As we close the books on another quarter of deal activity here at Hutchison, it’s time to take a closer look at venture capital financing trends and themes in the innovation hubs we serve across the Southeast. Based on deals we’ve closed, and others into which we have visibility through Pitchbook and other resources, the themes for Q2 2023 in the Southeast appear to be “survive and advance” and “back to basics.” It continues to be a challenging fundraising market in both the life sciences and technology sectors, generally across all stages of financing, though Seed and Series A stage financings show greater relative strength than later stage deals. Companies are focused on cash management, runway extension and revenue growth, and investors are shoring up their highest potential portfolio companies, stepping up diligence on new deals, and moving away from mega funds. The deal trends we see in the Southeast are consistent with the broader ongoing downturn in the U.S. and global venture and exit markets.

Deal Data. Here are some highlights from the quarterly deal data for core markets across the Southeast:

• Overall deal volume was down around 25% from Q1 2023 and down 35% year over year from Q2 2022.
• Total deal value was down approximately 45% versus Q1 2023 and down nearly 70% year over year from Q2 2022.
• Pre-money valuations also continued to decline, dropping off 13% from Q1 2023 and roughly 45% year over year from Q2 2021’s median of $35 million.
  • Companies headquartered in Florida, Georgia, North Carolina, and Tennessee raised around $1.5 billion across 265 deals for the quarter, with companies in North Carolina and Florida accounting for about half of that deal count and deal value.
• As would be expected with that decline in pre-money valuations and overall tighter funding markets, down rounds as a percentage of all financings increased to around 15% of financings closed in Q2.
  • We’ve also seen a number of investors and companies work on flat pricing rounds to avoid triggering anti-dilution provisions and keep the peace with earlier investors and founders.
  • In a similar vein, a significant number of companies are raising on convertible notes or Safes to get needed capital and extend runway but avoid issuing at a down-round pricing and/or to allow more time for the fundraising markets to stabilize and the valuation reset to level off before issuing priced equity.

Deal Terms. We continued to see a shift from founder-friendly to investor-favorable deal terms:

• While 1X non-participating liquidation preferences continue to be the norm, we have seen an increase in the use of participating preferred and multiple liquidation preferences, though generally in the 1.5-2X range and still in a relatively small minority of transactions.
• The tighter financing markets have also produced an increase in the use of pay-to-play provisions, particularly in the life sciences venture market.
• Deals are also taking longer to close from start to finish as investors are doing deeper dives on diligence.

Looking forward to the rest of 2023, we anticipate some continued near-term pressure on deal volume, deal value and valuations, particularly at the later growth stages, with many industry observers predicting a plateau by Q4 2023 or Q1 2024 and all eyes on a meaningful reopening of the IPO and M&A exit markets that drive the venture economy.