Yes, it really is harder to land that series A round from VCs

Photo via Images of Money

Photo via Images of Money

A lot has been made about the so-called “series A crunch” — the idea that it is increasingly challenging for early-stage companies to continue to raise financing as they move beyond the idea stage. That’s always been the case in the startup arena with more carnage in the earliest of stages of development.

But a big bottleneck is now occurring, with CB Insights releasing a report last December indicating that as many as 1,100 seed-stage startups will be “orphaned” because of an inability to raise the next round.

Now, here comes more evidence backing up that trend. Fenwick, the Silicon Valley law firm with operations in Seattle, just released a report on seed-stage financing deals.

The findings echo what we’ve been hearing on the street: It’s especially tough to raise a series A financing round right now.

Here’s the most telling stat from the Fenwick report:  “Of the companies funded in 2011, 27% had raised a Series A financing by the end of the following year (2012), while 45% of the companies funded in 2010 had raised a Series A financing by the end of the following year (2011).”

In other words, as an entrepreneur in 2010 you had a far greater chance to raise a series A deal than you did in 2011. Now, there’s a lot more going on here, as the chart below shows. Entrepreneurs are increasingly going back to raise additional seed financing, skipping the long, hard slog that it takes to nail the series A deal. And some VCs, looking to get involved with startups earlier, are spending more of their time and capital in the seed rounds.

According to Fenwick, the percentage of seed financings led by venture capital investors increased from 27 percent in 2011 to 34 percent in 2012.

seeddeals

A report from Fenwick shows that companies are returning to their seed financiers to raise more cash.

In Seattle, this situation can be felt more acutely since some of the region’s venture firms have either decided to toss in the towel or scale back their fundraising efforts. And there just have not been as many angel investors to step into the area. That means fewer potential places to raise a seed or series A deal, creating a funding gap that someone (angel, corporate investor, outside VC, etc.) could fill. (Stay tuned on this front as we’re hearing about a new effort afoot to help fill this gap).

One of the problems is that —in part because of the rise of accelerators, crowdfunding and other early-stage financing mechanisms — there have been just a heck of a lot more companies formed in the seed stage.

What happens to them will be an interesting story to watch in the coming months, with one New York investor telling Business Insider this week that there’s a “lot of blood in the water.”

“Pretty much every seed investment in the past two years that you haven’t heard about recently is shutting down.”

What do you think? What will happen to the companies that raised seed-stage funding in the past two years?

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  • Dave

    John, does the study include, or will Fenwick provide, numbers of funded deals in each period? I took a quick look and did not see it. The interesting data point to me is whether a similar number of Series A deals are getting done in both periods. That would support a conclusion that Angel financing and accelerators went a little crazy and funded a lot of companies that were not fundable long-term by VCs.
    None of this seems surprising. There has been no major increase in available Series A capital in the past several years, so it seems inevitable that many of these new seed companies will wash out unless they become self-supporting.

    • johnhcook

      Good question. I asked the Fenwick folks if they have that data. Stay tuned.

      • johnhcook

        Here’s some more info from Barry Kramer, an attorney at Fenwick who worked on the study:

        “We reported CBInsights data that seed financings in US increased from 472 in 2009 to 1749 in 2012, while Series A fundings increased from 418 to 692 during the same period. So Series A seems to be increasing, but seed is increasing much quicker. Of course follow on seed financings seem to be increasing also, so that’s taking some of the sting out, and maybe more companies are choosing not to look for/ dont need Series A, but overall it appears that a decreased percentage of seed funded companies are raising Series A. And to me, if the trend is true, it is something entrepreneurs should be aware of in deciding whether to start a company or join one that is already funded.”–Barry Kramer

        • tacoma1987

          I was about to make the same point as Dave. The term “Series A Crunch” makes it sound as though there is less Series A capital available than in the past – which is false.

          The takeaway should be there are a heck of a lot more seed stage companies raising money from angels, accelerators, etc. which doesn’t necessarily mean there are more quality Series A investments out there.

        • Dave

          Thanks John! I appreciate you getting this information from Fenwick.

  • http://twitter.com/fijiaaron Aaron Evans

    There are a lot more seed stage companies, thanks to incubators like Y-Combinator, Techstars, etc. Of course a lower percentage of them are going to get a significant Series A VC investment.