Down rounds are down
Catch up quick:
The percentage of down rounds shrunk during Q2, from 33% of deals in Q1 2024 to 22% in Q2 2024. However, nearly 30% of VC deals were still flat or down rounds.
Is it good news?
Fewer down rounds are a positive sign for founders hoping to raise capital, but the number still remains high compared to pre-2023 levels—and with over a fifth of deals still down rounds, it remains a slow fundraising landscape.
A potential trend?
Q2 2024 is the first time since mid-2023 that up rounds have made up 70% of deals for a quarter. Will it continue?
Our interpretation:
Investors are showing more confidence, however, the drop in deals valued over $100 million (from 35% to 28%) signals a continued conservative approach.
What makes a succesful founder?
Catch up quick:
Numbers guy, Nate Silver dove into the personalities VCs take big swings on in Go big or go home:VCs don’t care if you’re a nice person. They want founders who take massive risks.
What they’re saying:
VCs are increasingly seeking founders willing to take massive risks, often at the expense of being “nice” or well-adjusted. As Josh Wolfe, of Lux Capital, puts it: “chips on shoulders put chips in pockets.”
The intrigue:
Despite decreased social mobility, the number of self-made billionaires is increasing. VCs are pouring money into these controversial figures’ business, as seen with A16z’s investment in Adam Neumann’s new venture, Flow.
The other side:
This strategy might overlook talented individuals who don’t fit the “angry outsider” mold. And the “competitive fire” of adversity can be channeled in both constructive et self-destructive ways, so VCs have to be careful they don’t get burnt.
Understanding venture capital pay-to-play
Catch up quick:
Investors are inserting a record number in pay-to-play provisions (8.7% of all deals) into term sheets. While traditionally in for later rounds, an increasing percentage are series A.
What’s pay-to-play?
Pay-to-play provisions require existing founders, shareholders, and investors to participate in new funding rounds or face significant dilution of their shares.
Why it matters:
Pay-to-play terms are designed to benefit new investors at the expense of existing shareholders who don’t want to invest additional capital. From a founder’s perspective, it’s sacrificing the risk you and early stage investors took in exchange for more capital to grow.
The big picture:
The huge rise in pay-to-play is a stark reminder that VCs are facing performance pressure, too, in a tight market.
A generational AI-adoption gap
Catch up quick:
An American Express survey, which polled more than 1,100 small business “financial decision-makers,” found a massive generational rift in AI adoption.
By the numbers:
Almost 60% of millennial and Gen Z respondents said their businesses were already using AI compared to 34% of Gen X and baby boomer respondents.
Our hot take:
Younger, more tech-savvy entrepreneurs will gain a significant edge in areas like customer data analysis, automation, and content creation, potentially outpacing their older counterparts in efficiency and market responsiveness.
Thought bubble:
Is this generational AI gap a temporary phenomenon that will eventually close as AI becomes more mainstream, or are we witnessing the beginning of a long-term divide in how businesses operate and compete?
Pre-seed rounds are shrinking
What the data says:
~73% of pre-priced funding events in Q2 were less than $1 million, the most in over three years.
The concern:
Less pre-seed funding increases the pressure on startups to do more with less money while still demonstrating enough business traction to capture the interest of later-stage seed and series A investors.
The upshot:
Smaller rounds lead to a more competitive early stage startup ecosystem where only the strongest survive (get funded). So if you’ve got a winning startup, your path to funding may be less competitive.
A decline in new business formation
A stat worth watching:
The US saw a 2.1% month-to-month decline in business formation through July. New business applications in July totaled just 420,802, reflecting the cautious economic environment.
What it indicates:
The decrease in business applications suggests a slowdown in initial entrepreneurial interest, which dovetails with lower pre-seed money and a challenging all-around fundraising market.
The upshot:
For established startups, this trend may deter disruptive competitors from entering the market or gaining a foothold. However, the Census Bureau doesn’t expect the trend to continue, projecting a 0.2% decrease in business formations in the next 4 quarters.
