News and Analysis

VC deal valuations continue to advance, but at a slower rate

Silicon Valley VC deal price increases slowed over the course of Q1 2020, according to Fenwick & West’s survey. Start-ups are looking to various deal structures to extend their cash runway.

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The first quarter of 2020 showed an increase in Silicon Valley venture capital activity compared with Q1 2019, despite the covid-19 pandemic, according to Fenwick & West’s latest survey.

But the law firm’s numbers tell a different story when examined on a month-by-month basis.

While January 2020 registered 126 deals, the largest number of venture financings in a single month in over five years, deal count fell to 44 by March when shelter-in-place orders went into effect. In comparison, about 60 Silicon Valley companies raised fresh rounds in each month of Q1 2019.

Although fewer deals were completed in March of this year compared with last, most of these companies were valued higher than in their previous financings. The survey found that the number of up rounds declined slightly over the course of the quarter, from 81 percent in January to 73 percent in March. But the number of down rounds did not increase materially during the quarter or compared to March 2019.

But for the companies that had an up round, the median price increase from one round to the next dropped noticeably from 68 percent in January to 30 percent in March.

“Price increases came down in March, but it would be interesting to see what will happen to this trend in the second quarter,” said Mark Leahy, a Fenwick & West partner and one of the authors of the report.

“In this climate, start-ups are trying to extend their cash runway,” said Leahy, who added that his clients are using various approaches to conserve or add capital.

Companies that are short on cash may be relying on revolver loans, convertible notes or SAFE notes, a structure invented by Y combinator, Leahy said. “Some companies are opening their last rounds and selling additional shares on the same terms,” he said. “I am also seeing clients accept term sheets that they would not have agreed to in the past.”

Leahy said that based on his clients’ activity he would not be surprised to see an increase in down rounds next quarter.