Why Raising A Series B Round Is Getting Much Harder

 
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Venture Capital is a fast-changing asset class. The value creation process inherent to venture capital changes with markets, availability of capital, sentiment, and overall market confidence. 

As the costs for launching new startups have declined dramatically, expectations have also changed. One thing remains the same, companies that are going after big opportunities, will continue to need to raise capital. What has changed is the size and cycle of each round. Whereas before seed rounds were quite early and small, today’s seed rounds occur later and can be $2 - $3mm. 

  Median VC-Backed Company Age at Seed

Median VC-Backed Company Age at Seed

With larger seed rounds, startups have enough runway to demonstrate traction. That allows investors to bet bigger, earlier, and with higher conviction. The result is a flight to quality. It also means that A and B rounds are also much larger.

  US Angel & Seed Median Deal Size

US Angel & Seed Median Deal Size

However, only 42% seed-funded startups actually go on to raise a Series A round, according to Crunchbase News. Given the increase in seed-stage deal sizes, companies are more developed and demonstrate more traction when they raise their Series A. Given this environment, there are two converging trends that are making it more difficult to raise a B round.

First, the significant increase in the number of accelerators, incubators, as well as seed and early stage funds in most geographies in the past few years has resulted in a growing number of startups being funded every year that will need growth capital beyond Series A to continue scaling toward an eventual successful liquidation event.

At the same time many growth funds now have significantly higher expectations than they did just a few years ago. They expect companies to be in the expansion stage at this point with, demonstrated product-market fit, repeatability, and an efficient go-to-market engine. They look for great teams, significant traction, strong metrics and unit economics, recurring revenue, and highly defensible models, resulting in a considerably higher bar that start-ups need to meet to qualify for Series B funding. 

This leaves many startups in a difficult position, as they will need additional time and funding to bridge the gap needed to scale to the higher levels now required for a B round resulting in higher pre-money valuations ($60.0 million in Q4 2017).

  Year-Over-Year Comparison – Numbers in Millions (Source WSGR)

Year-Over-Year Comparison – Numbers in Millions (Source WSGR)

The result is that only 26% of seed-funded companies ultimately go on to reach a Series B. So, startups that are looking to get to a successful B round need to understand the new environment to increase their chances of a B round funding.

 

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Ivan Nikkhoo

October 2018

 
Ivan Nikkhoo