Lost Leverage & the Captains of Crunch

Below is the ‘Tip of the Week’ from Podcast Ep53: The Path to Series A, Part 2 (Semil Shah)


In the most recent interview with Semil Shah, he talked about how entrepreneurs are dictating the amounts that they raise, the valuation caps and even the timing through the use of rolling notes. This is largely driven by the proliferation of capital at the seed stage. We’ve all heard many of the talking heads arguing if the Series A crunch does or does not exist. Instead of focusing on all the orphaned startups that won’t receive A round funding, consider instead the effect this is having on the A round negotiations for the startups that do get funded.

To get some clarity on this, let’s start with some of the numbers. 


The Rise of Seed

First off, let’s start with the overall seed VC funding levels, which hit a five-year high in 2014, reaching $1.3B, This total dollar figure was a 49% increase vs 2013.



But, how does this compare w/ Series A and B? Seed funding may be up significantly, but if there is the same corresponding increase at the A and B stage, then it should remain in relative balance.


A & B Follow-on Success Rates

Tom Tunguz did an analysis, based on Crunchbase data, that analyzed the success rates of Seed funded companies in obtaining Series A and B capital.

As the graph shows, from 2006-2013 the mean success rate to raise an A after a Seed is 27%, to raise a B after an A is 35%, and that results in 11.5% of seed-funded companies that eventually get a B.

However, as Tom discloses, he published this analysis in early 2014 and included data from 2012 and 2013. This results in artificially low percentages. Imagine a startup that closed their seed round in November of 2013. This analysis, published a few months thereafter, counts this startup as one that did not raise an A round and a B round. So, any companies receiving their funding in the most recent years would look like they failed to raise follow-financing wherein they may not have even begun raising the next round yet. This analysis also excludes successful outcomes/exits aside from continued fundraising, which makes the numbers look overly pessimistic.

Tomasz sates in his post… “Despite the noisy data, it’s reasonable to conclude the financing market has become more competitive, driven by an increase in the total number of startups raising seed capital and a relatively constant inflow of capital into venture capital.”

Even when I remove the last two years of data and account for non-funding successes, this still illustrates a clear trend in the decline of seed-funded startups that receive a follow-on.

CB Insights conducted a similar analysis, over a more limited period from Q1 of 2009 – Q2 of 2011. While they display the data after that period, they removed it from the analysis for the reasons just mentioned in the Tunguz article. Over this period, they found that 39.4% of seed-funded companies received a follow-on. Nearly four companies in ten.



But with the limited time period covered in this analysis, it’s hard to see if follow-on success is trending up or down.

Another great graphic on Seed -> Follow-on is below, also capturing M&A Exits.  Unfortunately, this again looks at a very limited time-period (2009-10) that doesn’t paint the full picture or give a sense for how follow-on financing is trending.

VC Funnel by CB Insights


Back in early August, I was reviewing these numbers and was digging for a more current analysis. Coincidentally, Danielle Morrill of Mattermark was looking for column ideas and asked on Twitter if anyone had ideas for graphs to make.

I chimed in and requested “% of seed financings that receive series A funding within 2 years… Multi-yr trend would be great”

and, as is typical w/ Danielle, a few weeks later she delivered with a robust and detailed report.

The first graph here shows the incredible spike of seed deals over recent years, at growth rates that far exceeded increases for later stage rounds. Seed funding in 2014 and ’15 appear to have slowed down, but the trend still far out-paces that of later stages.


You’ll notice the absolute number of deals here differs from the CBInsights data. I believe this is due to CBInsights including VC deals only whereas Mattermark is looking at all Seed deals conducted by both VCs and Angels.

It was Danielle’s next graph that truly got to what I was looking for. Here she charts the “Seed to A Graduation Rate” ie. the percentage of seed-funded startups obtaining Series A funding.



After peaking at 45% in 2009, there’s been a steady decline. As with the other studies, it’s best not to look at the two most recent years of data, as those startups may still be raising an A. If we draw a line at 2012, as Danielle has done here, the percent has dropped to 30%. While five years ago, we were in a climate where nearly one in two seed-funded startups received a Series A, we’re now looking at less than one in three.

The Impact on Follow-on Valuations

But, do economic principles bear-out? Has the supply-side increase in seed-funded startups transferred additional leverage to the Series A and B investors? It seems the best way to determine if Semil was right and A/B investors have increased their negotiating power is to look at valuations.

We all know that valuations have increased, but are they increasing at a higher rate for the seed stage, than for later rounds?

According to the included chart from Pitchbook, over the period from 2010 -> 2013…



  • Median, Seed, pre-money valuation has increased from $3.2M to $5.2M, a 62.5% increase
  • Median, Series A, pre-money valuation has increased from $6.8M to $8.9M, a 31% increase
  • Median, Series B, pre-money valuation has increased from $21.1M to $25.7M, a 22% increase

So, over the recent four-year period, founders at the seed stage have been able to command a 63% premium to previous levels vs a corresponding 31% increase at the A and only a 22% increase at B.

If each of these valuation amounts had increased in equal measure, it would be reasonable to conclude that the balance of leverage has remained constant, despite the jump in seed activity.  But that’s not what we’re seeing here.

Is the Series A Crunch real? Is there an increasing concentration of investor-leverage at the Series A and B stage? Take a look at the numbers and you be the judge.

Thanks again to Semil Shah for his insightful and candid thoughts on the Path to Series A. Until next time…