Kevin Dowd’s Post

There have been some serious ups and downs in the startup fundraising market over the past five years. But throughout that roller-coaster ride, at least one trend has remained mostly steady—and it's a surprising one, at least to me. Across all stages of startup life, dilution is declining. When the median startup raises new VC funding today, it's retaining a significantly larger portion of its shares than the median startup five years ago. The chart below shows how dilution has progressed at every stage from seed to Series D. For my latest Carta story, I dug a little deeper into this data to examine the compounding effects of decreasing dilution. Raising a single round with lower dilution is one thing. But what does it mean for a company's cap table when dilution is lower at every stage? Put another way: When dilution is lower, startups get to keep a larger percentage of their shares. Just how much larger are we talking? If you want the full data and analysis, check the link to my story in the comments below.

The early returns are in for the state of venture capital activity in Q2 2024. The biggest takeaway: At most stages, valuations moved in the right direction. The median seed valuation on Carta increased to $14.8 million in Q2, according to the first cut of our State of Private Markets report, up from $14 million in Q1. Median valuations also increased at Series B, Series C, Series D, and Series E+. Those latest stages saw huge leaps in valuations—at Series D, the median pre-money val spiked to $802 million, up from $226 million. We'll see if these preliminary trends hold up when the full version of our SOPM report drops in a few weeks. In the meantime, I'll drop a link to the full first cut in the comments.

Bridge rounds are still booming. That's the big takeaway from my latest story on the startup space, which looks at some of the hows and whys behind one of the major shifts in startup fundraising over the past two years. In the first quarter of 2024, 42% of all seed-stage investments on Carta were bridge rounds, a higher percentage than in any other quarter so far this decade. At Series A, bridge rounds accounted for 43% of all activity, the second-highest rate of the 2020s. The rate of bridge rounds was also above the three-year average in Q1 at Series B, Series C, and Series D. “On the company side, I’m seeing more bridge financing instruments than I’m seeing priced rounds right now,” Jared Brenner told me. He's a senior counsel at Stubbs Alderton & Markiles, LLP who works with a roster of venture-backed tech startups. “Even for some of the more successful companies on my client list, with nine-figure valuations and such, I’m not really seeing them very eager to kick off a priced round right now, but rather to raise notes and wait and see.” I'll drop a link to the full story in the comments. A big thanks to Jared and to Frances C. Mosley of WilmerHale for sharing their insights on this one!

Can IPOs make a comeback in the second half of 2024? And if they can, what would it mean for the startup world? One of the defining features of the pandemic bull market was an explosion in IPO activity. In 2019, there were 232 IPOs in the U.S. By 2021, that number had climbed to 1,035, a 346% increase in the span of two years. The boom didn't last. As both public and private markets cooled off in 2022, IPOs became less frequent. There were just 181 IPOs in the U.S. that year, an 83% year-over-year drop, and only 154 listings in 2023. So far, 2024 is looking a little better. Through June 11, there had been 81 completed IPOs so far this year, on pace for an 18% increase over the previous year. And many of the larger debuts have met a warm reception: Since the start of March, 19 companies raised at least $100 million in IPOs in the U.S. Thirteen of the 19 have seen their stock prices go up. “There’s certainly a market opening right now for larger and better-quality companies,” Athena Capital founder and managing partner Isabelle Freidheim told me in a recent conversation. A big thanks to Isabelle and to Daffy co-founder and CEO Adam Nash for lending their expertise for a new Carta story breaking down the state of the IPO market from the perspective of venture-backed startups. I'll drop a link to the article in the comments below.

At the seed stage, the number of new venture rounds on Carta declined in Q1 from the previous quarter. The same was true for deal counts at Series A, Series B, Series D, and Series E+. The lone exception? Series C, where deal count increased by 14% compared to Q4 2023. It's been a tough past couple years for the Series C fundraising scene. But Q1 brought a much-needed boost. And it wasn't only in the number of deals getting done: The Series C market also experienced increases in total cash raised, median valuation, and median deal size in Q1. It's not exactly a renaissance for Series C dealmaking. But it is something that's been rare for founders looking to raise at this stage: positive momentum. I've got a new story up that takes a closer look at the latest data on Series C fundraisings—I'll drop a link in the comments.

Over the past two years, the leverage in VC funding negotiations has tilted in favor of investors. There are exceptions to this new rule, to be sure. The buzziest AI startups, for instance, are still juggling multiple highly attractive offers, and in many cases are able to dictate terms. But for many startups, raising capital has grown more difficult—and more likely to involve deal terms that offer protection to their investors. Frances C. Mosley has worked on a number of venture fundraisings over the past several months in her role as a counsel at WilmerHale. She's seen signs of the shift. “I’m seeing a lot more investor-favorable types of terms, as well as investor-favorable valuations,” Mosley told me. So too has Jonathan O'Connell, a partner at Crowell & Moring who's also been deep in the weeds on VC dealmaking in 2024. “I’m definitely seeing more participating preferred, usually with a cap from 1.5x to 3x,” O’Connell told me. “I’m seeing different types of more investor-friendly anti-dilution protection, like full ratchet. And I’m occasionally seeing some redemption rights.”  What else have Mosley and O'Connell been seeing in the market so far this year? And what does Carta data have to say on the state of liquidation preferences, cumulative dividends, and other investor-friendly deal terms? My latest story dives into it all—check the comments for a link. And a big thanks to Frances and Jonathan for sharing their insights!

What's going on in the late-stage funding market these days? The pithy answer: Not much. Startups on Carta raised just 39 rounds at Series D or later in Q1 of this year, the second-lowest quarterly total since the start of 2019. Late-stage check sizes also got smaller in Q1, continuing recent trends. The median Series D round was 78% smaller than its recent peak in 2021, and the median round at Series E or later was 72% smaller. I recently spoke to both Jonathan O'Connell, a partner at Crowell & Moring and Moring, and Adam Nash, a longtime angel investor, tech executive, and the current CEO of Daffy, to get some expert opinions on the slow start to the year. One theme? The ongoing slowdown in IPOs is depressing late-stage deals. With fewer companies going public, VCs are less optimistic they'll get a quick return on a late-stage investment. Thus, they're writing fewer checks. “A lot of late-stage investing is based on the idea of a relatively short timeline to liquidity,” Adam told me. A big thanks to both Adam and Jon for taking the time to talk. Here's my full story on the current late-stage lull: https://lnkd.in/g86Qt_zU

Eventually, every startup employee who own stock options in their company faces a decision: Should they exercise those options, or let them expire? Over the past two years, there's been a clear trend in the marketplace. Fewer employees are choosing to exercise vested stock options before those options expire, even when those options are in the money—that is, when the current value of the options is higher than their exercise price. Back in Q3 2021, workers exercised nearly 55% of all vested, in-the-money stock options on Carta before their expiration. By the end of 2023, that number had dipped to nearly 30%. The exercise rate declined in nine consecutive quarters. But that trend came to an end in Q1 2024: The exercise rate for in-the-money options bumped up to 33.2%. For an employee, a lot of questions enter the calculus of whether to exercise vested options: How much are those options worth? How much will it cost to exercise them? What's the state of the employee's personal finances? Are they optimistic about their company's future? Are they optimistic about the broader economy? In some sense, the exercise rate for in-the-money stock options can be an index for employee confidence in the startup ecosystem as a whole. For the first time in more than two years, things are looking up.

In the seed fundraising market, there was a sharp bit of divergence in Q1. Among primary funding rounds, the median valuation for deals on Carta stayed flat at $12.8 million, the same as the previous quarter. But among bridge rounds, the median valuation jumped by 23%, reaching $20 million. That's the largest quarter-over-quarter increase in more than two years, and it's tied for the highest median valuation so far this decade among seed-stage bridge rounds. Why the shift? Part of the reason could be that more (and higher-quality) seed-stage startups are turning to bridge rounds rather than raising a Series A. Bridge rounds made up 42% of all investments among seed-stage companies on Carta in Q1, up from a 36% rate the prior quarter. Here's another potential interpretation: The number of new seed investments plunged in Q1, falling by 33% compared to the prior quarter. When a market contracts like that, it can be particularly difficult for smaller companies at the lower end of the valuation spectrum. If some of the startups that would have otherwise raised bridge funding to stay afloat instead found themselves unable to raise any new funding at all, their absence from the dataset could drive the median valuation higher. There are surely some other factors, too. Any ideas? As the rest of 2024 unfolds, I'll be curious to see whether this proves to be a blip or a trend.