VC down rounds double to 16% across funding stages: Preqin
VENTURE capital (VC) down rounds are rising globally, doubling from a typical 8 per cent of total deals to 16 per cent in the second quarter of this year.
The ratio for Q2, the latest quarter for which data was available, was even higher than the pandemic peak of 12 per cent in Q3 2020, according to a report by private markets data tracker Preqin.
A Preqin survey conducted in November found that 57 per cent of investors viewed VC assets as over-valued; 30 per cent expected their VC portfolio performance to worsen over the next year.
Down rounds – which are funding rounds at a lower equity valuation than the immediate prior round – were most common in Series C and D rounds, at 25 per cent.
A sluggish exit environment has pushed investors towards early-stage deals, an earlier Preqin report showed, but even Series A down rounds have increased to 12.4 per cent of total deals. This is almost double the five-year average of 6.5 per cent.
Three-quarters of the 395 VC investors surveyed by Preqin cited the exit environment as the biggest challenge ahead.
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As of Q3, there were 1,328 exits valued at US$162.2 billion – down from 2,253 exits at US$248 billion in 2022.
The timeline from the earliest investment stage to an eventual exit has also increased to an average of six years, from 4.6 years in 2012 and 5.6 years in 2022, Preqin data showed.
Lower VC valuations, however, could prove a tailwind for 2023-vintage funds, said Preqin.
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“Some managers will see better entry levels on valuations, which have decreased over the past two years. This will provide a positive tailwind for 2023 and 2024 vintages as they mature,” said Cameron Joyce, senior vice-president and head of private equity and research insights at Preqin.
VC fundraising has continued its slowdown from the past two years and is set to hit an eight-year low. In the first nine months of 2023, 783 funds raised a total of US$85.7 billion. This was a year-on-year decline of 49.4 per cent and 53.2 per cent, respectively.
“The pessimistic outlook for future fundraising means that there will be limited capital available to startup founders, which may drive higher levels of insolvency,” Joyce added.
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