As we enter 2024, there are growing concerns about the state of Series A fundraising. The bar for investment seems much higher and fewer and fewer startups are reaching it.
This is a problem for founders and investors Jenny Fieldingmanaging partner Ventures in all places, who said: “Every Seed Investor Dilemma: All my Series A buddies want to satisfy with my corporations early! For all my corporations, it’s too early for my Serie A buddies.
Adding some data to this, we are able to see that the median valuation increase from the initial position to series A not exists $19.5 million in Q1 2022 to $28.7 million in Q1 2024.. Series A corporations appear to be looking for much higher revenue performance and their goals are: $2 to $3 million in ARRin comparison with $1-2 million just a few years ago.
As a result, 31.8% of seed startups in the first quarter of 2020 closed their series A inside two years, this percentage decreased to simply 12% for the first quarter of 2022 – which should worry everyone.
Why are series A investors so much more demanding?
Today’s Series A investors are looking at startups that set seed between 2021 and 2023, which points to the root of the problem: it covers the peak period for enterprise capital inflows in the second quarter of 2022.
For example, in 2021, there have been 1,695 seed rounds price over $5 million, in 2022 this number increased to 2,248, and then in 2023 it dropped to 1,521. For comparison, in 2024 there have been only 137.
As a result, two categories of startups have emerged that want to boost their series A today:
- Startups before the crisis which raised generous seed rounds and stretched capital so far as it could to grow to inflated valuations.
- Startups after the crisis which produced modest seed lots on more reasonable terms, with shorter runways and less pronounced growth.
Strictly speaking, neither is more attractive than the other; the first group has less risk, the second offers more advantages, and each are adapted to it current market realities. This should not be a problem for investors, provided they’ll tell the difference between the two.
The cost of market inefficiency
Venture capitalists take a market-based approach to investment decisions, which implies taking a fairly broad look at revenue trends and price rounding to find out conditions, e.g., a typical Series A falls inside certain performance and revenue valuation boundaries. While this approach will be useful and effective under ideal circumstances, the last few years have been far from ideal.
Without distinguishing between the two cohorts, investors are now looking at the performance of Series A candidates that have spent greater than $5 million on the war chest over two to three years of growth, along with the valuations of candidates that have raised around $2 million to prove scalability. It just doesn’t measure up as an average and hence the expectations are unreasonable.
The breaking wave of zero rate of interest madness
Fortunately, this is temporary. Series A investors face this challenge today because of what happened two years ago. In about 4 years, it can be the turn of Series B investors to take a look at an oddly diverse class of startups. In six years, when this hits Series C investors, the ripples must be hard to detect.
What frustrates many is that this is a phenomenon that is, in most cases, avoidable. Yes, the enterprise asset class is cyclical, but enterprise investors don’t have to rely on these cycles with annoyingly procyclical behavior. About the same as many startups closed in Q1 2024 as throughout 2020. Closed corporations. Job lost. The dreams are over. And this is not because of rising rates of interest, but moderately because of the way enterprise capitalists behaved when rates were low.