Funding for early startups has improved, AngelList data shows

• In the second quarter, a large number of startup founders were forced to raise money from VCs by taking a “down round” or a lower price per share than they obtained in their previous pre-pandemic round, data from AngelList shared with Business Insider shows.
• But two months into the third quarter, the data shows that the worst is over.
• “Things have rebounded,” AngelList’s head of data science Abe Othman tells us.
• Visit Business Insider’s homepage for more stories.

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Since March 11, some 565 startups have laid off about 79,000 employees, according to Layoff.fyi, as the pandemic crushed the economy and venture capital grew tight.

But about a month ago, the startup community walked into the light after the tunnel, according to new data on early-stage funding on the AngelList platform, one of the primary sources where thousands of startups obtain angel/pre-seed, seed and Series A rounds.

While some startups are still struggling and laying people off, venture funding has begun to flow in earnest again, which will allow more new companies to launch and flourish.

First, the bad news

The second quarter of 2020 was indeed rough. AngelList tracked funding data on 2,931 companies in Q2, (compared to 2,082 companies in the year-ago quarter), according to its data shared with Business Insider.

Out of the 230 companies that obtained funding, 76 (about one-third) took a “down round,†meaning that the price of their shares declined. The median markdown on the price per share was about 55%, too. 

And that was double the number of companies that took a down round in the second quarter of 2019: 26 out of 169 (or 15%).

For the most part, founders don’t do down rounds (which is akin to a fire sale) unless they need the money so badly they have no choice. Founders, obviously, want the value of their shares and their companies to grow over time, not decline.

On the bright side, almost one-third of the down rounds in Q2 2020 were for very small markdowns, 10% or less, AngelList’s head of data science Abe Othman told Business Insider.

And that likely means that investors didn’t chop the overall valuation of the company. So if investors thought a startup  was worth, say, $2 million before the pandemic, investors still believed it was worth $2 million as they bought more shares. But when a company sells a new batch of shares at the same valuation, it dilutes the value of each individual shares, ie, each share owns a little less of the company, making the price per share drop.

That’s not an ideal scenario for founders — but it’s not a death knell, either.

“Every quarter a bunch of startups die or get marked down because that’s just what happens. I think what’s new here, and it’s played out by this almost one-third of companies that took very modest down rounds … is that startups were essentially paying for optionality,†AngelList’s head of data science Abe Othman told Business Insider.

In other words, they were willing to take a haircut on their share prices to get extra cash, which gained them more options — more ways — to survive the effects of the pandemic.

And VCs were willing to buy a bargain.

Matt Turck, managing director of FirstMark Capital

Matt Turck

Now, the good news

With two months of the third quarter now in the books, Q3 is already looking much, much better: with activity back to about pre-COVID-19 levels.

While Othman didn’t shared detailed numbers because the quarter isn’t over yet, more startups are commanding increasing values for their shares, the data shows, and the number of new deals, while not exactly record-breaking, is rising again to normal levels.

“It’s better than it was three months ago. Things have rebounded. Ask any VC and they’ll say, ‘We’re not say we’re seeing a ton of downrounds, It’s back and frothy,†says Othman.

In fact, FirstMark Capital’s Matt Turck told Business Insider’s Max Jungreis that the venture capital market is currently “surprisingly rabid†and maybe even “more intense than it’s probably ever been.†VCs who were guarded six months ago are now knocking on startups’ doors looking to get their capital working, he explained.

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