Things appear to be humming in the venture capital world. Returns are improving (though in many instances they are still behind the public markets). IPOs, one the big ways that VCs cash out, are happening with more regularity. And venture dollars are increasing, though modestly over levels earlier this year.
But here’s a stat that should give entrepreneurs pause. According to the latest Fenwick & West report, so-called down rounds — a financing event in which the valuation falls from the previous round — doubled in the second quarter. A full 22 percent of deals tracked by the Silicon Valley law firm were down rounds in the second quarter.
That’s not good news for entrepreneurs who are going back out to hit the financing trail. And these stats may parallel what’s been dubbed as the “series A crunch” in which companies that raise a seed round of funding have an increasingly hard time moving up to the next level, known as the series A.
According to a report earlier this year, the ratio between seed stage and series A deals now stands at 3.3 to 1. In 2008, that ratio stood at just 1.9 to 1. Last year, CB Insights indicated that more than 1,000 seed-stage companies could be “orphaned” — meaning they won’t be able to raise their next round of cash.
Down rounds are part of that trend, since they typically indicate desperation by entrepreneurs to raise money, even if they have to do so at a lower valuation. This will be an important thing to watch.
Of course, the VC markets can change quickly. For example, could a Twitter IPO, which is being discussed in the tech press this week, add more fire to the tech economy and turn the tide on valuations of smaller companies? Possibly.
Here’s a look at the charts from Fenwick:
