Q3 2023 Venture Financing Report – Deal Count and Invested Capital Increase Slightly, While Percentage of Down Rounds Continues Rise to New Levels
Cooley handled 225 reported venture capital financings in Q3 2023, representing $6.8 billion in invested capital – an increase from 221 reported financings and $6.4 billion in invested capital during Q2 2023. This continues an upward trend that started in Q2 2023 and ends the steady decline we saw between Q4 2021 and Q1 2023. The slight increase in the number of deals was reflected more in early rounds. The number of mid-stage rounds decreased, and the number of late-stage rounds stayed consistent with Q2 2023. The slight increase in invested capital in Q3 2023 was seen more in late-stage rounds, with early and mid-stage rounds showing a decrease in invested capital compared to last quarter.
Median pre-money valuations remained steady for most stages of financing. Valuations for Series Seed deals generally remained high, consistent with levels seen since mid-2021. Series A valuations were down from the highs seen in early 2021 through mid-2022, in line with valuations seen in late 2020 and consistent with those seen since mid-2022. Series B and C valuations trended down during Q3 2023, with Series C valuations aligned with those seen throughout 2021 and 2022. Meanwhile, Series B valuations aligned with the valuations seen in Q4 2022 and Q1 2023. Valuations for Series D and higher deals, which have been down for most of 2023, climbed upward during Q3 2023 to be in line with valuations seen in 2022. The percentage of deals (at all stages) with a pre-money valuation of $100 million or more dropped slightly during the quarter, from more than 30% of deals in June 2023 to 24% of deals in September 2023 – though this is still higher than percentages seen during Q1 2023.
Despite the upward trends in numbers of deals and amounts raised, the percentage of down rounds continued to increase in Q3 2023, reaching 27% of deals for the quarter, as compared to 21% of deals for Q2 2023. The number of flat rounds also increased to 9% of deals for the quarter, as compared to 2.2% of deals last quarter. There was a corresponding decrease in up rounds to only 64% of deals in Q3 2023. This is the highest percentage of down rounds and the lowest percentage of up rounds in the history of our reporting (since 2014). In none of the previously reported quarters have down rounds exceeded 25%, nor have up rounds been less than 70%. Similarly, flat rounds have represented 9% or more of deals in only four quarters across the history of this report – and generally represent less than 5% of deals in a quarter.
Other (nonvaluation) deal terms in Q3 2023 remained generally favorable to companies. After rising to 3% of deals in Q2 2023, the percentage of deals involving a recapitalization declined in Q3 2023 to 1.8% of deals. This number is more in line with percentages seen since 2015 and through Q1 2023. Ninety-six percent of reported deals in Q3 2023 had non-participating preferred stock, up slightly from 95% of reported deals last quarter. In contrast to these two favorable trends for companies, however, the percentage of deals with a pay-to-play provision increased to 7.1% of reported deals for Q3 2023 – the highest percentage seen since Q3 2020 and only the fourth time in the history of our reporting that this number has exceeded 7%.
In PitchBook’s Q2 2023 Global League Tables, Cooley was named the #1 law firm overall in the US and globally for representation of companies in venture capital financings, as well as the second most active law firm in the US and globally for representation of investors in venture capital financings. In addition, Cooley ranked as the most active law firm in venture financing deals in various industry sectors – including pharma and biotech, healthcare (services and systems), healthcare (devices and supplies), commercial products, and services and media.
Spotlight on technology
Despite the quarter’s slight upward trend overall for deal volume and invested capital, those metrics for technology company venture financings remained about the same as they were in Q2 2023, with 119 reported venture financings, representing $3.1 billion in invested capital. This represents the lowest deal volume for tech 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 in invested capital. As with all industries, the deal count and invested capital for tech company venture financings are down significantly compared to one year ago, when Cooley handled 211 reported venture financing deals for tech companies, representing more than $5.6 billion in invested capital. The average reported deal size for tech company venture financings was just more than $26.4 million for Q3 2023, which is consistent with average deal sizes from both last quarter and one year ago.
Spotlight on life sciences
In Q3 2023, Cooley handled 48 reported venture financings of life sciences companies, representing $2.3 billion in invested capital. Deal count remained about the same compared to last quarter, but invested capital increased from just over $2 billion for Q2 2023. Reported deal sizes for venture financings of life sciences companies also increased in Q3 2023 to an average deal size of $48.9 million, compared to $35.7 million in Q2 2023. The number of venture financing deals for life sciences companies is down compared to one year ago – in Q3 2022 –when Cooley handled 59 reported venture financing deals for life sciences companies. However, despite the decrease in deal count, the invested capital and average deal size have increased compared to one year ago, when invested capital was $1.8 billion and the average deal size was $30.6 million. The percentage of life sciences venture financings structured in tranches increased in Q3 2023 to 46% of reported deals. This is the highest percentage of financings structured in tranches observed in the history of this report – and the first time this percentage has exceeded 40% since Q4 2016.
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