In A Tepid Market, Extension Rounds Are On The Uptick

Illustration of money growing from seed.

As the venture markets contract in 2022, startups that raised at high valuations in 2021 face a huge hurdle.

If they run out of cash and do not meet milestones required to raise the next funding stage, what are their options?

“We’re seeing a ton of extension rounds,” said Guru Chahal, an early-stage investor at Lightspeed Venture Partners.

“Most startups and their investors prefer advancing from one funding round to the next, but when the market reception is tepid, extended rounds can buy a startup another four to six quarters to grow revenue and try to raise funds again,” he said.

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Chahal, an investor in cloud infrastructure and cybersecurity at Lightspeed, was previously on the founder side of the table. He co-founded Avi Networks which was acquired by VMWare in early 2019.

Chahal said that in the hot market of 2021 startups had so much interest at such high valuations that having more capital from a strategic institution could be helpful, and were often supplemented after a funding closed.

Extensions in this market climate are very different.

Raising that B-4

There are different types of extensions raised in this market, said Chahal.

  • Some are valued at an increase from the prior funding, but not a fully fledged round. The valuation is up and the startup has bought another year for execution.
  • A straight extension round is where the funding is kept open and the startup gets more dollars at the same valuation. In some instances the investors are given penny warrants, an incentive that converts in the next round to provide more upside to the newer investors.
  •  And then there are down rounds. They are rarer but happening in this market.

Large extension rounds in recent months include a $400 million Series D extension raised by Munich and New York-based business execution management platform Celonis at a valuation of $13 billion, 14 months after its initial $1 billion Series D at a valuation of  $11 billion. Massachusetts-based business automation platform airSlate raised a Series B extension of $51.5 million led by G Squared, which valued the company as a unicorn. Its initial Series B raised 18 months earlier totaled $40 million.

Series designations as market signals

A series funding is not a technical designation, said Chahal. You could call this a “Series Apple” or “Series Cucumber,” he said. Giving a founder or CEO the ability to make a judgment call on signaling to the market on the stage for the startup is important. “You don’t want unnecessary friction in the next round,” he said.  If a startup is not yet ready for the next stage, raising extensions makes sense provided existing or new investors will come in with that bridge financing.

Back to 2019

We are back to 2019 planning according to Chahal.

“You do a plan for about 24-plus months with a plan to raise at about the 18-month mark,” he explained.

In 2021, feeling like you might get interest at the 12-month mark or earlier was becoming a norm. Also in 2021, “parts of the venture landscape were more signal-oriented than business fundamentals oriented,” he said, which can happen in hot markets.

“Round sizes have definitely come down over the last few months,” he said.

Correction: Celonis’ headquarters were updated to New York and Munich. 

Illustration: Dom Guzman


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