January 20, 2023

5 Trends to Watch: 2023 Venture Capital

You've Reached Your
Free Article Limit This Month
Register for free to get unlimited access to all OnPractice content.
Register Now
  1. Down-rounds, Re-Pricings, and Recaps Increase — The current macroeconomic environment, coupled with record increases in valuations over the last several years, is creating an increase in down-rounds, re-pricings, and recapitalizations. The exponential rates of valuation increases seen over the last few years are gone and, particularly for capital-intensive companies that raised cash in 2021 or 2022 and/or companies that did not meet their projected development goals and growth rates over that period, companies and existing investors are bracing for down-rounds and, potentially, re-pricings of prior rounds. Recaps will come in many forms, but most will share a common theme: pay up or lose your rights. These deals generally include some version of a pay-to-play, whether through a traditional cramdown mechanic or a pull-up mechanic. Regardless of the structure, balancing investor expectations regarding ownership levels and upside payouts, while keeping management and other employees incentivized through cash and equity compensation, will be critical to ensure continued growth for companies.

  2. De-risking Investments — Investors are feeling the pain in their portfolios, and they are looking for possible ways to de-risk and increase return rates for new investments. Standard convertible preferred stock and pari passu series that have been the norm for the last decade are giving way to senior securities with accruing dividends, guaranteed multiple returns, and/or participation features. Some investors also are looking for the right to force a sale in shorter timeframes (i.e., 18-36 months), which can create misalignment of incentives among early and late-stage investors and/or management/common stockholders.

  3. A Focus on Governance and Management Accountability — Investors will be hyper-focused on their portfolio companies' development and growth progress and ability to stay within the budget and business plan. Founders and management teams will have less freedom to make mistakes and investors may look for ways to hold the management team accountable, such as through enhanced governance and consent rights for investors and altering management compensation structures to include more performance-based compensation (cash and equity). Gone (for now) are the days of "total founder control" involving founder super-voting stock, voting proxies, and total Board control.

  4. Expanding Deal Timelines  Venture capital funds still have funds to invest, but they will take longer to approve an investment, in part because they are doing more due diligence - kicking the tires several times - and negotiating harder on terms. This means deal timelines are stretching. Companies looking to raise capital should make sure they have plenty of runway when planning the timing of their next capital raise, expect funding delays, and have a back-up plan for a short-term bridge (e.g., convertible notes). 

  5. Deal Sourcing Moving to New Markets — With new hubs for startups popping up throughout the U.S. and abroad since 2020, investors may look for deals in "secondary markets" with lower costs, including markets where fund managers have relocated over the past few years (such as Florida, Texas, Colorado, and Utah). On the other hand, some investors may pull back and focus on investing in their backyard in traditional markets so they can keep an eye on their investments and visit more often in-person, dropping by the office for lunch to check in on the business.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From Greenberg Traurig

CFPB Says 'Show Me The (Consumer Unfriendly) Fine Print'

By Timothy A. Butler Greenberg Traurig January 25 , 2023

On Jan. 11, the Consumer Financial Protection Bureau (CFPB) released a proposed rule that would require certain nonbank financial companies subject to its supervisory jurisdiction to submit annual reports about their use of terms and conditions that attempt to waive or limit consumer rights and protections.

FINRA Files Amendments to Proposed Rule Change That Will Allow Remote Inspections

By William B. Mack Greenberg Traurig January 25 , 2023

Last summer, the Financial Regulatory Authority (FINRA) proposed a rule change to its supervision rule (FINRA Rule 3110) to allow member firms to conduct remote inspections of some or all branch offices and locations.

SEC Proposes to Establish a New Best Execution Standard

By William B. Mack Greenberg Traurig January 20 , 2023

On Dec. 14, 2022, Gary Gensler, Chair of the U.S. Securities and Exchange Commission (SEC), released a statement announcing a proposal to establish an SEC rule setting forth a best execution standard for broker-dealers.

More From Private Equity and Venture Capital

Cookies and Other Tracking Technologies May Violate HIPAA

By Karin E. Ross Greenberg Traurig January 18 , 2023

In the midst of significant privacy changes in many U.S. states affecting tracking technologies such as cookies, pixels, and adtech, new lawsuits are alleging entities violated the Health Insurance Portability and Accountability Act of 1996 (HIPAA) via impermissible disclosure of protected health information due to the use of these technologies.

SEC Adopts Final Amendments to Rule 10b5-1 and New Disclosure Requirements

By Raffael Fiumara Greenberg Traurig January 12 , 2023

On Dec. 14, 2022, the Securities and Exchange Commission (SEC) adopted significant amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and new rules and disclosure requirements associated with 10b5-1 trading plans meant to address the SEC and other industry participants’ views of potential abuses under the current insider trading regime, including “cooling-off” periods for insiders, prohibitions on overlapping plans, certain insider certifications, and other requirements summarized below.

In an Internet Minute

By Kathryn C. Cole Greenberg Traurig January 11 , 2023

As the below DOMO infographic suggests, people are reliant upon the worldwide web at activity levels that are difficult to comprehend.

Featured Stories