Q2 2023 Venture Financing Report – Deal Count and Invested Capital Increase, Along With Down Rounds and Recapitalizations, While Late-Stage Pre-Money Valuations Decline
Cooley handled 206 reported venture capital financings in Q2 2023, representing $6.2 billion of invested capital, an increase from 192 reported financings and $4.7 billion of invested capital in Q1 2023. The slight increase in these numbers in Q2 2023 ends the steady decline we have seen since Q4 2021, but the numbers were still lower than those from Q3 2022. These slight increases were reflected more in later-stage rounds.
Median pre-money valuations remained mostly steady – with some slight upward trends – for most stages of financing. Valuations for Series Seed deals generally remained high, consistent with levels seen since mid-2021. Series A valuations were generally still higher than pre-pandemic levels, Series B valuations were trending up and aligned with valuations seen in mid-2022, and Series C valuations aligned with valuations seen throughout 2021 and 2022. The percentage of deals (at all stages) with a median pre-money valuation of $100 million or more was at 25% of deals in March 2023 and continued to rise in Q2 2023 to 33% of deals in June 2023.
Despite the aforementioned good news, the percentage of down rounds continued to increase in Q2 2023, reaching 21% of deals for the quarter. This is the first time the percentage of down rounds has surpassed 20% since Q2 2016. The percentage of up rounds rose slightly to 77% of deals for Q2 2023 – up from 73% last quarter – though still significantly down from the high percentages seen in 2021 and early 2022. Flat rounds represented just 2% of deals during the quarter, down from 11% last quarter and back in line with numbers seen during 2021 and early 2022.
Deal terms – while overall still favorable for companies – did show some less favorable trends for companies in Q2 2023. The percentage of deals involving a recapitalization rose to 2.91% of deals in Q2 2023. This number has exceeded 2% of deals only two times during the history of our reporting, the last time being in Q3 2014. The percentage of deals with a pay-to-play provision remained low at 5.3% of reported deals. However, it is rare that this number is above 5%, and prior to this year, the number had not exceeded the 5% mark since Q3 2020. Despite these two trends, the number of reported deals having non-participating preferred stock remained favorable to companies, at 95% of reported deals for Q2 2023.
In PitchBook’s Q1 2023 Global League Tables, Cooley was named the #1 law firm overall in the US and globally for venture capital financings and held the #1 rank in the US and globally for representation of companies in venture capital financings. In addition, Cooley ranked as the most active law firm in late-stage venture financing deals, as well as in various industry sectors, including pharma and biotech, healthcare (services and systems), and IT hardware.
Spotlight on technology
Deal volume and invested capital for technology company venture financings rose slightly in Q2 2023 to 118 reported financings, representing $3.1 billion of invested capital, as compared with 108 reported financings of technology companies, representing $2.9 billion of invested capital, in Q1 2023. Excluding Q1 2023, Q2 2023 represents the lowest deal volume for technology companies since Q3 2018, when Cooley handled 115 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 213 reported venture financing deals for technology companies, representing more than $12.3 billion of invested capital, in Q2 2022. The average reported deal size decreased slightly during the quarter for venture financings of technology companies to just under $26.4 million, compared to just more than $28 million in Q1 2023 – both down from more than $57 million a year ago in Q2 2022.
Spotlight on life sciences
In Q2 2023, Cooley handled 49 reported venture financings of life sciences companies, representing $1.9 billion of invested capital. Both numbers are slightly up from Q1 2023, when Cooley handled 47 reported venture financing deals for life sciences companies, representing more than $996 million of invested capital. Reported deal sizes for venture financings of life sciences companies also increased slightly to an average deal size of more than $38.3 million, compared with $21.2 million in Q1 2023. Despite these increases from the previous quarter, the numbers for venture financing deals for life sciences companies are down compared to one year ago, in Q2 2022, when Cooley handled 54 reported venture financing deals for life sciences companies with invested capital of $2.5 billion and an average deal size of more than $45 million. The percentage of life sciences venture financings structured in tranches remained high at 24% of reported deals. The number of venture financings for life sciences companies structured as tranches has now equaled or exceeded 20% for the last four quarters. Before Q3 2022, the last time the percentage of reported life sciences venture financings structured in tranches exceeded 20% was during Q3 2020.
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Key insights from Steve Harrick
On public financing in Q3 and Q4 2023: “There is still a lot of capital available that has been raised by venture funds, but it is a difficult deal environment when the last round prices were as high as they were in 2020 and 2021.”
On investor attitudes toward AI: “Our belief is that the value from artificial intelligence and machine learning will be enormous, but it will play out over the next several years.”
On investor reactions to market contraction: “What is different from some other cycles is – although the tourists have left, as they usually do when markets contract – the consistent venture practitioners raised a lot of money that will eventually need to find a home.”
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