Down rounds in 2022 lower than expected amid reliance on bridge financing: Osler report

More firms rely on bridge financing to extend cash runway as they aim for later, higher valuations.

Despite the market uncertainty that played out in 2022, the number of down rounds fell below the three year average between 2020 to 2022. This is one of the findings in the Osler, Hoskin & Harcourt LLP’s second annual report on venture capital and growth equity.

However, while the number of down rounds in 2022 may have been lower than expected, Osler pointed out that it came from companies relying on bridge financing. “We believe that the reliance on bridge financing strategies by companies in 2022 directly correlates to the lack of down round financings that we observed in 2022,” the firm reported.

“We believe that the reliance on bridge financing strategies by companies in 2022 directly correlates to the lack of down round financings.”

Seven percent of all financing rounds in 2022 qualified as down rounds while less than two percent qualified as flat rounds. The law firm called the result surprising in light of the macroeconomic pressures on technology and venture markets.

Osler noted that of the companies completing a down round during the three-year period the Deal Points Report covered, the highest incidence took place in later stage financings, from Series C onward.

“This aligns with our expectations: companies completing later stage financings are more susceptible to market pressures that affect their financial and customer metrics, which in turn influences investor demand and valuations,” Osler wrote in its report.

Osler pointed out that its data is also consistent with United States (US) deal studies in 2022, including Fenwick’s Silicon Valley Venture Capital Survey for the fourth quarter of 2022 and Wilson Sonsini’s report. Both showed US startups experienced a sharp increase in down rounds for later stage financings from Series D and beyond.

Osler found what it called a pronounced increase in the use of convertible instruments in financing in 2022. Particularly, these were used where startups wished to extend their cash runway while continuing to grow in order to gain a better valuation at a subsequent equity financing. Osler’s data showed 30 percent more bridge financing rounds completed in 2022 compared to 2021.

Venture capital boomed in 2020 and 2021, with record-breaking growth, but yielded to a tough fundraising and economic market in 2022. Further factors, such as the Silicon Valley Bank failure, have led to further concerns that more investors will retreat from Canada, tightening access to capital even more.

RELATED: BetaKit’s most-read March stories show #CDNtech sector struggles continue as government innovation promises continue to lag’s quarterly reports on venture funding have shown that many regions in the country have seen the highs of 2021 stagger, as companies face massive layoffs and valuation markdowns. Despite all this, 2022 was a record year for Canadian venture investor. However, it’s the makeup of the deals that are looking different these days.

Nonetheless, there are still those who maintain that “despite the current public market challenges and the dramatic shift in valuations for tech firms, there is still a record amount of capital in the system from both Canadian and American investors waiting to be deployed.”

The Osler report found that the highest concentration of financings in Canada over the three year period took place at the early stages, such as seed and Series A. That was consistent with other Canadian reports such as the CVCA’s 2022 Year in Review.

Startups in the information technology industry (including artificial intelligence, blockchain, adtech, edtech and cybersecurity) made up over 40 percent of all firms raising a financing round covered by the Deal Points Report. Consumer/retail-based companies had the second highest concentration of financings, representing 19 percent of the financings covered.

Feature image source Unsplash.

Charles Mandel

Charles Mandel

Charles Mandel's reporting and writing on technology has appeared in, Canadian Business, Report on Business Magazine, Canada's National Observer, The Globe and Mail, and the National Post, among many others. He lives off-grid in Nova Scotia.

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