Venture Funding on Carta Inched Upward in Q2, as Startups Raised $15.4B+ in Q2 2023

Venture funding on Carta inched upward in Q2.

Startups combined “to raise more than $15.4 billion in funding during the second quarter of 2023, up 26% from Q1.” In several other areas of the venture landscape, “such as early-stage valuations and late-stage deal counts, the story is similar: Numbers were trending back up in Q2 after significant declines in recent quarters.”

Even with these recent gains, the venture market “remains a long way off from the salad days of 2021.”

While capital raised was up significantly in Q2 on a quarterly basis, it’s still “down 58% year over year.” And there are other signs that “the fundraising environment remains tight.”

For instance, nearly 20% of all rounds “raised in Q2 were down rounds, the second-highest quarterly figure of the past five years.”

It might be some time before activity “returns to the record-setting pace of recent years. But it appears the overall venture market found a floor in the first half of 2023.”

Q2 highlights

Late-stage deal counts “are ticking up: For the first time since Q3 2021, the number of venture investments on Carta increased in Q2 at every stage from Series B onward.”

The downturn had hit these later stages “particularly hard: Deal counts at Series B, C, D, and E+ had declined by at least 50% from recent highs.”

The map of VC is shifting:

In Q2, companies in the West census region “raised 44.3% of all venture capital on Carta.”

That’s still more than any other region, but it’s “down from a 51.2% share of capital raised in Q1.” The Midwest, South, and Northeast regions all “saw their share of VC funding rise, led by the Northeast, which claimed 29.9% of all Q2 capital.”

Employees aren’t exercising “their stock options: Employees opted to exercise just 26% of their vested stock options in Q2, tied for the lowest exercise rate since at least the start of 2018.”

As recently as Q4 2021, employees “exercised 46% of vested options. Since then, the exercise rate has declined for six straight quarters.”

While the amount of venture dollars raised on Carta “increased by 26% in Q2, the total number of deals stayed relatively flat.” This means that the average investment size also “increased, growing from about $10.4 million in Q1 to $13.1 million in Q2.”

In terms of both deal count and cash raised, “this was the slowest Q2 since at least 2018.”

At the halfway point, 2023 is on pace “to be the quietest year for venture activity since at least 2018.”

The startup valuation “reset is real.” Nearly 19% of all primary fundings “on Carta in Q2 were down rounds, marking the third straight quarter in which that rate has been above 15%.”

Those three quarters “represent the three highest rates of down rounds since at least the start of 2018.”

The past 2.5 years of down-round data “paint a clear picture of how the valuation landscape has shifted.”

Between Q1 2021 and Q1 2022, when the venture funding market “was flourishing, the down-round rate declined for four straight quarters.” After that, when the market “entered a downturn, the down round rate increased for five straight quarters.”

In terms of deal count, venture activity appears “to have cooled off more in the West than in other parts of the country.” The West census region “accounted for 44.3% of all investments on Carta in Q2—still more than any other region, but down significantly from a 51.2% share in Q1 2023 and 55% for the entirety of 2022.”

Each of the other three regions has seen “an increase in its share of activity. The Midwest went from 3.5% of all deals in Q1 to 5.7% in Q2.” The South rose “from 18.1% to 20.1%, and the Northeast climbed from 26.8% to 29.9%.”

When looking at the percentage of cash raised instead of deal count, the picture is similar, but less “dramatic.” The West fell “from 47% of venture dollars raised on Carta in Q1 to 44% in Q2, while the other regions all either increased or held steady.”

On a longer timeline, two “major shifts emerge: The West’s share of all cash raised has gradually declined, and the South’s share has seen the greatest relative increase.”

Over the past four years, the West’s portion of venture funding “has fallen from 59% to 44%, and the South’s has risen from 10% to 20%.” Meanwhile, the Midwest remains “at 6% of cash raised, and the Northeast has ticked up from 25% to 30% over the same span.”

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