Behind the Series B Crunch: Profligate Entrepreneurs or Stingy Investors?
A lack of early-stage funding may not be today's startups' biggest problem after all.
Now that worry about the Series A crunch has been partly eclipsed by handwringing over an alleged Series B crunch, research firm CB Insights decided to do some math and see how bad things really are. In the process, they came upon an interesting phenomenon: Startups seem to be blowing through their Series A money faster than ever.
In its research blog, CB Insights has a sanguine take on this, noting that startups are “getting to Series B” faster. But often, “getting to Series B” doesn’t mean that a startup has accomplished specific milestones that automatically merit a B round. It means that they’ve run out of the money they raised in their Series A, and they’ve either got to raise more or pack it up and go home.
Behind the Numbers
First, the data on the possible Series B crunch. CB Insights looked at the number of Series A rounds and B rounds completed in every year from 2008 to 2013. You would expect there to be more A rounds than B rounds. That’s because some percentage of companies will stall out, fail, or just not need additional funding after an A round.
In 2008, there appeared to be about 575 A rounds and about 400 B rounds. Those numbers, and the gap between them, have grown pretty steadily since then. In 2013, there were about 940 A rounds and about 500 B rounds.
If you look at the trend lines, it’s hard to characterize this as a crunch, even though it must certainly feel that way to anyone trying to raise a B round. The real problem is that between super-angels and micro-VCs, there seems to be lots more Series A dealmaking--about two-thirds more--while the number of Series B deals is up by "only" about 25 percent.
Some more data, which is less dramatic but still doesn’t support the idea of a horrible crunch: In 2008, 55 percent of companies that raised an A round successfully raised a B round. In 2011, that number was 50 percent. So yes, fewer companies have been able to raise their B rounds recently but the decrease is hardly precipitous.
Then there’s the amount of time between a company’s Series A and its Series B. There's no doubt that has fallen. CB Insights looked at A round deals from 2008 to 2011, and then looked at how long it took those same companies to raise their B rounds. (They didn’t look at A rounds that were funded in 2012 or later, since those companies might not be ready for another round of financing quite yet.)
Here we see a big difference: In 2008, it took, on average, 20 months for a company to go from raising its A round to raising its B round. That number has declined each year since, so that, in 2011, it took just 15.1 months for a company to go from A round to B round.
It could be that companies are making progress more quickly. It could also simply be that their burn rates are higher. Those two things are not mutually exclusive, of course. A company that has not yet hit profitability could be going like gangbusters, and that costs money. The company could also be spending carelessly or spending on the wrong things, as we saw in the infamous dot-com bubble.
One interesting twist can be gleaned from data provided by PricewaterhouseCoopers and the National Venture Capital Association. The PwC/NVCA data is not exactly comparable to that of CB Insights. Instead of tracking investments by round, they characterize each deal as "seed," "early," and so on.
Still, if we look at the average size of a seed-stage deal, we see that it has changed dramatically over the past few years. In 2009, the average seed-stage investment was about $4.6 million. In 2010, the average seed-stage deal was $4.1 million. Get this: In 2011, the average venture-backed company got only $2.4 million at its first round.
That flies in the face of everything we hear about monster rounds for unproven companies. Instead, it shows just how much of an outlier those investments and companies are. Overall, what we’ve got at seed stage is more stinginess, not less.
There may be good reason for that: It doesn't cost as much to start a company as it once did, thanks to readily available cloud services, the ability to hire remotely, and a host of other familiar factors. But those smaller seed-stage rounds--not more progress or profligate spending--could be the reason venture-backed companies need to go back to the well so much sooner.