Earlier this year we already commented that “the $100 million venture rounds were going to be significantly reduced”. This time the prediction came true.
According to new PitchBook data the US venture market continues to endure lackluster speed for nine-figure investments in private companies, colloquially known as "mega-rounds."
In the first half of 2023, PitchBook inventoried just 108 mega-rounds in the United States. Yeah we assume that this rate will hold throughout the year, we're looking at just over 200 nine-figure deals in the US in 2023. That's a dramatic decline from previous levels. Beginning in the fourth quarter of 2020 through the third quarter of 2022, there was more of 100 mega-rounds registered per quarter. In 2021, the average was over 200 per quarter. To see maybe 200 this year implies that the number of late-stage startups that will be able to raise an IPO-sized round is in free fall.
Rounds are also getting smaller, with data indicating that the average nine-figure round size has fallen below the $200 million mark, not including some rounds that are not traditional venture deals, such as the massive round. of OpenAI earlier this year. Smaller, yet smaller, mega rounds is a tough mix for unicorns of all stripes and sizes.
Of course, we could see a bounce to the nine-figure rounds in other markets. Europe and Asia have seen their fair share of transactions historically. But since the US venture market is the largest in the world and is the leading player in mega round financing, where the US goes, so does the world.
If unicorns in the US are struggling to find capital in the amount they were used to, it is likely that other startups around the world are suffering from a similar capital shortage.
In particular, PitchBook believes that "the need for capital will likely lead to an increase in mega-rounds as the year progresses" thanks to "the notion that the depletion of cash tracks will force more of these startups to Increase in Tougher Trading Environment”, the full-year mega-round count is still expected to come in at dramatically reduced levels compared to prior years.
What could fill the void? There are very few ways to raise nine figures of capital. One is a private market fundraiser, which we discussed earlier. The other is a public market rise through an initial public offering (IPO). It may seem strange given the incredibly limited number of company-backed non-biotech IPOs we've seen in recent years, but unless unicorns have gotten less hungry, they may find themselves caught between a declining private market, expensive debt, or an IPO.
One should not expect the IPO market to suddenly shine again due to the great need for capital. But with the output to bag of champagne Recently, there is evidence in the market that public offerings are gaining at least some momentum. Bloomberg wrote recently that IPOs on US stock exchanges will raise about $1500 billion in a month, "marking the first consecutive months with more than $1000 billion sold since last fall." That's nothing compared to the previous mega-rounds scenario.
Part of the reason for that rise is the rabid reaction Cava's shares received when they debuted, skyrocketing sharply in the wake of their listing and still rising around 100% from their IPO price despite losing around 5% of its value during the first operations. .
There is a risk calculation that unicorns can do at this point with two options to consider: first, if it admits "a check from private investors that will clip the valuation wings, or, second, wait for the IPO market to be more interested in the company that late-stage venture capitalists still shocked. Desperate times (falling cash balances) may call for desperate measures (rapidly activated initial public offerings to keep cash balances afloat) as the year progresses.
The mega-rounds market could improve later in the year in terms of volume as the needs of the unicorn sharpen, but there are other reasons why we could see more deals in the last two quarters of 2023. The value of the Software revenue has recovered modestly, the tech-heavy Nasdaq Index, to choose another metric, is having a stellar year, and the pace at which we're seeing interest rates rise is slowing. That's the most favorable trio of signs you could hope for.
Enough to prevent the $100 million round from becoming a rarity once again? Probably not. But maybe enough to get a handful of IPOs before the end of the year. It should not be forgotten that IPOs were once fundraising mechanisms rather than ways to unlock secured private capital more than a decade ago.
