Startups, Especially Software Startups, Are Raising Up Rounds At Near Record Pace

Morning Markets: Startup valuations look strong as 2019 rolls into its second half. Especially software startup valuations.

A few weeks back the Crunchbase News team published a raft of information regarding the global and U.S. venture capital markets, along with dives into popular markets like Texas domestically, China globally, and more. One data point that we don’t track, however, is the percentage of ‘up rounds’ versus ‘down rounds’ in the period.

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In English, that means we don’t keep tabs on how many startups out of 100 who raise more capital do so at a higher valuation (price increase) or lower valuation (price decrease). It’s useful data. And so, when a new report dropped including the information we took note. Let’s explore.

Up Rounds

The Q2 Fenwick & West (a legal shop that works with startups) venture capital survey writes that in the second quarter, “[u]p rounds exceeded down rounds 86% to 6%, with 8% flat in Q2 2019, an increase from Q1 2019 when up rounds exceeded down rounds 81% to 11%, with 8% flat.” I imagined that the preceding 81 percent rate was high; to see it rise to 86 percent one quarter later in the same year was eye-opening.

Luckily for us, Fenwick et al graphed their findings. Observe:

The chart shows us that not only was the Q1 81 percent up-round percentage tied for the local maximum, Q2’s 86 percent is the highest result in years. (An extended version of the same chart shows that the Q2 2019 up-round percentage is roughly tied for the all-time high set in early 2015.)

In contrast, while up rounds reached their recent zenith, down rounds slipped to their smallest portion of new capital events. Indeed, while up rounds reached their highest known percentage, down rounds managed to dip under flat rounds.

This may be all a bit more grokkable if we turn to probabilities. Here’s how it shakes out: If a company raised in the second quarter of 2019, it had about a 1 in 16 chance of raising at a lower price, about a 1 in 13 chance of raising at a flat valuation, and a about a 1 in 1.16 chance of raising at a higher price. Those are good odds!

Not All Good News

The whole Fenwick document is worth reading (here) because you should imbibe the full context of the above information. That setting includes some weak points worth noting while we’re here highlighting yet another bullish indicator.

Chief among which is a modest dip in the pace at which companies raising their Series D can boost their valuation, and a slightly sharper drop in “Series E and higher” up valuation increases. What that means is that the amount that companies raising a Series D, Series E, or later round can expand their value in between rounds is falling.

Not much, mind; the amount that Series D rounds repriced companies up was still 89 percent after its decline. That’s not bad. But “Series E and later” price changes fell more sharply to a mere 39 percent gain.

This hints at a few things. Perhaps as startups reach deeper into the private markets, IPO prospects (ie the impact of public pricing on private valuations) is kicking in a bit more sharply, slowing private-market value accretion at late-stage startups. Or it could be that worry concerning the number of unicorns that will make it to a public offering before a correction is slowing super late-stage valuation growth.

You can fill in your own guess. What matters as a takeaway is that while early, and mid-stage startup valuations (Series B and C, say) are looking strong, things are weaker towards the end of the private capital game.

The Vision Fund 2 cometh, but perhaps not soon enough to reprice everyone at once. So, if you are looking for some big, late-stage checks, mind your expectations. For the rest of the startup world, the chances of raising at a nice premium from your last private round look good.

And those odds look the best for software-focused startup companies. Why? Because of all the categories of startups that Fenwick examined, the sharpest valuation increases were given, on average, to software firms. Once again, why? I’d reckon because as the public market rains favor on similar companies, venture capitalists can’t help but pay a little more for their smaller, private relatives.

Illustration: Li-Anne Dias.