Ever since the tech downturn began affecting startups, a question kept coming up: What if we are witnessing a correction?
The question implied that the way deals were done in the past couple of years, mostly during late-2020 and nearly all of 2021, were the exception, not the rule, and venture investing was returning to normal. But what exactly does that mean?
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Well, 2021’s frenetic deal-making environment, which saw generous valuations being handed out, was no longer the ideal anyone could hope to return to. In retrospect, investors and observers started to acknowledge that a market in which due diligence often got sidelined wasn’t healthy.
Valuations are a trickier topic. VCs like a good deal, but they also don’t want to lose money on past investments. Still, it’s slowly become clear that many startups’ valuations had gotten out of hand for a bit. With crossover funds mostly out of the picture, maybe we could nurse our collective hangovers together and pretend that 2021 never happened.
The problem, though, is that the venture market isn’t simply returning to 2020 levels, at least not in all respects. Today, we’re diving deep into CB Insights’ report on Q1 2023 trends, which shows that mega-rounds and late-stage deal share are at their lowest point in years.
Fewer late-stage deals are a cause for concern
And that’s an understatement. Last quarter had the fewest venture rounds on record (7,024) since the second quarter of 2020, per CB Insights, in addition to seeing a 12% decline from Q4 2022.
This fact alone could indicate that we’re in a market that’s correcting back to 2020 levels, but breaking down the data reveals a more concerning picture.
Looking at deal share by venture stage, we can see that 2023 began on a different footing. In 2019, the last full pre-COVID-19 year, late-state deals accounted for 12% of total venture deals, whereas in Q1 2023, two out of every three deals concerned early-stage rounds and only 8% were late-stage deals.
“If that trend holds through the rest of 2023, it will mark the lowest annual level in over a decade” for late-stage rounds, CB Insights said.
At first sight, seeing early-stage rounds gaining ground over late-stage deals looks encouraging, since it suggests that VCs are still betting on the future. But if we take a step back, this is actually worrisome.
That’s because late-stage companies are the ones with enough employees that they could lay off if their troubles mushroom out of control.
No mega-rounds to the rescue
The fact that late-stage companies are not raising new rounds en masse doesn’t mean that they are failing, but if this keeps happening, some of them are bound to see some hard times. Even if they raised large rounds in 2021, that cash won’t last forever and a new mega-round is unlikely to come to the rescue.
Indeed, another piece of data from CB Insights indicates that mega-rounds — worth more than $100 million — are growing rare. Again, they aren’t just returning to pre-COVID-19 levels: Accounting for $21.9 billion across 90 deals, these rounds are now at their lowest level since Q1 2017.
To put this into context, Q1 2019 saw 128 mega-rounds accounting for $35 billion in deal value, and Q4 2022 ended with a tally of $23.8 billion across 127 mega-rounds.
The drop isn’t limited to one part of the world, either. The number of mega-rounds declined globally in Q1 from the previous quarter, CB Insights noted.
A logical corollary is that unicorn creation is also at its lowest point in years, and The Exchange will take a closer look at what that means shortly.