US start-up valuation struggle continues

Staff reporter

US start-up valuation levels fell to five-year lows in the September quarter, California-based Wilson Sonsini says in its latest report on private company financing trends. Its Q3 edition of The Entrepreneurs Report suggests seed-stage enterprise valuations are the only segment holding up year-on-year.

The Palo Alto advisory firm said seed to series B start-up average fundraising rounds fell in Q3 after an uptick in Q2.

“Series B start-ups, in particular, saw a significant drop in median raise amounts [US$2.6 million], reaching lows not seen since early 2016,” Wilson Sonsini said.

“In contrast, series C and later-stage companies demonstrated an upward trend in median raise amounts [$21.2m], despite remaining lower than any non-2023 quarter since 2019.”

The report said the overall percentage of down and flat rounds rose in Q3 2023 after a decline in the previous quarter.

“Nearly half of the fundraising companies resorted to down or flat rounds during Q3 2023, marking the highest percentage observed in over a decade,” it said.

“As round sizes increase, valuations decrease and deal terms become harsher, the effects of the cash crunch for later-stage companies are becoming evident.

“This includes companies that last raised funds during the 2021 rush, which are now caught with fewer attractive exit opportunities.

“After 18-24 months of running lean operations and focusing on cost efficiency, these companies are unable to postpone fundraising any longer.

“The decline in valuations across all stages demonstrates that even those companies fortunate enough to raise an equity round in Q3 are increasingly being forced to accept more stringent deal terms.”

The report says a further rise in pre-seed convertible note round sizes in Q3, continuing the upward trend in Q2, showed alternatives to full-seed rounds were being pursued in the current environment. Those options included simple agreements for future equity, or SAFEs.

“As the high-interest-rate environment persists, 2023’s convertible note interest rates continue to be elevated compared to recent years,” it said.

“In 2023 thus far, 47% of pre-seed and 66% of post-seed convertible notes carry interest rates of 8% or higher. The recent investor push for shorter maturity periods may have stabilised somewhat, with 53% of pre-seed and 55% of post-seed notes maturing in 12 months or less.

“While convertible notes are seldom called for repayment at maturity, an approaching maturity date places pressure on companies to complete a preferred stock financing to convert the notes.

“SAFEs continue to be a popular fundraising tool for emerging companies, thanks to their simple terms. Throughout 2023, SAFE terms have remained largely in line with those seen in 2022, albeit with a few minor variations.

“This year, about 50% of SAFEs have included a discount, an increase from 38% in 2022. Meanwhile, valuation caps were incorporated in 76% of SAFEs, down from 90% in 2022, with a median valuation cap of $18 million.

“In Q3 2023, the median amount raised in SAFE financings remained at or below $1 million for the sixth consecutive quarter. This was a slight increase from Q2 2023, but early-stage companies continue to struggle in securing the multi-million-dollar pre-seed SAFE rounds that were commonplace in 2021.”


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