What’s up with the Series A?
On the one hand, $10-25M rounds; on the other, a “Crunch”
A couple months ago, I was chatting with a first-time entrepreneur who had recently raised a couple million dollar seed round after graduating from a well-known startup accelerator. He told me of his fundraising plan:
I’m guessing I’ll raise a $15-20M Series A in about a year… by that point, we’ll have shown product/market fit so we’ll be ready to step on the gas.
5 years ago, that wouldn’t have been “the plan.”
Series A rounds used to be different. The prevailing view back then was that the Series A, defined for our purposes as the first round of institutional venture funding for a technology startup, was typically a $2-6M round after which investors would own 10-30% of the company.
When Twitter raised a $5M Series A in July 2007, it had 300K users after usage had spiked to 60K tweets per day during SXSW in March 2007.
When Stack Overflow (now Stack Exchange) raised a $6M Series A in October 2010, it had grown to 7.1M monthly unique visitors in less than two years.
There are countless examples of the “standard” $2-6M Series A from 2007-2011 even for companies with significant usage or sales traction.
The $10-25M Series A
Yet something seems to have changed over the past year and a half.
Snapchat raised a $13.5M Series A in February of last year. RapGenius raised a $15M Series A in July 2013. Clinkle raised a $25M Series A pre-launch. Already in 2014, Teespring has raised a $20M Series A, StyleSeat raised a $10.2M Series A, Oyster raised a $14M Series A, Medium raised a $25M Series A, and Coin is rumored to be raising a $15M Series A.
Is this the new normal? Are entrepreneurs expecting to be able to raise larger Series As, and are investors willing to invest $10M+ at the Series A stage?
By analyzing Crunchbase data, I found that there were 102 Series A rounds between $10-25M in size in 2013, up from 35 rounds of such size in 2009.
The data indicates that there’s been a clear increase in the number of large Series A rounds being raised by companies, particularly over the past year, which confirms the anecdotal evidence that we’re seeing in the venture capital industry.
So what about the Series A Crunch?
There was much talk last year about the Series A Crunch. The number of seed- and angel-funded companies has exploded over the past few years, and the thesis behind the Crunch is that many of those companies are not able to raise a Series A given the lack of increase in investors and dollars going towards Series A rounds relative to seed rounds.
How can it be that some companies are facing the Series A Crunch while at the same time there are more $10-25M Series A rounds being funded by investors than ever before?
A further analysis of Crunchbase data shows that the average Series A round has actually declined in size over the same time period as the number of $10-25M Series A rounds has increased in number. The average Series A round size peaked in 2011 at $6.41M and declined to $5.82M in 2013. The median Series A round has remained at $3M for the majority of 2009-2013.
Clearly, the $10-25M Series A, while a reality for more companies than before, is not the reality for all.
The reality is that the Series A Crunch has led to a Series A Bifurcation.
Companies with factors such as traction as exhibited by usage growth or revenue growth, or an all-star team, or an insanely compelling story are raising larger Series A rounds than in the past. But companies without such momentum are finding it harder to raise a Series A, often having to raise smaller Series A/“Seed+” rounds, or bridge rounds, or facing the reality of having to shut down.
What does this mean for entrepreneurs?
While there are many high profile companies raising $10-25M or larger Series A rounds, this is not the new normal for all entrepreneurs.
If your company does not have significant momentum behind it, you may face the dreaded Series A Crunch. And even if you do have traction and are able to raise a large Series A, be careful. “Maximizing runway can minimize success.”