Things are beginning to look up for startups after a long fundraising drought. Venture funding grew 26% QoQ, the first such increase since 2021, according to venture platform provider Carta’s State of Private Markets: Q2 2023.
The report brought more good news for startups, including upticks in early stage valuations and later-stage deal counts. Carta aggregated its data from the companies and security holders that use its platform.
It’s not all good news, though. Later-stage companies are successfully raising money, but at lower valuations relative to the past few years, according to Carta. “Nearly 20% of all rounds last quarter were down rounds, the second-highest quarterly figure of the past five years.”
Later stage valuations were mostly up QoQ, but later stage valuations were mostly up QoQ, but noticeably lower compared to recent highs. and noticeably lower compared to recent highs; the later the stage, the worse it gets. Series A valuations were down only ~17% from their peak, while Series D and E+ were off more than 70% from their highs. And while startup fundraising overall was up QoQ, it was still down 58% from a year ago.
The message is that while the venture market isn’t going gangbusters, it’s nonetheless headed upward, having “found a floor in the first half of 2023,” even if it “might be some time before activity returns to the record-setting pace of recent years,” according to Carta’s analysis.
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The lower valuations on late-stage companies is breaking up the logjam on rounds for those companies. Deal count grew for every stage from Series B onward, the first time that’s happened since Q3 2021. But if the venture market found its floor, it is still very far from getting back to its ceilings of past years; deal counts at all later stages “declined by at least 50% from recent highs.”
A key downstream effect of all of these down rounds and fundraising challenges is that employees aren’t exercising options like they used to, presumably because the changing valuation environment has made it less profitable. In Q2, employees exercised only 26% of their vested stock options, “the lowest exercise rate since at least the start of 2018.”
This suggests that startups face a dual challenge in this fundraising environment: They aren’t raising cash like they did in the glory days of a year or two ago, and the equity options they can use to acquire and retain talent don’t offer the bump they once did.