The Manatt Ventures team constantly evaluates changes in the market, both for our clients and for the Manatt Venture Fund, our internal venture capital (VC) fund. Below are some of the more interesting data points and perspectives we have come across lately that have helped inform our perspectives.
Pre-Seed Burn Rates — Correlating Burn With Success
Charles Hudson of Precursor Ventures provides a look at its portfolio of pre-seed investments and how burn rates correlated with raising a seed investment.
- The average burn rate of pre-seed companies that went on to raise seed funding was $59,333, versus $47,365 for those that did not raise seed capital. The raw difference is not large, but the ability to spend wisely is important. Hudson notes that spending is “more likely an effect, not the cause of success.”
- The gap narrowed in 2022, with no clear distinction between those that went on to raise a seed and those that did not. Burn rates rose for both.
- Pre-seed burn rates for companies that did not raise a seed almost doubled from 2020 to 2022.
- To read more, click here.
Tech Valuations Evening Out But Still Down Dramatically From Q1 2022
CB Insights provided an update on falling tech valuations in Q1 2023. While median quarter-over-quarter changes from Q4 2022 grew for Series A, B and C (12%, 9% and 7%, respectively), they continued to fall for seed and Series D (-3% and -10%, respectively).
Later-stage valuations are still down dramatically, with Series B down 42%, Series C down 33% and Series D down 40% year over year. Deal sizes for late-stage rounds have been stuck at $50 million since Q4 2022, just below 2019 levels and down 54% from 2021.
Senior or tiered liquidation preferences are back for late-stage deals, jumping to over 64% of deals as investors look for downside protection in today’s market. That percentage was between 35% and 36% in 2020 and 2021, signaling leverage has continued to shift back in favor of VCs coming out of the pandemic.
VC Fundraising Falls Off a Cliff in Q1 2023
VC funds have finally felt the reality of the market, with only $11.7 billion raised from 99 funds, according to Pitchbook’s latest Venture Monitor report. For reference, funds raised $170.8 billion across 892 funds in 2022. The amount of available capital still in the market, combined with a general tightening of the belt for limited partners (LPs ), has left emerging fund managers with an uphill climb for capital; a record 86% of this limited amount was allocated to experienced managers. Dry powder was up to $289 billion as of the end of 2022, giving LPs pause as they wait for existing funds to deploy capital.
Exits Still Almost Nonexistent
Public markets continue to challenge later-stage companies, with only eight initial public offerings (IPOs) in Q1 2023, according to Pitchbook’s latest VC Valuations Report. Unprofitable high-growth companies that used to find liquidity through public markets are still stuck between high-interest lending facilities, lower valuation multiples for continued venture rounds, and an unforgiving public market focused on profitability and solid balance sheets. Opportunities for later-stage VCs and lenders are ripe where companies are forced to increase their cash position, but companies are increasingly focused on workforce reductions to extend runways in the hopes of finding more favorable market conditions down the road.
Watch for more insights and perspectives from the Manatt Ventures team in the coming months.