How Venture Valuations Move Through Market Cycles

· 20 min read
venture-capital startups finance

Venture markets move in cycles, and the pricing of individual funding rounds is where those cycles show up first. When I was Head of Data Science at Aumni, I spent years tracking how venture valuations shifted through booms and corrections. The 2022-2024 period gave us a textbook case study: a full cycle from peak to trough to selective recovery, all visible in the data if you knew where to look. The patterns weren’t unique to that period. They’re structural features of how venture capital reprices, and they’ll show up again in the next correction and the one after that.

This post is for informational and educational purposes only. Nothing here is legal, tax, or investment advice. Consult qualified professionals before making any decisions based on this content.

This post pulls together the full picture: what up rounds, down rounds, flat rounds, extensions, and bridges actually tell you about market health, how corrections ripple unevenly through different stages, and why the word “recovery” is almost always misleading. I’ll use the 2022-2024 cycle as the case study throughout, but the dynamics are timeless.

The Best Single Metric for Venture Market Health

If you want one number that tells you the most about the state of the venture market, the split between up rounds, down rounds, and flat rounds is hard to beat. It’s simple to understand, it’s a leading indicator of broader market trends, and it carries information about both company performance and investor sentiment simultaneously.

Every priced equity financing round either comes in above the company’s prior valuation (an up round), below it (a down round), or roughly the same (a flat round). The aggregate ratio across all financings in a given period acts as a barometer for the overall market.

When up rounds dominate, the majority of companies going out to raise are commanding higher valuations than their last round. That reflects both real company progress (growing revenue, expanding customer bases, hitting milestones) and positive market sentiment (investors willing to pay up for quality). When the balance tips toward flat and down rounds, it signals one or both of two things: companies aren’t making enough progress to justify a higher valuation, or investor sentiment has soured to the point where solid progress doesn’t get rewarded. The first is a real economy problem. The second is a capital markets problem. Corrections usually involve some of both.

These ratios function as a leading indicator. When up rounds increase for a sustained period, it tends to precede broader improvements in deal volume and deal size. Founders who see peers getting good outcomes start their own processes. Investors who see up rounds succeeding deploy capital more readily. The virtuous cycle builds on itself, and you see it in the pricing data before you see it in the deal count data. The reverse is equally true: when down rounds start increasing, founders delay fundraising, investors tighten up, and the cycle runs in the opposite direction.

The Selection Effect Caveat

Before looking at any specific numbers, there’s an important caveat: the companies raising in any given period are not the same companies.

There’s always a selection effect at work. During tough market periods, the companies that choose to raise are disproportionately the ones that need to (running low on cash) or the ones performing so well they’re confident in the outcome regardless. The middle of the distribution tends to wait.

As the market improves, more of those “middle” companies come off the sidelines. If they raise at valuations above their last round (likely, given they’ve had more time to grow), they push the up round percentage higher. Some of the increase in up round prevalence is genuine improvement in market dynamics, and some of it is just the natural result of a broader set of companies entering the fundraising market.

This doesn’t mean the metric is useless. It means you have to interpret magnitude carefully. A move of a few percentage points could be entirely explained by selection effects. A move of seven points in a single quarter is harder to explain that way.

Three Forces That Drive the Up/Down/Flat Split

Three factors determine the up/flat/down split at any given moment, and understanding them helps you distinguish between healthy and unhealthy markets.

Company progress. The most fundamental driver. If companies are genuinely building value between rounds (more revenue, more customers, better unit economics), they’ll command higher valuations when they return to market.

Time between rounds. This interacts with company progress in important ways. When rounds are spaced further apart, companies have more time to grow into higher valuations. Paradoxically, a slower fundraising market can sometimes produce more up rounds simply because companies have had more time to improve.

Market sentiment and multiples. Even if a company has grown, the valuation it receives depends on what multiple investors are willing to apply to that growth. When multiples compress, companies can grow 30% and still get a flat or down round because the market is applying a lower multiple to those revenues. When multiples expand, even modest progress gets rewarded.

These three forces interact constantly and don’t always push in the same direction. The ratio of up, flat, and down rounds at any point in time is the net effect of all three playing out across thousands of individual fundraising processes.

The 2022-2024 Cycle: From Peak to Trough

The 2022-2024 correction provided a clear illustration of how these ratios move through a cycle.

The peak (2021). Up rounds dominated, with some datasets showing them above 90% of all deals. This is what an overheated market looks like. Nearly everyone who raised got a higher valuation, partly because companies were genuinely growing fast, and partly because abundant capital meant investors were competing aggressively for allocation. The froth was concentrated at the later stages, where some companies raised at 50x revenue multiples or higher.

The decline (2022 into mid-2023). When the correction took hold (driven by rising interest rates, banking sector volatility, and a frozen IPO market), median post-money valuations fell roughly 50% from peak to trough. The decline didn’t hit evenly. Later-stage rounds (Series D and beyond) saw drops exceeding 50%. These companies had raised at extreme multiples during the boom and had the furthest to fall. Early-stage rounds experienced meaningful but less dramatic pullbacks. This isn’t unique to the 2022-2024 cycle. Later-stage valuations are anchored to revenue multiples and public market comparables. When public markets reprice, late-stage private valuations follow. Early-stage valuations are priced more on potential and were less inflated to begin with.

The trough (late 2023). Up rounds fell well below their peak, with roughly a quarter to a third of companies raising getting flat or down pricing. Both early and late-stage companies hit peak pain around the same period, with year-over-year valuation declines exceeding 50% at some stages.

The early recovery (Q1 2024). Up rounds improved meaningfully, and both flat and down round frequencies dropped. The improvement wasn’t just about more up rounds. It was a broad move away from adverse pricing outcomes.

Finding the Floor

In any correction, there’s a moment when the market stops getting worse and starts stabilizing. Identifying that moment in real time is notoriously difficult. In the 2022-2024 cycle, the second half of 2023 was that moment. The biggest quarter-over-quarter improvements came in Series B and Series D+ rounds. That was surprising, especially for late-stage deals, which had taken the worst of the annual declines. But it makes sense: the companies that were going to be marked down already had been. The remaining dealflow was increasingly composed of companies that had survived the worst of the correction, and the few that raised in this period tended to be genuinely strong.

This is a useful pattern to watch for in any correction. The floor often shows up first as a stabilization of the hardest-hit segments, not as broad improvement. If you’re waiting for the median to start climbing before you call the bottom, you’ve probably already missed it by a quarter or two.

There’s a psychological component to this too. When the worst-performing segments stop getting worse, it changes the conversation. LPs stop bracing for further writedowns. Fund managers start thinking about deployment again rather than triage. That shift in posture, from defensive to cautiously opportunistic, is part of what creates the stabilization you see in the data. The floor is partly discovered and partly constructed.

Down Rounds: The Early-Stage/Late-Stage Divergence

Down rounds are one of those topics that everyone in venture talks about but few people track with much precision. The headline during the recovery was cautiously optimistic: down rounds were declining. But the more interesting finding was the divergence between early-stage and late-stage companies.

At early stage, down round prevalence had been climbing for two years before it finally reversed. The reversal was noteworthy because early-stage companies are typically the first to feel shifts in investor sentiment. Even after improving, early-stage down round rates remained elevated compared to pre-correction norms, when down rounds at this stage were typically in the low single digits to low teens as a percentage of deals.

The late-stage picture was more complicated. In mid-2024, roughly two in five later-stage transactions were down rounds. Companies that raised at peak 2021 valuations were still working through the math. If you raised your Series B or C at a 50x revenue multiple in 2021, and the market was pricing comparable companies at 15x or 20x, you needed a lot of growth just to get back to your last valuation. Many companies simply hadn’t grown fast enough to close that gap, even with two or three years of additional runway.

Looking at the second half of 2024, early-stage down rounds ticked back up slightly while late-stage down rounds dropped meaningfully. Late-stage companies were moving past their legacy valuation overhangs. Early-stage companies were working through a new wave of pricing pressure. The correction wasn’t resolving uniformly across stages, which meant aggregate market statistics were masking very different realities depending on where in the lifecycle you were looking.

Extension Rounds: The “Wait and See” Signal

Extension rounds are one of the most underappreciated signals in venture data. A company that takes an extension round is essentially saying “we need more capital, but we don’t want to (or can’t) set a new price.” The aggregate trend in extension activity is useful information.

Extension rounds peaked at around 30% of all transactions near the height of the correction, then declined steadily to around 22% by late 2024. That brought extension round prevalence back to pre-pandemic levels.

The timing matters. The decline in extension rounds for late-stage companies and the corresponding drop in down rounds at that stage suggest companies were moving past the “extend and hope things improve” phase and back into a more normal fundraising pattern. When companies stop extending their existing rounds and instead raise fresh capital, it signals that pricing has found more sustainable footing and that the standoff between founders and investors is resolving.

The psychology of extension rounds is worth understanding, because the aggregate numbers don’t fully capture what’s happening at the company level. An extension is a compromise. The founder doesn’t want a down round (for morale, for optics, and because it triggers anti-dilution provisions). The existing investors don’t want to mark down their position. So they put in more money at the same terms as the last round, deferring the valuation question to a later date.

But “later date” eventually arrives. If the company’s business has improved enough by the time it raises a proper round, the extension was a smart tactical move. If not, the extension just delayed a down round and added more capital to the stack at a price that turned out to be too high. During the correction, a lot of extension rounds were in the second category. That’s part of why the decline in extensions was such a positive signal: the market was done deferring hard conversations.

Convertible Bridge Rounds: The Honest Signal

Convertible bridge rounds sit at the intersection of company health, investor sentiment, and market timing. They often tell you something the headline numbers don’t.

Priced round data can be distorted by outliers, and headline metrics like “total dollars invested” don’t tell you much about the health of individual companies. Convertible bridge rounds, by contrast, are usually happening because a company needs capital soon and doesn’t have the luxury of waiting for perfect terms. The valuation caps in those instruments reflect what investors are actually willing to pay right now, not what everyone hopes the company will be worth in a year.

During the correction, bridge down rounds rose sharply. A bridge down round is a financing event where a Convertible Note or SAFE contains a valuation cap lower than the post-money valuation of the immediately preceding priced round. When that cap is below the last priced round, the company and its investors are acknowledging that the business is worth less than the last time they raised equity. It’s a down round by another name, but it often flies under the radar because it’s packaged as a bridge.

This matters for two reasons. First, bridge down rounds don’t always show up in the headline metrics. If you’re only counting priced equity down rounds, you’re missing a significant chunk of valuation markdowns happening through convertible instruments. Second, a bridge down round often signals that a company couldn’t raise a full priced round at or above the last valuation. The bridge buys time, but the valuation cap tells you the real story.

Bridge round activity and bridge down round prevalence are metrics worth watching closely. They tend to lead the broader down round trends by a quarter or two, giving you an early signal about where the market is heading.

What Happens to Deal Structures During Corrections

When valuations fall, the structural features of deals shift too. During the 2022-2024 cycle, down rounds became much more prevalent, and with them came predictable ripple effects. Liquidation preferences tilted in favor of investors. Convertible note interest rates climbed. Participation rights became more common. Some deals included structured features that hadn’t been standard in years, like ratchets and pay-to-play provisions. These structural shifts are the market’s way of adjusting to a higher-risk environment. Investors who are less confident about near-term upside protect themselves through terms, not just price.

The terms conversation is one that founders often underestimate during corrections. A down round with clean terms might actually be a better outcome than a flat round loaded with structural protections that shift economics in subtle but meaningful ways. That kind of structural complexity tends to accumulate during corrections, and it creates problems that compound over subsequent rounds.

Down round prevalence is an underappreciated metric in general. A market where median valuations are stable but a large share of late-stage deals are down rounds is telling you something very different than one where valuations are stable and down rounds are rare. The median can look fine while a large share of companies are quietly taking haircuts.

Variability as a Signal

One of the most useful things to watch during a correction is the spread between the best and worst outcomes. In the 2022-2024 cycle, the distribution of outcomes widened significantly at the late stage. Some companies still raised strong rounds at high valuations, while others faced severe markdowns. The early-stage distribution stayed much tighter.

This pattern is predictable and recurs. Early-stage companies are valued on potential, and that potential looks roughly similar across comparable companies. Late-stage companies are valued on actual performance: margins, growth rates, unit economics. When the market tightens, the gap between strong executors and everyone else becomes much more visible in the pricing. The signal is in the spread, not the median.

Why “Recovery” Is Almost Always the Wrong Word

Here’s where most analysis of corrections goes wrong. People see valuations start to climb and declare the correction over. But what actually happens, at least in the 2022-2024 cycle and in other market corrections I’ve studied, is bifurcation, not recovery.

The improvement that came in the first half of 2024 was concentrated. The top quartile of companies saw significant valuation momentum. Medians were relatively flat. The bottom quartile was unchanged or barely improved. This pattern showed up across stages, which made it feel structural rather than stage-specific. The best companies were pulling away from the pack while the average company was still stuck in correction territory.

Three dynamics drive this kind of bifurcation, and they tend to show up in every correction:

Capital concentration. When the overall pace of deployment slows, available capital concentrates on the highest-conviction opportunities. Investors who might have spread capital across more deals in a hotter market become more selective. The companies they do back see competitive dynamics that push valuations up. Everyone else sees nothing.

Survivor quality filtering. In a down market, weaker companies either don’t survive to raise or don’t attempt to. The companies that do raise tend to be the strongest, which means the top of the distribution is populated by genuinely excellent businesses. The bottom is populated by companies that need capital badly enough to accept whatever terms they can get.

Uneven public market signals. Public market recoveries tend to be lopsided too. During the 2022-2024 cycle, a handful of large-cap tech companies drove most of the index gains while many smaller companies traded sideways. Since venture valuations eventually reference public comparables, that lopsided recovery filtered directly into private market pricing.

In later-stage deals, the pattern was especially pronounced: top-quartile valuations showed strong momentum while median and bottom-quartile valuations stayed flat or even decreased. The “recovery” was really a story about the best companies, not the average company.

The Challenge of Valuing What You Own

All of this bifurcation has practical implications for anyone trying to value a portfolio of private companies during and after a correction. If you assume the “market recovery” applies broadly, you’ll overstate the value of most of your holdings.

Valuing private equity securities requires information about capital structure, specific terms (liquidation preferences, participation rights, anti-dilution provisions, conversion mechanics), and financial performance. Two regulatory standards are particularly relevant. ASC 820 (the FASB standard for fair value measurement) establishes a framework for determining fair value, but applying it to illiquid private securities requires significant judgment beyond what the standard’s hierarchy of observable inputs anticipates. Applying it to illiquid private securities requires judgment and methodology that goes beyond looking at a stock ticker. SEC Rule 2a-5 governs fair valuation of fund investments and places specific requirements on how registered investment companies determine fair value when market quotations aren’t available.

During a correction, you can’t apply a single discount to your portfolio and call it a day. Some positions are genuinely recovering. Others are still deteriorating. And the gap between those two categories is wider than it would be in a normal market. Getting the granular data right is the only way to have an honest picture of what you own.

Practical Implications for Founders and Investors

For founders, a significant late-stage down round rate means you have to be genuinely prepared for the possibility. That means thinking carefully about anti-dilution protections in your existing documents, having honest conversations with your board about realistic valuation expectations, and potentially exploring alternatives like extension rounds or structured deals. It also means extending runway wherever possible, because the companies that could afford to wait an extra quarter or two often saw materially better outcomes as the market normalized.

For investors, bifurcation is a reminder that “the venture market” isn’t one thing. It’s a collection of sub-markets with their own dynamics. Early-stage deal flow can be showing signs of normalization while late-stage pricing is still working through legacy issues. Aggregate statistics obscure more than they reveal. Stage-level data is where the useful signal lives.

Reading the Signals: A Framework

For anyone watching the venture market, here’s how I’d suggest using this data going forward. These are the lessons that generalize beyond any single cycle.

Track the trend, not the level. Whether up rounds are at 60% or 70% matters less than whether they’re increasing or decreasing quarter over quarter. The direction tells you about momentum.

Watch for divergence between stages. In the 2022-2024 cycle, early-stage companies saw down round prevalence decline faster than late-stage at first, then the relationship flipped. That stage-level divergence was a useful signal about where the correction was easing first and where stress was persisting.

Remember the selection effect. When up rounds increase coming out of a correction, some of that is real improvement and some is the pool of companies raising shifting toward stronger companies. Don’t assume a rising up round percentage means the entire market is healthy. It might mean the unhealthy companies have stopped raising.

Look at the denominator. A market where 65% of rounds are up rounds but total deal count has fallen 40% is telling you a very different story than one where 65% of rounds are up rounds and volume is stable. The ratio and the denominator together tell you the full story. Either one alone can mislead you.

Watch bridge round activity as a leading indicator. Bridge down round prevalence led the broader down round trends by a quarter or two in the 2022-2024 cycle. If you’re looking for early signals about where the market is heading, the pricing embedded in convertible instruments is a good place to start.

Look at the distribution, not just the median. This is the big one. When the top end of the distribution pulls away while the median stays flat, aggregate numbers will tell you the market is healing when most of the market is still stuck. Always look at the interquartile range, the spread between best and worst outcomes, and the concentration of improvement.

Watch for extension rounds to normalize. Extension round prevalence peaking and then declining is one of the clearest signals that a correction is resolving. It means companies and investors have stopped kicking the can down the road and are back to setting prices, even if those prices aren’t always what founders want.

Lessons That Generalize

Looking at the full 2022-2024 arc, a few patterns emerge that I’d expect to recur in future corrections.

First, corrections can be severe without being crises. Median post-money valuations fell 50%, but the market didn’t seize up entirely. Deals continued to get done, just at lower prices. That’s a correction, not a collapse. The system kept functioning, even if it was functioning at half speed.

Second, stage matters enormously. Aggregate venture market statistics can mask dramatically different realities at different points in the company lifecycle. The early-stage/late-stage bifurcation in both the decline and the recovery was one of the most useful signals in the data. Anyone analyzing “the venture market” as a monolith is going to miss the story.

Third, the sequence of a correction follows a recognizable pattern. Valuations drop, deal volume drops, extension rounds surge, bridge down rounds spike, then slowly the extensions normalize, down rounds decline, and the strongest companies start pulling away from the pack. That sequence played out clearly in the 2022-2024 data, and I’d bet it plays out similarly next time. The timing will be different, the trigger will be different, but the structure will rhyme.

Fourth, the boom-era highs were the anomaly, not the correction-era lows. The correction was a reversion. And the selective, bifurcated recovery that followed was the market telling you what it actually valued when capital wasn’t free anymore. That lesson applies to every correction, not just this one.

The overall trajectory through 2024 was encouraging: extension rounds falling back to pre-pandemic levels, late-stage down rounds declining meaningfully, and the pricing standoff between founders and investors gradually resolving. None of it was fast, and none of it was uniform. But the market was healing, and the data showed it, if you knew which data to look at.

Further Reading

Some of the data and analysis in this post originally appeared on the Aumni blog, here, here, here, here, here, here, and here.