The transformation of the venture capital industry over the past year has been “stark,” according to a recent update shared by Carta.
Carta writes in a blog post that the total venture capital “raised by startups plunged 80% from Q1 2022 to Q1 2023.”
Venture deal count “fell 45% over the same span.” Overall, Q1 was “the slowest quarter for both capital raised and deal count since 2017.”
According to the report from Carta, there are “signs of a venture spring.” Valuations from seed to Series C “ticked up from recent lows.” Median round sizes mostly “stabilized.” But these green shoots “were overwhelmed by the decline in total rounds across all stages.”
Other Q1 highlights
- Down rounds spiked in frequency: Just shy of 20% of all venture investments in Q1 were down rounds, the highest proportion since at least 2018. A year ago, barely 5% of venture deals resulted in a reduced valuation. With median valuations having fallen so far from recent highs, many companies seeking a valuation increase are battling against the current.
- More companies chose bridge rounds: For companies ranging from Series A to Series C, bridge rounds have emerged as an increasingly attractive option. At least 40% of all investments in Series A and Series B companies were bridge rounds in Q1, the highest figures of the 2020s.
- Startup M&A bounced back: The number of venture-backed companies that were acquired or merged with another company increased by 20% in Q1 compared to Q4 2022, with 57% of those M&A deals valued at $10 million or less. In a challenging environment for raising new venture capital, some smaller startups are instead opting for an exit.
Key trends shared by Carta are as follows:
- Total rounds (bars) and total cash raised (line) by quarter, Q1 2016-Q12023
- What a difference a year makes. There were fewer investments and less capital raised by startups on Carta in Q1 2023 than in any first quarter since 2017—a sharp contrast to Q1 2022, which saw more deals and the second-highest total capital raised of any Q1 in recent history.
- After several years of steady growth, the venture market is on pace for a second straight year of declines. Across all stages, Carta logged 906 venture capital investments in Q1, ending a streak of 21 consecutive quarters in which deal count had reached at least 1,000. That’s a 35% decline from Q4 2022, the largest quarter-over-quarter dip since at least 2016.
- Nearly one in five venture rounds raised in Q1 came at a lower valuation than the company’s previous round. That figure is 3.6x higher than a year ago, and it’s far and away the highest rate of the past five years.
The recent spike is “due in part to the fact that valuations have continued to decline across most stages of the startup lifecycle.”
But it’s also “due to the fact that valuations have remained depressed for several consecutive quarters.”
Some companies that “had delayed new fundraisings in hopes of avoiding a down round are nearing the end of their financial runways and have decided that a lower valuation is a lesser evil than running out of cash.”
Percent of total cash raised by state, aggregated to US Census Regions, Q1 2023
There was no venture capital activity “to speak of in more than a quarter of the 50 states during Q1.” That’s a notable shift from Q1 2022, “when all but four states hosted at least one venture deal.”
Compared to recent history, the investments “that did get done were more tilted to the eastern half of the country than in past quarters.”
A combined 44.9% of activity “was in the South and Northeast regions, up from an even 40% over the course of 2022.”
Both round count and capital raised “have fallen off significantly at seed, Series A and Series B.”
Last quarter’s total seed capital “raised of $1.1 billion is down 68% from the recent quarterly high, which is actually the smallest decline of any of the three early stages.”
Series B activity “had shown signs of plateauing in Q4 2022, but round count and capital raised both fell again in Q1.”
For more details on this update, check here.