Amid the layoffs and cuts in startup perks, there’s been much chatter about a slowdown in Silicon Valley. As evidence, people have pointed to “down rounds”—new rounds of financing that value a company at less than what investors previously deemed it was worth.
In the first quarter of 2016, 11% of financing rounds in Silicon Valley were such down rounds, a slight tick below the 12% in the fourth quarter, according to a report released yesterday (May 9) by Fenwick & West, a law firm that specializes in technology.
That valuations are falling is not new. Last year, Dropbox, Snapchat, and Zenefits saw their valuations marked down by Fidelity; Square, Box, and Good Technology all IPOed at less than what investors had privately valued them; and the remains of Rdio and Fab.com sold for less than what these once-hot companies raised.
But the report provides insights into the types of startups that have seen their valuations lowered. Among Silicon Valley tech firms, mature companies (at least from a fundraising standpoint) have suffered the most. Of 12 down rounds recorded in the first quarter, four were attributed to companies raising a series E round or later. Overall, 20% of all series E or later rounds were down rounds, compared to 8% for series B, C, and D rounds, according to Fenwick & West.
Broken down by industry, Silicon Valley software and life sciences companies both logged the most down rounds, at four each. As a percentage of all financing rounds within their categories, life sciences and hardware had the highest representation of down rounds, each at 18% (but there were fewer hardware financing rounds closed too, with only two down rounds in the first quarter).
Some investors haven’t been too concerned about down rounds because of built-in protections in their deals (venture capitalist Bill Gurley calls these “dirty deals“). Early investors often get preferred shares specifying liquidation preferences that pay them before founders and employees. In the first quarter, a quarter of all financings came with senior liquidation preferences, according to the report.