Venture Vernacular: VC Overview & Market Updates

Venture capital ("VC") represents a crucial source of funding for entrepreneurs gearing up for their company's next phase of growth. Transitioning from bootstrapped to VC-funded requires a grasp of capital raising alternatives, industry jargon, and current market conditions.

Market Update

A recent report on VC trends highlights that during the first three quarters of 2023, VC deals in the U.S. raised more than $32.1 billion across 2,209 transactions.[1] Globally, VC activity reached a substantial $193.6 billion.[2] Notably, early-stage deals constituted 61% of all VC activity in the U.S. in 2023Q3, while late-stage deals dipped to a mere 7%, marking their lowest level since 2019.[3] VC funds made up 30% of the investor share of global VC funding, with corporations and corporate venture capital ("CVC") contributing 17%.[4] Angel investors held a 10% share, while asset and investment management firms accounted for 9%. Private equity ("PE") represented 7% of the investor share, and incubators/accelerators rounded out the landscape with 5%.[5] In 2023, the market witnessed the emergence of 12 new unicorns, five of which are U.S.-based, bringing the total number of unicorns to 1,221.[6] Notably, mega rounds have made a resurgence, with U.S. companies completing 65 mega rounds and raising an impressive $15.8 billion.[7]

Local Spotlight: Philadelphia VC VC funding in Philadelphia rose to $1.1 billion in the third quarter of 2023 almost double the total funding raised in the first half of 2022.[8] Makatuu, an internet company currently in stealth mode, raised $554 million in an undisclosed funding stage.[9]

Types of Investors

Companies raise money from a variety of investors and programs. Click the arrows to read a brief overview of each investor type.

Incubators

Accelerators

Angel Investors

Venture Capital Funds

Corporate Venture Capital

PE Funds & Hedge Funds

Types of Transactions & Structures

The various kinds of investors discussed above participate in diverse capital raising rounds, exchanging capital for different types of consideration. Regardless of type of structure or transaction, the deal must fit within a regulatory exemption outlined by the federal securities laws to avoid having to register the offering.[28] Click the arrows to read a brief overview of each transaction or structure type.

Seed Rounds

SAFEs

Series Rounds

Early-Stage Rounds

Late-Stage Rounds

Convertible Notes

Preferred Stock

Venture Debt

Liquidity Exits

Of course, this is not an exhaustive list of terms an entrepreneur should familiarize themselves with as they consider their capital raising strategy. We will continue to explore venture capital and capital raising topics on the Forum for Entrepreneurship & Law.

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[1] CBInsights, a leading market intelligence platform on private companies and investor activities, releases a quarterly report including global data and analysis on dealmaking, funding, and exits by private market venture companies. CBInsights, The State of Venture Q3’23 1, 11-13 (Oct. 2023), available at https://www.cbinsights.com/research/report/venture-trends-q3-2023/ [herein CBInsight Report]. [2] Id. [3] Id. at 83. [4] Id. at 15. [5] Id. [6] Id. at 34-35. [7] Mega rounds are funding rounds that raise over $100 million. Id. at 20. [8] Id. at 136. [9] Top equity Philadelphia, including Makatuu’s July 2023 round, raised $773 million in 2023Q3. Id. at 138. Stealth mode is used to describe a startup that is developing a product or establishing a company in secret until a public launch. See Stealth mode, PCMag Encyclopedia, https://www.pcmag.com/encyclopedia/term/stealth-mode (last visited Oct. 23, 2023). [10] Catherine Cote, Startup Incubator vs. Accelerator: Which Is Right For You?, Harvard Bus. Sch., https://online.hbs.edu/blog/post/startup-incubator-vs-accelerator (last visited Oct. 23, 2023). [11] Id. [12] Id. [13] Id. [14] Id. [15] Id. [16] What are the differences in friends and family, angel investors, and venture capital funds?, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/education/capitalraising/building-blocks/investor-types (last visited Oct. 23, 2023) [herein SEC Investor Differences]. [17] Id. [18] Id. [19] Id. [20] VC fund is defined in Rule 203(I)-1 of the Investment Advisers Act of 1940. 17 C.F.R. § 275.203(l)-1 (2023). In future blog posts, we will explore VC funds in depth. [21] SEC Investor Differences, supra note 14. [22] Id. [23] CVC also excludes investments into internal new ventures. Henry Chesbrough, Making Sense of Corporate Venture Capital, Harvard Bus. R. (Mar. 2002), available at: https://hbr.org/2002/03/making-sense-of-corporate-venture-capital. [24] Id. [25] Private Equity Funds, Investor.gov, https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity (last visited on Oct. 23, 2023). [26] Id. [27] Hedge Funds, Investor.gov, https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds (last visited on Oct. 23, 2023). [28] SEC Investor Differences, supra note 14. [29] Seed Round, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/education/glossary/jargon-z#SeedR (last visited Oct. 23, 2023). [30] Id. [31] Id. [32] The SEC has cautioned investors about the use of SAFEs. Investor Bulletin: Be Cautious of SAFEs in Crowdfunding, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_safes (last visited Oct. 23, 2023). [33] Series Rounds, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/education/glossary/jargon-z#SeriesR (last visited Oct. 23, 2023). [34] Id. [35] Id. [36] Id. [37] Id. [38] Id. [39] See e.g., Charles J. Johnson, Joseph McLaughlin & Anna T. Pinedo, Corporate Finance and the Securities Laws 3-7 (6th ed. 2023 & Supp. 2022). [40] Convertible Note, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/education/glossary/jargon-z#CN (last visited Oct. 23, 2023). [41] Id. [42] Preferred Stock, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/education/glossary/jargon-z#PS (last visited Oct. 23, 2023). [43] Id. [44] Learn About Venture Debt, Hercules Capital, https://www.htgc.com/about/ (last visited Oct. 23, 2023). [45] Id. [46] See e.g., Johnson, supra note 34, at 3-8. [47] CBInsight Report, supra note 1.