Year in Review: Venture Capital Law in USA

For US start-ups, 2023 resembled a reset to the pre-pandemic years of 2018 and 2019.8 Eleven interest rate hikes by the Federal Reserve, starting in March 2022,9 led to investor wariness and demands for significantly lower valuations.10 Despite the resilient US economy and stable unemployment, interest rates reached a 23-year high,11 eliminating cheap capital. As a result, deal count and capital raised mirrored 2018 and 2019 levels.

Start-ups that raised funds at frothy 2020–2021 valuations avoided raising in 2022–2023 to evade down rounds (i.e., a financing round where the purchase price per share is less than the price in the prior round).12 However, decreased VC funding led to valuation resets across all start-up stages, raising equity costs while inflation drove up operating expenses.13 Many start-ups depleted their cash reserves. Facing difficulty raising funds, start-ups suffered down rounds or relied on bridge rounds from existing investors to temporarily extend their runway.14 In Q4 2023, 19.6 per cent of deals were down rounds, and 45 per cent of Series A financings were bridge rounds, the highest rate on record.15