RESEARCH TRIANGLE PARK – Emerging startup companies that already have successfully raised rounds of capital face a much different funding environment in 2023 with “down rounds” on the way.

So says PitchBook – a bible in the venture capital industry – in its 2023 VC market forecast.

Down rounds are bad news for existing owners and investors. Investopedia defines a down round as “a private company offering additional shares for sale at a lower price than had been sold for in the previous financing round.” In the process, existing investors get squashed with their values declining.

‘Starved for capital’

“Series C and D rounds will see the most down rounds, as these companies are currently the most starved for capital,” PitchBook reports.

“When we compare the estimated capital demanded by startups to observed deal value in each quarter, we can track deal activity dislocations
in the market.

“Relative to historical trends, all stages have seen a massive dislocation of deal activity starting in Q4 2020, but nowhere is this more pronounced than the late stage.

“In Q4 2022, 3.5 times more capital was demanded than the deal value observed. This could mean that the late stage became the most overextended during the VC dealmaking frenzy of 2020 and 2021.”

PitchBook notes that as inflation continues to ravage the U.S. economy and interest rates climb, that the days of easy capital raising are over.

The report described available capital in 2020-2021 as “cheap.”

Not now.

The consequences

And a lack of capital could lead to layoffs – perhaps even closures.

“As these companies grapple with the new reality of higher interest rates and stricter deal terms, they will not be able to raise at their previous paces, high cash burn rates, or valuation levels,” PitchBook says.

“Depending on how long it takes for the IPO window to open, we may see these companies cut operations significantly to increase runway at the expense of short-term growth. If or when these companies need additional capital from the private markets, many will have to
raise it at a reduced valuation.”