs in July that its “incredibly supportive shareholders” had provided “£500mn equity, which it had fully drawn”. Instead it came from a £515mn convertible loan, charging 8 per cent interest payable in March each year, according to the accounts of Thames Water’s parent entity, Kemble Water Holdings.

Goodwill said the disclosure “leads us to question the accuracy of evidence provided to our committee by Thames Water in July”. It also “raised further concerns about the stability of the company’s finances and the actual ability of the company to invest the sums of money required to implement its turnaround plan”, he said.

“Our committee will consider whether we need to call Thames Water back before us to explain how the evidence we heard stacks up against the recently reported revelations,” he added.

Thames Water said it had not misled the committee. In a statement to the committee seen by the FT it said that it was “entirely correct and accurate” to describe the £500mn as new equity.

Thames said that external shareholders loaned £500mn to Kemble Water Holdings in March 2023. Kemble Water Finance then purchased £500mn of shares in Thames Water Limited and Thames Water Limited purchased £500mn of shares in Thames Water Utilities Holdings. Thames Water Utilities Holdings then passed the £500mn to Thames Water Utilities Limited — the regulated company — as repayment of an existing intercompany loan.

“TWUL has no obligation in respect of this loan therefore it does not increase the debt burden of TWUL . . . These funds were provided by our external shareholders not third parties,” it said.

The prospect of a fresh investigation will add to pressure on Thames Water, which provides water and sewerage services to around 15mn households in London and surrounding areas. The company has faced rising financing costs on its £14.7bn of debt, as well as soaring prices for energy and labour. 

Financial pressure on the group is mounting according to company data. In accounts signed off on in July and published by Companies House last month, auditors PwC warned that Kemble Water Holdings was yet to confirm refinancing arrangements for a £190mn loan from external lenders due in April at one of the group’s many subsidiary companies — Kemble Water Finance.

PwC also warned there was “material uncertainty” about whether the group could continue as a going concern.

The government is on standby for a temporary renationalisation of Thames Water.

The utility provider and its regulators have been under scrutiny since June when chief executive Sarah Bentley quit abruptly following a boardroom bust-up just two years into an eight-year turnaround plan. Cathryn Ross, a former head of water regulator Ofwat, is acting as interim head until a new chief executive is appointed.

The company has asked Ofwat to approve a 40 per cent increase in customer bills by 2030 in addition to its annual inflation-based increases, which would take average household charges to at least £614 a year.

Separately from the £500mn financing, shareholders have agreed to invest £750mn in equity by the end of next year, Thames Water said in October that this was subject to a range of conditions including restrictions to regulatory fines for poor performance such as sewage pollution, an increase in permitted returns and higher bills.

The company admitted this week it was running behind on promised improvements to the pipe and sewage treatment network. The need for maintenance of its ageing infrastructure was diverting investment from bigger projects, it has said.

The Liberal Democrats called on Friday for a public inquiry into both Thames Water and Ofwat, saying it was not up to the job. Tim Farron, Lib Dem environment spokesperson, said Thames Water’s financing arrangements were “scandalous”.

“Conservative ministers must haul Thames Water in for emergency talks to demand answers, as well as launch an independent inquiry,” Farron said. “If a single penny of this is passed on to bill payers then it will be nothing less than a national scandal.”

Ofwat declined to comment.

More than 8mn people blacklisted by authorities after missed payments on mortgages and business loans

Defaults by Chinese borrowers have surged to a record high since the outbreak of the coronavirus pandemic, highlighting the depth of the country’s economic downturn and the obstacles to a full recovery.

A total of 8.54mn people, most of them between the ages of 18 and 59, are officially blacklisted by authorities after missing payments on everything from home mortgages to business loans, according to local courts.

That figure, equivalent to about 1 per cent of working-age Chinese adults, is up from 5.7mn defaulters in early 2020, as pandemic lockdowns and other restrictions hobbled economic growth and gutted household incomes.

The soaring number of defaulters will add to the difficulty of shoring up consumer confidence in China, the world’s second largest economy and a crucial source of global demand. It also throws a spotlight on the country’s lack of personal bankruptcy laws that might soften the financial and social impact of soaring debt.

Under Chinese law, blacklisted defaulters are blocked from a range of economic activities, including purchasing aeroplane tickets and making payments through mobile apps such as Alipay and WeChat Pay, representing a further drag on an economy plagued by a property sector slowdown and lagging consumer confidence. The blacklisting process is triggered after a borrower is sued by creditors, such as banks, and then misses a subsequent payment deadline.

“The runaway increase in defaulters is a product of not only cyclical but also structural problems,” said Dan Wang, chief economist at Hang Seng Bank China. “The situation may get worse before it gets better.”

The personal debt crisis follows a borrowing spree by Chinese consumers. Household debt as a percentage of gross domestic product almost doubled over the past decade to 64 per cent in September, according to the National Institution for Finance and Development, a Beijing-based think-tank.

But mounting financial obligations have become increasingly unmanageable as wage growth has stalled or turned negative in the midst of the economic malaise.

As a growing number of cash-strapped Chinese consumers have struggled to make ends meet, many have stopped paying their bills. More Chinese residents are also struggling for work: youth unemployment hit a record 21.3 per cent in June, prompting authorities to stop reporting the data.

“I will pay my Rmb28,000 ($4,000) credit card balance when I have a job,” said John Wang, a Shanghai-based office worker who defaulted on his payments after being laid off in May. “I don’t know when that will happen.”

China Merchants Bank said this month that bad loans from credit card payments that were 90 days overdue had increased 26 per cent in 2022 from the year before. China Index Academy, a Shanghai-based consultancy, reported 584,000 foreclosures in China in the first nine months of 2023, up almost a third from a year earlier.

Life for blacklisted borrowers can be difficult as they navigate dozens of state-imposed restrictions. Defaulters and their families are barred from government jobs, and they can even be prohibited from using toll roads.

Jane Zhang, owner of an advertising company in south-eastern Jiangxi province who defaulted on a bank loan, said she panicked when a local court banned her in May from using WeChat Pay to buy meals for her toddler.

“I thought my son was going to starve since I didn’t have any cash at hand and all my daily purchases were made through WeChat,” said Zhang, who later persuaded the court to drop the mobile payment ban while keeping other punishments in place.

As defaults climb, legal experts have proposed the introduction of personal bankruptcy laws with debt relief for individual insolvencies.

“We need to figure out a way to help individual defaulters rise up again,” said Liu Junhai, a law professor at Renmin University who helped draft China’s corporate bankruptcy law.

But a lack of transparency concerning personal finances has made such measures difficult to implement. Policymakers have made little progress in passing regulations on individual asset disclosures due to a backlash from government officials and other interest groups who fear the rules may reveal corruption.

With little hope of relief, many blacklisted borrowers have given up on restoring their financial health. Zhang decided to close her advertising business after losing accounts from local government departments, which are banned from working with blacklisted companies.

“The court said my life will return to normal if I pay off the debt,” she said. “But how can I make money when I am facing so many restrictions?”

Insurer Aspen chooses New York over London for planned $4bn IPO

Concerns about lower valuations and stringent listing requirements pushed management away from UK

Insurer Aspen is targeting New York instead of London for its planned $4bn initial public offering next year, partly because of management concerns about valuations and more stringent listing requirements in the UK, according to people familiar with the decision.

A listing by Aspen in New York, rather than on the London Stock Exchange alongside competitors such as Beazley, would be a fresh blow to the UK market. A number of companies have chosen to switch their listing to the US or float there over the past years.

Aspen is owned by private equity group Apollo and sells insurance and reinsurance through the Lloyd’s of London market as well as in Bermuda and the US.

It was founded in 2002 and is domiciled in Bermuda, but has more than half of its 1,100 employees in London. It was listed in New York until it was bought by Apollo five years ago. It is now being advised by Goldman Sachs, Citi and Jefferies on an IPO planned for the first half of next year, targeting an enterprise value at listing of up to $4bn, according to people familiar with its view.

The company conducted work to compare listing venues. The factors pushing management against London, according to people familiar with their deliberations, included a diminishing valuation premium over similar New York-listed insurers in recent years — and other technical requirements in London, such as that the company would have had to have one year’s worth of figures reaudited because of a change in auditor. It would have also been likely to have to do some work on translating its figures from their US accounting basis.

“As the relative valuations narrowed, then the technical issues become more impactful,” said one of the people, adding that greater liquidity in the US was also “an important factor”.

However, people familiar with Apollo’s position said the owner’s base case was always to relist in New York, given its historic ties, its US accounting basis and that the US is its biggest market. They highlighted Watches of Switzerland, the retailer that was more than 90 per cent owned by Apollo before a successful IPO in London in 2019.

Aspen, Apollo, Goldman, Citi and Jefferies declined to comment. Industry title Insurance Insider previously reported Aspen was planning a US IPO.

Aspen’s chief executive Mark Cloutier was previously the boss of Brit Group, which was also backed by Apollo and chose London for its 2014 IPO, before its acquisition a year later by Canadian group Fairfax Financial.

The number of big specialist insurers listed in London has dwindled with the acquisitions of groups such as Catlin, Amlin and Novae over the past decade. In recent months, Bermuda-based insurers Hamilton and Fidelis have opted for New York IPOs.

The head of the London Stock Exchange Group said last month that it was a “myth” that valuations were higher in the US and that there were no problems with liquidity in the London market.

Conduit Re, a Bermuda-based reinsurer, listed in London in late 2020. Chief executive Trevor Carvey told the Financial Times that a listing in the US would have been a “step too far” at the time, but the same decision today would have been more “50/50” because of liquidity considerations.

“What the US does offer for insurers, and specialist reinsurers, is a greater pool of specialist investor knowledge.”

Deal with Absci is the latest between big pharma and tech companies to build new disease treatments

AstraZeneca has signed a deal worth up to $247mn with Absci Corporation of the US to design an antibody to fight cancer, the latest tie-up in fast-expanding efforts to use artificial intelligence for drug discovery.

The collaboration aims to harness Absci’s AI technology for large-scale protein analysis to find a viable oncology therapy — a leading focus of Anglo-Swedish drugmaker AstraZeneca.

The partnership adds to a flurry of agreements between big pharmaceutical companies and young AI businesses to build novel disease treatments and cut the costs of developing them.

Sean McClain, Absci’s founder and chief executive, said the application of engineering principles to drug discovery improved the potential of success and a reduction of the time spent in development.

The deal includes an upfront fee for Absci, research and development funding and milestone payments, as well as royalties on any product sales.

Absci, which is based in Washington state and has an AI research lab in New York, generates proprietary data by measuring millions of interactions between proteins.

It then uses these to train its generative AI model and, eventually, design and validate viable antibodies — proteins that target foreign substances in the body.

The companies have not disclosed precisely which kind of cancer they will target.

The agreement is part of AstraZeneca’s ambitious plans to replace traditional chemotherapy with a new generation of targeted drugs.

In October, it announced the outcomes of clinical trials for new treatments for lung and breast cancers — results it hailed as a “massive achievement”. 

The collaboration with Absci was an “exciting opportunity” to use the company’s antibody creation AI, said Puja Sapra, an AstraZeneca senior vice-president who leads biologics engineering research and development.

“AI is enabling us to not only increase the success and speed of our biologics discovery process, but also enhance the diversity of the biologics we discover,” Sapra said. “We are applying AI throughout our discovery and development process, through building in-house capabilities and through collaborations such as with Absci.”

Anti-tumour drugs using various technologies are a significant subject of collaborations between leading pharmaceuticals multinationals and smaller companies doing cutting-edge research.

In September, Moderna of the US agreed a deal potentially worth more than $1.7bn to develop cancer vaccines and therapies with Germany’s Immatics. The German company uses so-called T-cell receptor technology to target proteins associated with cancer.

Silicon Valley venture capital firms rush to establish ‘continuation funds’

Silicon Valley venture capital firms are rushing to create private equity style structures in a race to protect their portfolios and return money to investors.

VC funds that invest in tech start-ups typically run for 10 years with an option to extend for two years — at which point their backers expect a return on investment, without which they can force a sale of portfolio companies or shut them down.

Providing those returns has become problematic, as a funding boom in fledgling tech companies during the pandemic has been followed by an uncertain economic environment that has led to start-ups staying private for far longer.

In response, dozens of tech investors — including $25bn venture firm New Enterprise Associates and New York-based Insight Partners — have set up or are establishing “continuation fund” vehicles, according to people advising on the plans.

Continuation funds, which are common in private equity but rare in venture capital, are a secondary investment vehicle that allows them to “reset the clock” for several years on some assets in old funds by selling them to a new vehicle that they also control. This helps a VC fund’s backers, known as “limited partners”, to roll over their investment or exit.

“It’s a good time for this kind of structure,” said Hans Swildens, founder of VC firm Industry Ventures. “During the next year, if the IPO market doesn’t function and M&A is light, the only way for VC firms to [distribute funds back to investors] is . . . secondaries.”

Others are undertaking “strip sales”, a form of restructuring in which a slice of a fund’s assets are sold to new investors, as pressure increases to return money to limited partners.

“Unless you have been really conservative in your reserves . . . every venture firm is in need [of liquidity],” said the chief operating officer of one multibillion-dollar Silicon Valley firm. “It is a real problem. Most funds are 10 years old and have scraps left they can’t fund.”

Financial institutions, including Goldman Sachs and Jefferies, and large private investment managers such as Industry Ventures, StepStone Group and Coller Capital have also been in talks with the venture groups with offers to fund secondary transactions, venture capitalists said.

Secondary funds have raised $64bn this year in order to buy up stakes in portfolio companies from venture and private equity investors, according to Jefferies — more than the combined total raised in 2021 and 2022.

“For a lot of folks we are now having exploratory conversations with, they have an absolute need to generate distributions,” said Matt Wesley, head of private capital advisory at Jefferies. “Given the dearth of exits for companies owned by venture firms, certainly the groups who are registered [as investment advisers] are actively exploring continuation funds.”

UK chip designer Arm, US grocery delivery app Instacart and San Francisco-based market automation group Klaviyo listed on New York exchanges in September, ending an 18-month drought in tech initial public offerings. However, trading has been mediocre at all three companies, prompting start-ups to delay their listing plans.

“The performance of the handful of companies that have gone public has intensified some of these conversations among venture firms,” said Joe Binder, a private funds partner at law firm Debevoise & Plimpton. “People had hoped there would be a lot more enthusiasm [for tech listings] but it has waned and so people are turning to alternative solutions.”

However, continuation funds can be unpopular with limited partners which must decide whether to continue to back a VC fund for several more years, or sell their stake, typically at a discount. There are also regulatory restrictions that make it difficult for venture firms that are not registered investment advisers (RIAs) to set up such vehicles.

Insight Partners’ continuation fund allowed it to shift 32 companies from its funds into a new vehicle over a five-week process, according to a letter from Jefferies advertising its services to venture clients. The transaction resulted in $1.3bn being distributed to Insight’s limited partners, the letter said.

In May, Tiger Global, which manages more than $50bn, hired secondary investment advisers Evercore to launch a sale of parts of its venture portfolio, with a strip sale being one option for a deal. Offers from buyers did not meet the valuations that Tiger expected and a transaction has not been completed, according to people close to the plans.

Quiet Capital, whose early investments included Airbnb and Robinhood, raised $100mn from secondary investors in such a “multi-asset tender offer” in late 2021, according to the Jefferies document.

The transaction allowed Quiet Capital LPs to sell half or all of their stake in the fund to new institutional investors at Goldman Sachs Asset Management and Blackstone Strategic Partners — both secondary investors — at a premium, according to a person with knowledge of the deal.

Dozens of large venture funds such as Sequoia, Andreessen Horowitz and General Catalyst have become RIAs in recent years. The regulatory designation made it easier for them to trade in cryptocurrencies, debt and in secondaries, in which they can trade stock with other private investors.

“There used to be clear lines between what a venture capital fund and a private equity fund was, but now all these strategies are converging,” said Binder. “Venture funds . . . are doing the sort of thing you could never have imagined 10 years ago.”

New European legislation on artificial intelligence could help cement the dominance of big U.S. tech companies.

The European Union is seeking a consensus on regulating artificial intelligence, and for once it might be good news for big U.S. technology companies.

A draft of the EU’s proposed AI Act has been making the rounds since 2021. After much back and forth, the EU’s representatives face a key Dec. 6 deadline to reach an agreement. If the act remains in its current state, tech investors should be encouraged, with Microsoft Alphabet Google, and Amazon.com set to be the big winners. The legislation won’t halt AI development, but it imposes a regulatory burden that could ultimately cement their dominance.

Why Is the EU AI Act Important?

The EU AI Act is set to be the world’s first comprehensive legal framework for the sector. While the U.S. government has imposed an executive order on AI, it’s unclear how that would be enforced. In contrast, the EU Act specifies potential fines based on global revenue.

Considering the difficulties of controlling access to AI models, Microsoft, Google, and Amazon will probably have to shape their approach in line with the EU’s requirements. The so-called Brussels Effect often causes the EU’s rules to become the effective international standard. U.S. tech companies, for instance, have spent several years figuring out how to adapt to the EU’s strict privacy law known as General Data Protection Regulation, or GDPR.

The EU has tended to be an antagonist to the U.S. technology giants. In recent years, It has levied billions in fines on them while passing sweeping legislation on digital markets.

What It Means for U.S. Big Tech

Instead of heeding calls from certain scientists and AI doomsayers to pause AI development, the current EU Act proposes to regulate it by implementing a sliding scale of requirements. That gives current AI leaders the ability to continue their innovation but is likely to add additional costs that could be harder for start-ups to handle.

The draft AI Act as supported by the European Parliament is set to assign a higher burden of regulation on the next generation of foundation models, the most powerful AI systems that can be adapted to different tasks.

That would probably include future versions of Microsoft-backed OpenAI’s GPT, as well as models from Google and Meta Platforms and U.S. start-up Anthropic, which is backed by Google and Amazon.

The AI Act would ask whether these models present systemic risks. The ones that do would be subject to enhanced oversight, transparency, and documentation requirements.

The Sticking Point

France, Germany, and Italy have objected to the proposed targeting of regulation at foundation models, the powerful AI systems that can be adapted to different tasks, according to European Parliament member Axel Voss. Instead, they are arguing for regulation to apply to specific AI use cases such as a chatbot or image generator, while foundation models would be self regulated via codes of conduct.

How that negotiation resolves itself should become apparent over the next week or so.

France is home to Mistral AI, an AI start-up that has raised $113 million, according to PitchBook. Germany has Aleph Alpha, which has raised $654 million. Both firms are building AI models similar to the ones from OpenAI.

European venture-capital investors are worried that AI regulation targeting foundation models could put these companies at a disadvantage to their larger U.S.-based rivals.

“Applying risk-based regulation to foundation models, rather than at the application layer [typically apps like ChatGPT], misses the point. All algorithms can be misused by malicious actors—it’s how models are applied that brings risk,” Ekaterina Almasque, general partner at European venture-capital firm OpenOcean, told Barron’s.

Voss, who supports the current proposal put forth by the European Parliament, told Barron’s that Parliament members are sticking to their position that foundation models should be regulated.

The EU parties will come together next on Dec. 6 to try to hash out a compromise. While there’s no hard deadline, failure to agree would make it difficult for the legislation to pass before the coming European Parliament elections in June 2024.

The Beneficiaries

Big Tech companies would be able to use their deep pockets to meet the requirements of the draft act, which could involve paying to license copyrighted data as well as employing staff to test the systems and monitor compliance.

That gives them an advantage over challengers who already face the heavy cost of training next-generation AI models, even before complying with any new regulation. OpenAI’s GPT-4 cost more than $100 million to train, according to company co-founder Sam Altman—that is likely to be prohibitive for many. Microsoft has invested $13 billion in OpenAI. The firm is planning an employee share sale at a valuation of $80 to $90 billion, according to The Wall Street Journal.

Given their head start, vast resources, and ownership of the three largest public clouds, Amazon, Microsoft, and Alphabet are effectively now the AI incumbents. That status could be preserved by new regulation.

Microsoft declined to comment on the EU draft. Google, OpenAI, and Anthropic didn’t respond to requests for comment. A spokesperson for Amazon told Barron’s that it supported the EU’s regulation, but it was important that it didn’t limit low-risk uses of AI.

Interestingly, Meta Platforms has diverged from its Big Tech rivals when it comes to AI. The social-media pioneer doesn’t have its own cloud and has provided its own AI model on an open-source basis.

In June, Meta Platforms’ chief AI scientist Yann LeCun signed an open letter arguing that the EU’s current approach to AI regulation would create disproportionate costs for would-be competitors. LeCun has repeatedly warned that the future of AI risks being dominated by a few powerful companies.

Meta declined to comment on the EU legislation.

Until now, the AI race has largely been determined by talent and infrastructure, which has given Microsoft, Google, and Amazon a formidable advantage. Regulation could reinforce their lead. The dilemma for the EU—and all AI regulators—is balancing risk and competition. That battle is probably just getting started.