Canadian companies closed more funding rounds last year at lower valuations than their previous fundraises, with nine per cent of deals constituting down rounds, up from 3.7 per cent in 2021, according to a report from law firm Torys LLP. But the report’s authors suggest those numbers don’t capture the real drop in valuations, which they expect were much steeper, due to favourable terms for investors in undisclosed inside funding rounds. (The Logic)

Talking point: “We are seeing financings at the same valuation but with more investor-friendly deal terms, implying a reduced valuation … since the investor is receiving more value for the same investment amount,” the report said. It found that more deals included “sweeteners” like warrants or pull-up rights that may incentivize existing investors to participate in future funding rounds in exchange for better terms, which could include senior liquidation preferences or better convertible rates on their shares. Many VC investors predicted down rounds would increase this year, as startups that raised at inflated valuations in 2020 and 2021 run out of cash and need to fundraise at lower valuations.