The Venture Capital Market In Q3 2024

The venture capital market in Q3 2024 largely reflected familiar trends when considering high-level figures, such as the number of deals closed and the amount of capital raised. For the past nine quarters, private startups on Carta consistently raised between 1,250 and 1,650 rounds and brought in between $15.7 and $23.8 billion in new capital each quarter. Following the remarkable boom experienced during the pandemic in 2021 and early 2022, the market has found its post-pandemic balance. After a period of big changes and rapid growth, the venture capital market is now more stable and predictable. So, there won’t be a change in macro terms to kick off the fundraising, as we’re not expecting that the total rounds and capital raising numbers will approach the levels we saw in 2021.

On the other side, despite this overall stability, the Q3 data shows changes within specific stages and deal types. Early-stage investments, specifically at the seed and Series A levels, decreased in Q3 activity. However, median valuations for these stages actually increased, indicating that while fewer early-stage companies raised funding, those that did were valued more highly than before. On the other hand, the later-stage investment activity showed growth.

For example, the number of Series D rounds increased significantly, with 43 new rounds completed on Carta in Q3. This is the highest level reached in the two past years, makes it clear that there is more interest and activity at this stage of funding. Moreover, mergers and acquisitions have been on the rise. This increase in M&A deals hints that the late-stage investment market, which had slowed down recently, may be starting to recover.

Overall fundraising for Series B and Series C rounds remained relatively stable in Q3, there was no significant shift up or down in total funding amounts for these stages. However, within this flat trend, there were minor changes: Series B rounds saw a 10% increase in the total cash raised, while Series C rounds experienced a 10% decrease.

This shows that while Series B startups managed to attract slightly more investment than before, Series C startups faced a slight reduction in available funds. This pattern reflects investors’ cautious approach, with a preference for earlier-stage companies (Series B) that could be seen as having more growth potential, while being more selective with later-stage (Series C) companies.

In the third quarter, valuations for primary Series A rounds showed an increase, largely driven by the growing presence of AI startups. Investors have been showing more interest in companies focused on artificial intelligence, seeing potential for strong returns as AI technologies advance and integrate into more sectors and industries. This demand for AI innovation is boosting Series A valuations, as investors are willing to back these promising startups at higher values.

Since mid-2022, many other sectors have been experiencing valuation resets, where company valuations are being adjusted downwards, and investors have become more cautious in their approach. However, AI companies are seeing rising valuations despite this trend.

At the early stages, such as Seed and Series A, the dilution rates have remained relatively stable. It's still a common rule of thumb that founders will give up around 20% of their company's equity when raising funds. This standard hasn’t changed much in recent years, as investors expect a certain level of ownership in exchange for their capital at these early stages. The dilution rate remains around 20% for series seed and series A.

However, as startups mature and move into Series B and C, the trend for dilution has been shifting downwards over the years. The percentage of equity sold in these rounds has decreased compared to earlier stages. This is primarily because, at these stages the company is more mature. At that level, the startup can raise larger amounts of capital without needing to give that much equity.

In Q3, startup M&A (Mergers and Acquisitions) activity reached near-record highs. However, these exits are not necessarily generating significant wealth for founders and employees. While the number of M&A transactions has increased, these deals are often considered "low-quality" M&A, meaning they are not high-value acquisitions driven by strategic growth or major technology acquisitions. Instead, they are more likely to be "fire sales", where companies are sold at a lower valuation, often just to generate some cash flow.

These M&A deals do not result in substantial wealth creation for the founders and employees, as the sale prices tend to be lower than what might be expected. In essence, these exits provide some liquidity but not large financial returns.

In 2024, SAFEs continue to dominate as the preferred funding mechanism for smaller seed rounds, especially those under $1 million, accounting for about 64-65% of seed deals. Among these, the popularity of post-money SAFEs has grown significantly, with nearly 90% of recent SAFEs being post-money (compared to a smaller proportion of pre-money SAFEs)

89% of recent SAFEs have a valuation cap, and 46% has a discount rate.

To sum up, In Q3 2024, the venture capital market showed a continuation of familiar trends, reflecting stability after the post-pandemic boom. Early-stage investments, including Seed and Series A saw a decrease in deal activity but the valuations for these rounds increased, particularly in sectors like AI, which drove higher interest and valuations. On the other hand, later-stage investments, especially Series D showed growth. The M&A market also saw significant growth, although many of these exits were low-value sales rather than high-impact strategic acquisitions. In terms of funding mechanisms, SAFEs continued to dominate in smaller rounds, with post-money SAFEs becoming increasingly popular.