Startups hoping to raise a nine-figure round in the future had best temper their ambition; venture funding events worth $100 million or more are going extinct — quickly.
A few years back, nine-figure venture funding events were common. So much so that during my Crunchbase News days, we started to call them “supergiant” rounds to avoid having to spell out their size. Hell, we actually ran regular reports of rounds worth a few hundred million or more until sheer volume made it impractical. Good times.
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Now more than a year past the peak of the 2021 venture boom, it’s clear that those days are behind us. And while it took much longer to deflate the $100 million round bubble than I expected, if trends continue, nine-figure venture funding events will become, once again, rare enough to warrant our attention.
The $100 million round’s fall from prominence is an Icarian saga. PitchBook data collected by TechCrunch this morning tells a simple story: From a stable base of around 75 such funding events per quarter through 2019 and much of 2020, the pace at which venture investors pumped capital into startups in nine-figure chunks exploded through 2021, only to come crashing down to prior levels in roughly the same amount of time as it took to reach its peak.
The data is stark: From 75 $100 million or greater funding events in Q1 2019 to 426 in Q4 2021, the pace of nine-figure venture deals has retreated to just 57 thus far in the first quarter of 2023.
Naturally, we’ll see the current quarterly tally tick higher over the coming weeks, but it’s certainly going to close out Q1 under the 157 that we saw in Q4 2022.
Here’s the chart of mega-round deal volume from the start of 2019 through today:
Data visualization by Miranda Halpern, created with Flourish
And, from the same time frame, the dollar value of those deals, which charts a similar arc:
Data visualization by Miranda Halpern, created with Flourish
The correct question at this juncture is so what? So let’s answer it. The change in nine-figure rounds from pandemic to increasingly scarce:
- Matters because it indicates that even the latest-stage startups will be forced to build with less capital. In turn, a dearth of super-late-stage capital for unicorns content to delay their IPO until the heat death of the universe means they may suddenly decide that going public is the only way to raise the sort of capital that they need.
- Fits neatly into the trend of falling technology valuations. If you want to get a good-sized chunk of a multibillion-dollar startup, the only way to do so is to write a gigantic check. With valuations in retreat, especially among startups valued against public comps, far less capital is needed to acquire a similar stake. Ergo, smaller rounds and fewer mega-funding events.
- Implies that the pullback we’ve sensed among nontraditional private equity players, who distorted the startup funding market during the 2021 frenzy, is real.
- Tells us that while the startup market was arguably already frothy in 2019, the bonkers few first years of COVID were an outlier to an outlier — a second-order outlier, in other words. This implies that there’s still ample pain to work its way through the startup funding system. Think unicorn implosions, mergers of last resort, fire sales, cram downs and brutal down rounds ahead.
The last mini-lesson for us today is that momentum is one hell of a drug. When the music stopped in late 2021, you might have expected wallets to slam shut and the largest venture rounds to dry up faster than the Colorado River Basin when threatened with one more alfalfa field. Instead, it took quarters and quarters to unwind to the pace we saw in 2019.
A fun question is whether the largest venture deals made from Q3 2020 to Q4 2021 will perform better or worse than transactions of a similar size from Q1 2022 through the end of last year. I suspect that the latter will be a little bit better in IRR terms but nothing special.
One more bit of venture gristle to chew on: What happens to funds that were raised to invest in the nine-figure round world? Can historical multibillion-dollar venture funds post anything like expected returns, and does the now-smaller world of venture deal-making imply that venture funds — and, therefore, venture firms — will now be forced to downsize?
I don’t want to become yet another quasi-wag making ZIRP jokes on main, but perhaps the $100 million round and the venture economics that came with it were zero interest rate-induced ephemera, just like SPACs, ICOs, the NFT boom, sneakers being the new blue-chip assets and all the rest of the silliness we had to endure over the last few years.
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