Q1 2023 Venture Financing Report – Pre-Money Valuations Trend Up While Deal Volume, Invested Capital and Up Rounds Continue Decline
Cooley handled 192 reported venture capital financings for Q1 2023, representing $4.7 billion of invested capital. Both deal count and invested capital have been declining since Q4 2021, when we saw a record high deal count of 428 reported VC financings, and Q1 2022, when we saw a record high amount of invested capital at $24.3 billion. This continued decline in deal count and invested capital is consistent with trends seen in the broader market and represents the lowest deal count and invested capital we have seen since Q1 2017.
While we have witnessed downward trends in deal counts and amounts raised over the last year across all stages of financing, the decline in Q1 2023 is most significant in Series C and later deals. Looking back to near-record highs for deal count and amounts invested for Series D and later in Q4 2021, the number of deals has dropped by 90%, and the amount invested has dropped by 97%. For earlier rounds, the decline in deal count is not quite as steep. Since Q1 2022, the number of Series Seed deals reported is down by 32%. For Series A, the number is down by 56%, and for Series B, the number is down by 44%. However, the decline in invested capital has been more significant – with invested capital down by 71% for Series Seed deals, by 76% for Series A deals and by 84% for Series B deals.
Median pre-money valuations have not declined at such a steep rate. The valuations for Series Seed deals generally remain high, consistent with levels seen since mid-2021. Series A valuations are down since late 2021 but are generally still higher than pre-pandemic levels, and Series B valuations are trending up again, aligning with valuations seen in late 2020 and early 2021. Meanwhile, Series C valuations are now back in line with valuations seen in early 2022. The median pre-money valuations for Series D and higher rounds in March 2023 also was up again, in line with valuations from early 2021. The percentage of deals (at all stages) with a median pre-money valuation of $100 million or more increased slightly to 25% of deals for March 2023 – after dropping to below 20% of deals in January and February of this year – which is the first time it has dropped below this threshold since October 2019.
Overall, the percentage of up rounds continued to decline, representing just 73% of deals for Q1 2023, down from 79% in Q4 2022. Down rounds represented 15% of deals, and flat rounds represented 12% of deals – the highest percentage of down rounds reported since Q2 2020 and the highest percentage of flat rounds noted in the history of this report.
Despite the continued decline in invested dollars, deal volume and up rounds, deal terms themselves in Q1 2023 continued to be generally favorable for companies. During the quarter, 95% of reported deals had non-participating preferred stock. The percentage of deals with a pay-to-play provision remained low at 5.7% of reported deals. However, it is rare that this number is above 5%, and this is the first time since Q3 2020 that it has exceeded the 5% mark. The percentage of deals involving a recapitalization rose slightly in Q1 2023 to 1.04% of deals, as compared with just 0.35% of deals in Q4 2022.
In PitchBook’s 2022 Annual Global League Tables, Cooley continued to hold the top spot in the US and globally for representation of companies in venture capital transactions and was ranked as the #2 law firm for all venture financing transactions. Cooley also ranked as the most active law firm in various industry sectors for venture capital financings – including in pharma and biotech, energy, healthcare (services and systems), IT hardware and media.
Spotlight on technology
Deal volume and invested capital for technology company venture financings continued to decline in Q1 2023. Cooley handled 108 reported financings of technology companies, representing more than $2.9 billion of invested capital. This represents the lowest deal volume for technology companies since Q1 2017, when Cooley handled 102 reported deals, and the lowest amount raised since Q1 2019, when Cooley handled 123 reported deals representing more than $2.8 billion of invested capital. As with all industries, the deal count and invested capital for technology company venture financings is down significantly since one year ago, when Cooley handled 257 reported venture financing deals for technology companies, representing more than $18.6 billion of invested capital for Q1 2022. Average reported deal size increased slightly during the quarter for venture financings of technology companies at more than $27.6 million, compared to slightly more than $25 million in Q4 2022 – both down from more than $72 million in Q1 2022.
Spotlight on life sciences
In Q1 2023, Cooley handled 46 reported venture financings of life sciences companies, representing more than $993 million of invested capital. Both numbers are down from Q4 2022, when Cooley handled 58 reported venture financing deals for life sciences companies, representing more than $1.2 billion of invested capital. Reported deal sizes for venture financings of life sciences companies also decreased slightly to an average deal size of more than $21.5 million. The numbers for venture financing deals for life sciences companies are significantly down compared to Q1 2022, when Cooley handled 70 reported venture financing deals for life sciences companies, with invested capital of $2.2 billion and an average deal size of more than $32 million. The percentage of life sciences venture financings structured in tranches remained high at 24% of reported deals. Prior to Q4 2022, the last time that the percentage of reported life sciences venture financings structured in tranches exceeded 20% was in Q3 2020.