Down rounds on the rise in venture capital

Down rounds appear to be on the rise, according to a pair of reports examining venture-capital activity in the second quarter.

The news is hardly a surprise. VCs have been bracing for a correction in valuations for several quarters.

What comes as a surprise is the extent of the shift. According to a study from Cooley, 21 percent of disclosable transactions handled by the law firm during the period were down rounds. That is a 3x increase from recent quarters and the highest level since 2011.

A separate examination by Wilson Sonsini Goodrich & Rosati found a less dramatic increase, but an increase nonetheless. Seventeen percent of the venture deals the firm handled during the quarter were down rounds, up from 13 percent in the first quarter. Up rounds also increased to 81 percent of transactions, suggesting sentiment in the industry is hardly all doom and gloom

Still, a pullback in deal pricing and enthusiasm appears to be taking hold. Median pre-money valuations fell in Series A and Series D and later rounds, with fewer large, late-stage transactions completed. Cooley found.

Deal terms also mirrored the new caution. Drag-along provisions appeared in 96 percent of deals, a mark not hit since 2008. The use of liquidation preferences greater than 1x also increased.

Wilson Sonsini Goodrich & Rosati found the median pre-money valuation fell among A and B rounds but rose in later deals.