Financial Management

Rounds down

From down rounds to bridge rounds to no rounds, companies face a new fundraising landscape.
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Wong Yu Liang/Getty Images

· 4 min read

What do the latest venture investment numbers tell us about how startups are operating today? According to the latest data from Carta, an ownership and equity management platform, many companies beyond the seed stage are kicking the can down the road, often raising smaller bridge rounds instead of raising a full, new round.

“At least 40% of all investments in Series A and Series B companies were bridge rounds in Q1, the highest figures of the 2020s,” it announced in a new report. That trend is even more pronounced for later-stage companies, according to Peter Walker, head of insights at Carta.

“There are so few Series D rounds happening that the majority of the ones that are taking place are some form of extension bridge,” he told CFO Brew.

And for those that are raising a full round, nearly 20% are down rounds, “the highest proportion since at least 2018,” according to the report.

Holding it close. This comes amid a trend in recent years in which more and more late-stage companies have opted to stay private rather than push for an IPO. In North America in recent years, there has been a 500% increase in the number of private companies that have reached unicorn status, according to research from the National Foundation for American Policy, a reflection of increasing startup valuations and companies staying private longer.

“We’ve seen this throughout our dataset, that companies are staying private longer and longer,” Walker said, “the reason they’re doing that is because they were pretty certain that they could continue to fundraise out of private cash instead of having to tap the public markets.”

That’s now changed: “The water has sort of gone out on that strategy, because the money in the private late-stage market has dried up,” Walker said, noting that many companies are taking a wait-and-see approach while the IPO market remains less active.

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Less early on. At earlier stages, companies simply aren’t raising as often: “In terms of seed rounds, over time, Carta saw 857 seed rounds completed in Q4 of 2021,” Walker said, adding: “That was the peak quarter for us.” As to how things are now, Walker said, “In this most recent quarter, we saw 347 seed rounds,” noting “that’s a significant drop.”

Outside of the data, Walker said there are other indications companies are seeing new challenges raising funds: “We’ve heard anecdotally that the metrics required to achieve a Series A have increased,” such that “you need to show more traction, there needs to be better unit economics, or whatever the investor in question is looking for.” Nevertheless, Walker said, “The picture is still far more rosy in early stage than it is in late stage.”

Time for a rethink. Ultimately, Walker said, these dynamics are changing how leadership is choosing to run their companies: “If you’re a Series D company and you grew up in the last five or six years, when the paradigm was radically different than it is today, shifting between growth at all costs and profitability is a really difficult changeover to make, and that’s partly why we see deep cost-cutting layoffs, those kinds of things.”

Walker reminded companies to be mindful of the changed fundraising environment: “As you go out to that next fundraise, your expectation should be different from the valuation and cash rate perspective that you might have wanted a year or two prior.”

But also worth watching, he said, are deal terms. “One of the biggest changes that we’re seeing within venture deals is some of them are coming along with pretty onerous terms or investor-friendly terms in a way that weren’t before.”—SW

News built for finance pros

The latest news and insights corporate finance professionals need to know to keep up with their constantly evolving industry.