Data: CFOs Fear Down Rounds Are Coming

By Yael Benjamin

Rising inflation and increased interest rates have greatly complicated the venture fundraising landscape, limiting the availability of venture capital and bursting the tech valuation bubble.

Over the past year, down rounds, flat rounds and more complex venture terms have become the norm, as fewer investor dollars are being invested at substantially lower prices.

To provide some visibility into what is happening inside private tech companies, at Startup Snapshot, we collected data from finance executives in more than 70 tech companies from around the world. The data, which was collected in partnership with Intel Ignite, Consiglieri and the Zell Entrepreneurship Program, highlighted how today’s tech companies are well capitalized for the next few months, but fear that dropping valuations are at their doorstep.

Most firms have enough fuel for the next year

About two-thirds of finance executives reported that their firms have more than one year of runway, with 42% reporting they have over 18 months of capital, and 22% reporting they have 12-18 months of capital. With sufficient funding in the bank, these companies secured the breathing room necessary to weather the volatile market conditions, at least for these next few months.

“Anything below 12 months of cash runway is a death zone for startups,” according to Tal Brener, CFO at Zego. “Smart CFOs have been working tirelessly, utilizing multiple strategies to secure additional cash runway during the last year, helping them weather the current economic storm.”

But what’s next?

Looking forward, raising the next round plays a big challenge for finance professionals, with 67% reporting they are worried or very worried about their ability to raise their next round of funding.

Valuation is top of mind, as 64% of finance execs think valuations have not yet hit rock bottom, with half of those predicting it will take a while until they do. According to Liat Aaronson, chairperson of the Zell Entrepreneurship Program: “The data shows that most finance professionals still believe that valuations will continue to drop over the coming months. It is natural that there will be more down rounds after the over-the-top valuations of the last few years. Corrections are painful, but a necessary part of the cycle.”

Putting their ego on hold and taking an honest look at their cap tables, about half of finance executives reported high odds (over 50%) that their next round will be a down round.

The overwhelming majority are also open to increasingly aggressive covenants, including financial covenants and operational covenants, representing investment terms that were practically unseen just a year or two ago.

Yael Benjamin is the founder of Startup Snapshot, a data-sharing platform working to increase transparency in the venture ecosystem.

Illustration: Dom Guzman