Funding in US is being pulled back on Series A, B, and C valuations. How do startups raise money? How are Valuations driving in 2022?

Funding and Valuations for Startups in US are Dropping for Series A, B & C

Venture funding in 2021 broke records with investment up more than 10x what it was a decade earlier, reported Crunchbase

Global venture investment last totaled $643 billion, compared to $335 billion for 2020—marking 92% growth year over year (YoY).

2022 has started on a different footing according to Carta.

Carta, a unicorn startup that provides equity management and other services to private companies, recently published a report suggesting that funding during Series A through C stages are in decline, along with startup valuations - in the United Stated (US). Good news for investors and bad for founders.

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According to Peter Walker, Head of Insights at Carta:

  • Series A founding posted the largest average decline in the US. Series A rounds on both a median and average basis in the starting months of 2022 remain over $10 Million.
  • Series B round data is similar, with a sharper average decline than median round-size shift.
  • Series C funding is falling more sharply in median terms than average, implying that outlier rounds at the venture stage are changing, but that we’re seeing more movement among smaller deals than with Series A and B rounds.

While January remained strong for fundraising, the last few days of February seemed to show decreasing deal flow and size, according to Crunchbase data. 

“If you are a special company, you are still getting the valuation you want,” said Mark Sherman, managing director at Telstra Ventures. “But I would say the more ‘meat and potato’ companies are probably down 20 percent in January-February in relation to November-December—some more, some less.”

“In Q3-Q4 (of last year) companies imagined it would take weeks,” Sherman said. “Now it will take months. Back then there was a formula and all things were a go. But companies are still getting term sheets.”

“I think the market pullback is here,” said Ryan Bloomer, founder and managing partner at K50 Ventures. “I think what we saw happen in the public market is leading the private to a big dose of reality.”

Companies that find the market less enticing do have alternatives.

  • First would be to get to cash-flow neutral, so no funding needed.
  • Wait on raising funding till the trends reverse.

“I’ve seen this merry-go-round before, it doesn’t go on forever,” said John Chambers, chairman emeritus of Cisco and founder and CEO of Palo Alto’s JC2 Ventures. 
75% of his Chambers' portfolio companies raised money in last year, giving them runway now that the market has hit some road bumps.

There also are different ways to raise cash.

Don Butler, managing director at Thomvest Ventures, stated that he has seen an increase in convertible notes in the market. Such notes allow a company to get money—typically from a desired strategic or VC firm—now, while said investor gets a discount when the company raises its next round.

“I don’t think this is all doom and gloom,” Bloomer said. “Investors and founders need to answer, ‘have you found a product market fit?’ We have to get back to first-principle investing.”