State of Private Markets: Q3 2023

Authors: Peter Walker, Kevin Dowd
Read time: 13 minutes
Published date: October 31, 2023

The downturn that has defined the venture capital industry for much of the past two years continued in the third quarter of 2023.

Executive summary

The downturn that has defined the venture capital industry for much of the past two years continued in the third quarter of 2023. The amount of capital raised by startups on Carta declined by 38% from Q2 to Q3, and the number of venture fundraising rounds fell by 27%. Nearly one in five investments was a down round. In terms of dollars raised, total VC funding has now declined in six of the past seven quarters.

For founders and startups, Q3 offered a few encouraging signs: The median pre-money valuation in venture deals increased at nearly every stage. Dilution is trending downward at most stages, which means founders are able to retain ownership of a larger portion of their companies when they raise new cash. And Q3 saw a sharp decline in the frequency of investor-friendly deal terms such as liquidation preferences and cumulative dividends.

The startup market remains a bustling place: Many companies are successfully raising venture capital at attractive valuations. But investors are still playing offense in most deal negotiations, and the bar for writing a check remains high.

Q3 highlights

• Early-stage valuations are on the rise: The median pre-money valuation for deals at both seed stage and Series A increased in Q3 for the second consecutive quarter. The median Series A valuation hit $40 million, its highest point in the past five quarters.

• Time between rounds is lengthening: Among startups that raised a Series C in Q3, the average wait time since raising a Series B was 1,090 days—more than three years. At both Series C and Series A, the average and median time between rounds increased significantly in Q3. More time in between primary rounds means startups have to make their existing funds last for longer.

• 409A valuations are staying put: About 54% of companies that received new 409A valuations in Q3 saw their valuation stay the same, the highest rate of flat 409A valuations since the start of 2018. About 29% of companies saw their 409A valuation go up and 16% saw it go down.

Key trends

Q3 numbers for deal count and capital raised will likely increase in the weeks to come as companies continue to report transactions from the quarter. For now, Q3 was the slowest quarter for venture fundraising activity on Carta since Q1 2018.

This past quarter’s declines continue a two-year trend. From Q3 2021 to Q3 2022, overall deal count fell by 27%. Over the next year, from Q3 2022 to Q3 2023, it fell by another 36%. Total capital raised fell by 61% between Q3 2021 and Q3 2022, then by another 46% between Q3 2022 and Q3 2023.

From the perspective of founders, down rounds remain an all-too-prominent feature of the current venture landscape. While the rate of down rounds declined slightly in Q3, it remained above 18% for the third quarter in a row. The past three quarters represent the three highest down-round rates we’ve seen since the start of 2018.

About 11.7% of all venture capital raised in Q3 went to startups headquartered in Massachusetts, surpassing New York for the second largest share of any state. Relative to the rest of the U.S., it’s been a good year for raising capital in the longtime biotech hub. Massachusetts startups brought in more than 12% of all VC in the country in both Q1 and Q2, tracking well above the state’s 9.5% share for all of 2022.

On the opposite coast, California logged 46.2% of all venture dollars raised in Q3, equaling its market share from 2022. During the first half of 2023, it had appeared that the rest of the country might be gaining ground on the VC industry’s historical home base: California logged 40.7% of capital raised in Q1 and just 36% in Q2. But that downward trend didn’t continue into Q3.

As a result of California’s recovery, the West census region’s share of all venture capital raised in the U.S. rose to 53%, its highest point in the past five quarters. The other three census regions all saw their share of dollars raised decline.