USA – CALIFORNIA Trends and Developments Contributed by: Mehdi Khodadad, Dan Clivner, Vijay Sekhon and Matthew Thompson, Sidley Austin LLP
ent and proprietary technology. This consolidation trend is likely to continue, particularly as competitive pressures intensify. Liquidity constraints and evolving exit pathways While capital inflows into AI have surged, liquidity and exit opportunities have not kept pace. The long-antic - ipated reopening of the IPO market remains limited, with only a small number of technology listings suc - cessfully reaching public markets. Many AI companies are taking preparatory steps, including strengthening governance structures, enhancing financial reporting and engaging with underwriters, but are ultimately deferring public offerings in light of market volatility and valuation uncertainty. As a result, companies are operating with longer time - lines to exit, often supported by large private financing rounds that extend their runway. This has contributed to the growth of secondary markets as an alternative liquidity mechanism. Dedicated secondary funds have proliferated, providing opportunities for early inves - tors, founders and employees to monetise portions of their holdings without requiring a full exit event. Large tender offers and other structured liquidity programmes have also become more common, with some transactions reaching substantial scale. These mechanisms allow companies to address internal liquidity pressures (particularly among employees holding significant equity). For legal advisors, these transactions present unique considerations, includ - ing compliance with securities laws, information parity and full and fair disclosure, valuation fairness and the co-ordination of multiple stakeholder interests. Another notable development is the growing presence of private equity growth funds in the venture ecosys - tem. Traditionally focused on more mature compa - nies, these funds are now actively participating in late-stage venture and even earlier-stage financings. Their involvement brings larger check sizes, a focus on operational scalability and, in some cases, different governance expectations. In addition, these investors are often focused on the M&A path to liquidity, and as such the PE growth equity investment is the first step toward an alternative to the IPO as the defining value realisation event for VC-backed entrepreneurs and their companies. This convergence of venture capital
and private equity is reshaping deal structures and negotiation dynamics across the market. Looking ahead Taken together, these trends point to a venture capital environment that is both highly competitive and evolv - ing. The concentration of capital in a relatively small number of AI leaders, the persistence of large early- stage financings and the continued reliance on private markets for liquidity all suggest that traditional ven - ture models are being redefined. For companies, the implications are significant: access to capital remains robust for those perceived as category-defining, but expectations around growth, defensibility and execu - tion are correspondingly higher. For investors, the challenge lies in balancing the pursuit of outsized returns against the risks inherent in a rapidly consoli - dating and capital-intensive sector. For entrepreneurs, the environment presents both opportunity and pres - sure: while capital is available for compelling, differ - entiated visions, founders must demonstrate clear paths to sustainable growth, strong unit economics, and the ability to execute in an increasingly competi - tive and scrutinised market. For legal practitioners, the landscape demands careful navigation of increasingly complex financing structures, secondary transactions, uniquely structured M&A, and cross-border consid - erations. M&A and private equity As discussed below, deals involving California-based companies are being shaped by a mix of sector con - centration and regulatory intensity that differentiates California from many other markets. AI and diligence expectations Across the AI, software, data and cybersecurity com - panies prevalent in California, buyers are valuing not only growth, but also the defensibility of data assets, model training inputs and product differentiation. This shift has real implications for deal execution, includ - ing diligence intensity and liability assessment. On diligence intensity, buyers are demanding deeper dili - gence around data provenance, open-source compli - ance, model training practices, cybersecurity controls and AI governance frameworks, particularly where value is tied to proprietary or regulated datasets. On liability assessment, buyers find that product claims,
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