In mid-December, we learned there’s no end in sight for the Federal Reserve’s interest rate hike campaign. As a result, experts are predicting the economy will continue to cool in 2023, perhaps even more than previously anticipated.
If that news has you wondering, “What does that mean for venture capital financing?” you’re not alone.
VC financing counsel Robert Suffoletta has founders covered when it comes to anticipating and responding to trends for 2023. Suffoletta is a partner in the corporate and securities practice of Wilson Sonsini Goodrich & Rosati, a law firm that specializes in business, securities and intellectual property law.
On Jan. 24, 2022, Suffoletta hosted a webinar for Founders Network where he discussed the outlook for venture capital financing for the new year.
To learn more about venture capital financing for 2023, see if you qualify for membership and check out the webinar from January 24.
Valuation Trends
In order to anticipate what’s to come for venture capital financing, it’s critical to evaluate end of year trends. A recent report from Wilson Sonsini Goodrich & Rosati has broken down financing trends for the third quarter of 2022.
After reaching all-time highs in the second quarter, median pre-money valuations took a dip in the third quarter for most fundraising rounds.
According to the report, here’s what happened to median pre-money valuations between the second and third quarters of 2022:
- Series Seed financings declined from $18 million to $15 million. However, that’s above the 2021 median of $10.5 million.
- Series A valuations declined by more than half, from $60 million to $29.9 million. That’s just below the 2021 median of $30.5 million.
- Series B valuations dropped from $195 million to $190 million.
- Valuations for Series C and later fundraising rounds increased from $255 million to $390 million. But, that’s still below the record-breaking 2021 median of $465 million.
Mixed Results for Fundraising
Founders have experienced mixed success while fundraising in the third quarter, depending on the round.
The median amount raised for Series A and Series C and later rounds saw slight declines.
- From $9.9 million in Q2 to $8.2 million in Q3 for Series A
- From $43.2 million in Q2 to $30.8 million in Q3 for Series C and later rounds
The median amount raised for Series B financings more than doubled between the second and third quarters of 2022 – from $25 million to $54 million.
As a result of these trends and expected conditions in 2023, “there is a big focus on trying to raise less money or make the money you raise last longer,” says Suffoletta.
The Rise of Investor-Favorable Terms
For early-stage startups without performance data, Simple Agreements for Future Equity or SAFE notes are a popular tool for raising capital. The agreement converts to shares in a future financing round.
In the third quarter of 2022, the median amount raised for SAFE agreements trended downward, according to the Wilson Sonsini report, from $1.2 million in Q2 to $0.88 million in Q3.
In addition, the proportion of SAFE notes that include a “Most Favored Nation” clause – which protects investors – rose from 15% in 2021 to 23% in Q1 to Q3 of 2022. The proportion of SAFE notes using a valuation cap, another safeguard for investors, also increased from 86% in 2021 to 90% in the first three quarters of 2022.
In the webinar, Suffoletta covered:
- Fundraising trends for 2023
- What to expect for valuations
- SAFE financing and bridge loans
- Making the money you raise last longer
To learn more about venture capital financing for 2023, see if you qualify for membership and check out the webinar from January 24.
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