As the fintech venture market goes, so goes the venture market itself. Why? Because fintech investment has historically made up around one-fifth of every venture dollar invested — at least in recent years. And after both fintech investing and venture capital itself went a bit bonkers last year, both are dealing with a new, more conservative reality.
For fintech startups, the downturn is real, and many upstart companies — we learned during our recent fintech investor survey — are looking to avoid de-novo rounds that include a new valuation (no one wants to raise a down round!). Therefore, extension rounds are an attractive option for many founders.
But as TechCrunch has reported, while extension rounds are popular even beyond fintech today, there are often more startups hunting for the round type than there are checks. So, to better understand the market for fintech extension rounds today, we have one more set of answers from a group of fintech venture investors we surveyed. Here’s the question we posed:
How popular are extension rounds proving? Are you seeing more companies opt to raise extensions rather than new rounds compared to, say, 2021 and 2020?
Eight investors answered: Paul Stamas of General Atlantic, Alda Leu Dennis of Initialized Capital, Michael Gilroy of Coatue, Justin Overdorff of Lightspeed Venture Partners, Addie Lerner of Avid Ventures, David Jegen of F-Prime Capital, Nik Milanović of The Fintech Fund, Jay Ganatra of Infinity Ventures. (Their answers have been lightly edited for clarity.)
Michael Gilroy, general partner and co-head of fintech, Coatue
Companies in a current position of weakness have long raised extensions with high velocity, and this moment in time is no different. The difference is that in this current environment, we’re slowly starting to see high-quality businesses also raise extensions. An extension is a great way to grow into the last round valuation. Founders see extensions as a safer way to bridge through the macro environment shifts and are willing to sacrifice points of dilution for liquidity assurance.
Paul Stamas, managing partner and co-head of financial services, General Atlantic
Yes, we are seeing more extension rounds, and we have been proactive on this front to support our portfolio companies. The increase relative to 2020-2021 is probably a combination of a few things: Companies (and their investors) seeking to strengthen their balance sheet quickly, certain previously active fintech investors having basically left the market and the swift valuation correction making it so that the most viable (and motivated) investor is the one who led the last round and knows the company best.
Alda Leu Dennis, general partner, Initialized Capital
There are definitely a lot of companies wanting to raise extensions in general, mostly in order to hedge against a fundraising winter.
Justin Overdorff, partner, Lightspeed Venture Partners
As a function of market uncertainty and the stress on cash runway, many more companies are opting for bridge and insider rounds. This is prudent in the current market and should set many companies up for success.
Addie Lerner, founder and managing partner, Avid Ventures
Extension rounds have been very popular over the last few months. Given severe market uncertainty and a pullback in VC deployment, rather than raise a full-priced Series A or Series B, most founders are opting to raise a (large) extension round, usually on the same terms of the last round, and sometimes with a slight mark-up or better terms. We actually saw a fair amount of “in between” rounds in 2020 and 2021, but those were usually driven by insiders investing more money in their best companies at a premium to the last round valuation — and occasionally through uncapped, undiscounted notes — a very different dynamic to today’s extensions.
David Jegen, managing partner, F-Prime Capital
Almost every early-stage company we meet is open to an extension or top-up on reasonable terms compared to years prior. It’s one of the levers for extending the runway and growing into their last round valuation. We view it as an opportunity to partner with founders we have admired for a while and ahead of future larger rounds.
Nik Milanović, general partner, The Fintech Fund
Many companies are going to market for Series As, not finding takers and scaling them down to “seed extensions” — effectively diluting themselves at similar terms to their seed. We expect there to be some divergence, where strong teams and products are able to raise consecutive rounds, while more and more of the less-developed companies open up SAFEs for extensions.
Jay Ganatra, co-founder and managing partner, Infinity Ventures
Insider-led extensions are prominent for high-quality companies right now. We’re seeing founders be more open to these types of rounds because the goal posts for subsequent rounds have meaningfully moved in the past few months. These rounds extend the startup’s cash runway and avoid the optics and pain of a down round. Investors are also able to increase their ownership stake in companies where they still have conviction.
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