The Journey to Series A — a look at our “Seed-to-A conversion rate”

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A couple of weeks ago, market research firm Dealroom published an insightful report about the state of early-stage funding in Europe. Titled “The Journey to Series A in Europe” and published in partnership with Atomico and Localglobe, the report takes into account more than 22,000 European funding rounds between January 2012 and September 2018 and might well be the most extensive analysis of European early-stage financings yet.

The central question that the researchers try to answer is this: If you are a European startup and you’ve raised a seed round, what is the probability that you are going to raise a Series A round?

Since building a large tech company typically requires tens of millions of dollars (or more), the availability of follow-on financing is a crucial element of any tech ecosystem. And while there are startups that become profitable businesses (or achieve a decent exit) after having only raised a seed round, those are exceptions, and almost every tech startup that raises a seed round aspires to raise a Series A round 12–24 months later. That’s why from the perspective of a seed VC, the term “conversion rate”, which is used in Dealroom’s report, is quite fitting. A successful Series A is not the ultimate goal (like a “closed won” in sales lingo) but an important intermediate step. If a seed investment is the equivalent of an MQL and a Series A represents an SQL, we want our MQL to SQL conversion to be as high as possible. :-)

Because there are no generally accepted standards for what constitutes a seed round or a Series A round, Dealroom developed clear definitions for each type of round, went through all 22,000 financings, and re-labeled rounds whenever needed. The re-labeled, consistent dataset allowed Dealroom to make reliable comparisons and to offer a level of insight that didn’t exist before. You can read all about the methodology on pages 3–5 of the report.

What you need to know, according to Dealroom

If you’re only interested in the TLDR, here you go:

As you can see in the chart below, one of the key findings of Dealroom’s research is that the probability of raising a Series A varies drastically with the Seed investor:

While the average „Seed to Series A conversion rate“ across all startups stands at 19%, a whopping 40% of the startups that raised their seed round from a top quartile Seed investor like Localglobe, Seedcamp, or Connect Ventures went on to raise a Series A. If you raise your seed round from one of these investors, you triple your chances of raising a Series A compared to a 3rd quartile fund. Compared to a 2nd quartile fund you are still increasing your chance by more than 65%. It’s important to point out that Dealroom’s research doesn’t tell us anything about what’s cause and what’s effect here, i.e. whether some investors are better at “picking” great companies or if it’s about an investor’s ability to help a startup become more successful and raise a Series A. If you ask me, I think it’s a combination of both.

In any case, we were excited like a kid at Christmas when we saw our logo in the “top quartile” box (because, you know, we’re f***ing proud of our portfolio). But besides making us happy and proud, the Dealroom report also made us curious to dig in deeper and find out where exactly our “Seed to A” conversion stands so far, so Ola went through all of our data, applied Dealroom’s labeling methodology, and determined the graduation rate for the entire Point Nine portfolio. We didn’t include our current fund, PNC IV, as most PNC IV investments are just a couple of months old. We also excluded a very small number of companies in which our initial investment was part of a Series A round. So the analysis is based on all PNC I*, PNC II, and PNC III seed investments (including our investments outside of Europe) which, in line with the Dealroom methodology, are 18 months or older — a total of 92 companies.

Without further ado …

Long story short, 46 of these companies, exactly 50%, have raised a Series A so far. We expect a couple of additional Series As in the next 12–24 months, so ultimately our “Seed to A” conversion rate will likely be somewhat higher than 50% … which is significantly higher than the average of the top quartile.

Did I mention that we’re f***ing proud of our portfolio?

* The numbers for PNC I (our first, very small fund) contain three edge cases (involving secondaries, bridge rounds, etc.) in which it’s not quite clear whether based on the Dealroom methodology a company meets the “has converted to Series A” definition. We’ve included these edge cases in the numbers above. Excluding these cases, the conversion rate drops from 50% to 41.2% for PNC I and from 50% to 48.3% across all three funds. Excluding PNC I from the analysis entirely, i.e. looking only at PNC II and III, the conversion rate stands at 50%.