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Thompson Hine’s <a href="https://www.thompsonhine.com/services/new-ventures/">New Ventures</a> group expanded its Midwest presence this year, deepening its foothold in Chicago while simultaneously expanding its bench in Columbus and Cleveland, Ohio. The team now represents fund and startup clients in 49 of the 50 states, giving it a solid market view into what is unfolding across the United States, particularly in non-coastal markets.

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The Number of Venture Financings Decreased Nationwide

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In line with deals across the country, the <a href="https://www.thompsonhine.com/services/new-ventures/">New Ventures</a> group saw a decline in the number of closed financings in FY 2022. As noted in Pitchbook’s Q4 2022 Venture Monitor, the venture market saw a reduction in deal count of startup investments for four consecutive quarters compared to the venture boom of FY 2021. The New Ventures group experienced a nearly identical percentage-based downturn against market standards in the total number of new deals closed but saw a significant increase in reopening of existing rounds to accept additional investment as well as a 37.2% uptick in bridge convertible note rounds compared to the deal type seen in FY 2021. Many founders increased cash reserves and created plans to manage capital more efficiently and effectively through FY 2022 and into FY 2023. However, many companies that expanded rounds or created short-term bridge rounds are expected to return to the market by mid-2023 for needed early-stage and growth.

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Venture Fund Formation Accelerated Despite Decline in Financings

FY 2022 was a record-setting year for both the number of new VC funds closed and the total dollar value raised by funds at $162.6B (compared to the previous record-high of $150B in FY 2021). Emerging managers captured $34.4B in commitments in FY 2022 across the country, indicating that investors were more likely to invest with known, experienced fund managers instead of undertaking additional due diligence on new firms.

Contrary to the nationwide trend that a supermajority of the new dollars raised went to larger-sized funds within the Bay Area and New York City, the Fund Formation side of the New Ventures practice witnessed immense growth in funds at or below $225M in capital raised, known in the industry as micro-funds.

The group helped to form new funds totaling nearly $1.7B in value in the micro-fund space in FY 2022, an increase from FY 2021 of almost $1B. The newly formed micro-funds primarily occurred in ecosystems between the coasts, were mainly seed and early-stage funds and had a median size of $77.09M per fund. Overall, most of these funds were geographically focused ‘qualifying venture capital funds’, but they also included fund of funds and debt funds. This trend indicates healthy amounts of available capital for deployment in FY 2023-2025 into early-stage companies. Given the four-quarter decline in the total number of investment transactions, financings will certainly be needed to fund the companies that are anticipated to return to the market in late Q2/Q3 2023.

Dollars Will Need to Be Deployed, But When?

Given the uptick in new funds closed, the available capital of newly formed funds and the decrease in startup financings over the past four quarters, it is expected that capital deployment for the funds will need to commence no later than Q3 2023 to satisfy investor requirements and expectations. This means that interim cash management will remain essential for founders to retain strong negotiating positions and to make it through the first two quarters of FY 2023. This is further complicated by the notion that many startups raised sufficient capital to fund FY 2022 in hopes that FY 2023 would demonstrate general market improvement and may now need to be hitting the market to raise capital sooner than the market may like. This will more than likely force funds to choose between diversifying into new portfolio company investments and investing in follow-on positions in their existing portfolio companies.

Deal Timing and Cash Management for Startups Will Be Critical

The demand for additional early-stage capital and the supply of fresh VC capital may reach general alignment in late 2023, which will create the opportunity for funds and nontraditional investors to invest in anticipated down rounds (i.e., relative to seemingly company-friendly valuations from pre-2023), enable companies that make it into Q3 2023 with sufficient capital resources to raise markedly larger rounds or both. Timing and cash efficiency for startups will be crucial in determining whether they are forced into a down round or can hold off on capital raising until the market resettles.

Understanding the Markets and Terms is Key

For any funder or founder, working with advisors who understand the market’s pace, expectations, timing and needs is crucial in wading through the turbulent waters of any trying or confusing economic time. Thompson Hine’s New Ventures team is well-positioned to help clients navigate through financings nationwide. Seeing approximately 175 financings a year and nearly three dozen fund formations annually across the country, the New Ventures group works with clients of all sizes and stages to achieve the best outcomes for founders and funders alike by fundamentally understanding the market’s expectations, timing and cadence.

The group represents high-growth companies of all sizes and stages in industries, including technology, health care, life sciences, consumer products, nanomaterials, transportation, communication, medical devices and more. Our attorneys guide clients through their growth and funding cycles, offering customized counsel on everything from day-to-day legal matters to funding to exits. For more information, visit <a href="https://www.thquicklaunch.com/">THQuickLaunch.com</a>.

New Ventures Practice Group: A Year in Review