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Quantitative Perspectives

Increasing capital in VC industry gives founders an edge in dealmaking

The supply of funding is rising rapidly, helping startups push their preferences in term sheet negotiations.

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The supply of capital in the VC industry is increasing rapidly, helping startup founders push their preferences in term sheet negotiations.

After several years of shrinking, the capital supply-and-demand ratio changed over the last few quarters of 2021, coinciding with robust VC fundraising activity in 2020 and 2021, according to the latest PitchBook VC Quantitative Perspectives report.

“When we see an increase in capital available to startups relative to what we estimate they demand, we expect startups to have more leverage at the negotiating table,” said Alex Warfel, an emerging tech analyst at PitchBook.

 


This means that more dollars are available to startups for every dollar demanded—giving them more options when searching for capital, working with partners and potentially finding attractive deal terms, all else being equal.

“This additional leverage gained in 2021 from fundraising activity has buoyed the longer-term, 10-year trend of startup friendliness in VC dealmaking, which has left some investors unprotected from downside risk,” Warfel said.

 


Strong fundraising activity in the US also coincides with the decline in the share of deals that include liquidation participation terms, which govern whether preferred shareholders for the round receive additional compensation after their liquidation preference has been paid out.

 


Another indication of how the supply of capital impacts founder-friendly deal environments is the median percent obtained by investors from a company when they make an investment

According to PitchBook’s VC Dealmaking Indicator, which captures startup- or investor-friendly deal environments in the early- and late-stage markets, a decline in the median percent acquired during Q4 at the late stage has played a crucial role in boosting startup friendliness in 2021.

To download PitchBook’s VC Dealmaking Indicator, click here


Featured image by Feodora Chiosea/Getty Images

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    Written by Priyamvada Mathur
    Priyamvada Mathur writes about venture capital at PitchBook.

    She is an Indian chartered accountant and has studied economics and journalism.
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