Earlier this year we wrote that the “the $100 million venture round is going extinct.” Often our predictions wind up sideways. This time we were on the right track.
According to new data from PitchBook, the U.S. venture market is continuing to endure lackluster velocity for nine-figure investments into private companies, colloquially referred to as “mega-rounds.”
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In the first half of 2023, PitchBook counted just 108 mega-rounds in the United States. If we presumed that this rate will hold throughout the year, we’re looking at just over 200 nine-figure deals in the U.S. in 2023. That’s a dramatic decline from prior levels. Starting in Q4 2020 through Q3 2022, there were more than 100 mega-rounds recorded per quarter. In 2021, the average was more than 200 per quarter. To see perhaps 200 this year implies that the number of late-stage startups that will be able to raise an IPO-sized round is in free fall.
The rounds are also getting smaller, with data indicating that the average nine-figure round size has fallen under the $200 million mark, exclusive of a few rounds that are hardly traditional venture deals, like OpenAI’s massive round earlier this year. Smaller mega-rounds, and fewer of them, is a tough mix for unicorns of all stripes and sizes.
Of course, we could see nine-figure rounds rebound in other markets. Europe and Asia have seen their fair share of the transactions historically. But as the United States’ venture market is the largest in the world and was once the leading player in mega-round financings, where the U.S. goes, so, too, goes the world.
If unicorns here are struggling to find fodder in the quantity that they became accustomed to, other startups around the world are likely enduring a similar dearth of capital.
Notably PitchBook thinks that “the need for capital likely leading to an uptick in mega-rounds as the year progresses” thanks to “the notion that depleting cash runways will force more of these startups to raise in the harsher dealmaking environment,” it still expects full-year mega-round tallies to come in at dramatically reduced levels compared to prior years.
What could fill the gap? There are very few ways to raise nine figures of equity capital. One is a private-market fundraise, which we discussed above. The other is a public-market raise through an IPO. It may seem odd given the incredibly limited number of non-biotech, venture-backed IPOs that we have seen in recent years, but unless unicorns have become less hungry, they may find themselves stuck between a private-market down round, expensive debt or an IPO.
Don’t expect the IPO market to come roaring back suddenly due to sheer capital hunger. But with the Cava IPO behind us, there’s evidence in the market that public offerings are picking up at least some momentum. Bloomberg wrote earlier this week that IPOs on U.S. exchanges will raise around $1.5 billion this month, “marking the first consecutive months with more than $1 billion sold since last fall.” That’s not nothing.
Part of the reason for that bump is the rabid reaction that Cava shares received when they debuted, shooting dramatically higher in the wake of their listing and still up around 100% from their IPO price today despite losing around 5% of their worth during early trading.
There is a risk calculation that unicorns can make here: Take a check from private investors that will clip your valuation wings, or pray that the IPO market is more interested in you than shell-shocked late-stage venture capitalists. Desperate times (falling cash balances) may call for desperate measures (fast-trigger IPOs to keep cash balances afloat) later in the year.
The mega-round market could improve later in the year in terms of volume as unicorn needs sharpen, but there are other reasons why we could see more of the deals in the final two quarters of 2023. The value of software revenues have rebounded modestly, the tech-heavy Nasdaq index — to pick another metric — is having a stellar year, and the pace at which we are seeing interest rates rise is slowing. That’s about as good a trio of signals as you could hope for.
Enough to save the $100 million round from becoming a rarity once again? Probably not. But maybe enough to get us a handful of IPOs before the year end. Don’t forget, IPOs were once fundraising mechanisms more than they were ways to unlock private capital secured more than a decade ago.