What the numbers say: Nearly 7.5% of all venture funding rounds in the U.S. in Q1 2023 were down rounds, per preliminary data from Pitchbook reviewed by Bloomberg. In Q4 2022, the number of down rounds hit a five-year high, making up 10.95% of all funding rounds, per Prequin. With several firms already taking steep valuation cuts — including financial startup Stripe, payments startup Klarna, and cybersecurity startup Snyk — VCs and founders are bracing for more down rounds in the near future. What happened: Founders and VCs tend to typically avoid down rounds as they think it reflects poorly on the company's growth prospects. With the slump in VC funding deployment that started in 2022, several startups curbed their growth plans and laid off employees to avoid down rounds and extend their cash runway. However, Pitchbook estimates that nearly a third of unicorn startups, equating to nearly 400 firms, have not raised any new funding since 2021. These startups are likely to raise down rounds as many will be running low on cash reserves. Typically, a startup that is not profitable yet needs to raise capital every year or two. Pitchbook analyst Kyle Stanford expects down rounds to increase this year, "especially toward the second half of this year." Why it matters: Cameron Lester, global co-head of technology media and telecom investment banking at Jefferies, believes that startups that are able to raise down rounds are the lucky ones as the survival of a startup is paramount. Where to see the impact: Carta's data from Q1 2023 shows that valuations of Series A to Series C stage startups have eased their fall. However, the valuations of Series D and later-stage startups continued to drop in the quarter. Stripe, Klarna, and Tonal have been able to raise down rounds in recent months that have slashed their respective valuations by 50%, 85%, and 76%.
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The gap between dry powder raised and deployed by European VC firms has increased, potentially leaving them with a capital shortage, per Pitchbook. European VCs are having trouble raising capital from limited partners, having raised just €3.4B ($3.75B) in Q1 2023. The difference between dry powder raised and deployed widened to €84.2B ($92.7B) in 2021 and €74.6B ($82.2B) in 2022. More: - Lack of exit opportunities for portfolio startups has made it difficult for VCs to distribute returns to LPs, which in turn is making it challenging to secure follow-on commitments for new funds.
- Additionally, the reduced liquidity makes it difficult for VCs to make new startup investments.
- In Q1 2023, VCs slowed their deployment into European startups by 32.1% QoQ, investing €11.8B ($13B) in the three months.
- Pitchbook reckons VCs will need to explore other options to generate returns for LPs, such as partial share sales, rather than simply reducing their deployment rate.
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Schroders Capital Global Innovation Trust, an investment trust managed by Schroders, marked down its stake in portfolio startup Revolut by 46%. Schroders acquired the stake in the firm for £10.1M ($12.5M) in 2021. The markdown has effectively reduced the value of its stake by £4.7M ($5.8M). More: - Despite posting profits in 2021, Revolut's auditor could not ascertain "the completeness and occurrence" of almost three-quarters of its revenue that year.
- In an emailed comment to Bloomberg, Revolut downplayed the valuation reduction, saying, "We do not engage in speculation on our valuation."
- Revolut added, "Since our last funding round, in which we were valued at $33B, Revolut has continued to perform strongly in all its markets, has continued to hire and expand, and reported its first full year of profitability."
- Last month, TriplePoint Venture Growth BDC Corp. marked down its Revolut stake by 15%.
Zoom out: - Revolut's drop in valuation comes as investors exercise caution on their fintech investments.
- Due to heightened interest rates, rising inflation, and declining startup valuations, VC funding for U.K.'s fintech startups declined from $22B in 2021 to $17B in 2022.
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Smart electric panel maker SPAN raised $96M through a Series B2 funding round led by Wellington Management. The financing is an extension to the firm's $90M Series B round led by Wellington and Fifth Wall last year. Incoming funds will be used to develop its R&D site in South San Francisco and hire 100 employees across R&D, sales, and go-to-market divisions. More: - The San Francisco-based firm offers smart electricity panels and electric car chargers that enable homeowners to monitor their energy consumption and optimize power usage.
- CEO Arch Rao, who formerly oversaw the development of Tesla's home battery product Powerwall, founded the firm in 2018.
- To date, the firm has raised $231M in total funding.
- Congruent Ventures, Capricorn Investment Group, Munich Re Ventures, Fifth Wall, A/O PropTech, Qualcomm Ventures, and Amazon's Alexa Fund participated in the current round.
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Savings, cashback, and credit building app Super.com, formerly known as SnapCommerce, raised $85M in Series C funding led by Inovia Capital. The funding consists of $60M in equity and a $25M credit facility. The firm intends to use the proceeds to accelerate product development and introduce new features on the app. More: - Super.com did not disclose the valuation at the current round. However, it was able to "double its valuation" from its previous fundraiser in 2021.
- The firm raised its valuation by focusing on top-line revenue and unit economics.
- CEO Hussein Fazal claims the firm is on track to cross $1B in gross merchandise volume and $100M in net revenue in 2023.
- The firm has over five million customers for its cashback card SuperCash which launched last October.
- Super.com has raised a total of $200M in equity and debt funding to date.
- Telstra Ventures, Acrew, Lion Capital, and NBA player Steph Curry backed the current round.
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SaaS construction procurement platform Constrafor raised $7.5M via a SAFE note led by Motive Partners. CEO Anwar Ghauche said that the firm opted for a SAFE note over a priced equity round as the market is not "great today in terms of pricing," helping the firm avoid a valuation drop. Along with the equity round, the firm also secured a credit facility from Apollo. More: - Constrafor had previously secured $6.3M in equity seed funding led by FinTech Collective and a $100M credit facility provided by CoVenture in June 2022.
- The company has reportedly grown 25% MoM this year.
- Incoming funds will be used for payroll and operations, securing ratings for its EarlyPay program, and opening up access to its APIs to general contractor customers.
- Constrafor is targeting between $5M to $10M in annual recurring revenue (ARR) before it raises a Series A round.
- The current round was backed by Fifth Wall, FinTech Collective, Commerce Ventures, FJ Labs, and NotreVis.
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- Fusion energy startup Avalanche Energy closed its Lowercarbon Capital-led Series A funding round with $40M capital.
- Salesforce Ventures, Morgan Stanley Next Level Fund, HubSpot, Verizon Ventures, and others provided $25M in funding to the SMS engagement platform Community.
- Real estate-focused IoT software and sensor company Haltian secured €22M ($24.2M) in growth funding led by Mandatum Asset Management with participation from Varma, Tesi, Ventic, and Inventure.
- India needs $600B in VC and PE funding to reach its $5T GDP target by 2027, per Praxis India.
- Indian VC firm Qi Ventures hired Vinod Keni as managing director of institutional business.
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 |  | Karan Chafekar is a Management Consultant, Business enthusiast, and Licensed Pilot. | | | | Editor | Aaron Crutchfield is based in the high desert of California. Over the last two decades, he has spent time writing and editing at various local newspapers and defense contractors in California. When he's not working, he can often be found looking at the latest memes with his kids or working on his 1962 and 1972 Fords. | |
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