The Changing Face Of Early Round Funding

Much focus has been spent (and column space been given) to the ever-expanding valuations handed off to maturing — or nearly mature —startups as part of their supercharged late funding rounds.

Given the sheer scale of all that funding, that makes sense. As of the writing of this article, there were 93 American unicorns (Americorns?), firms with valuations north of $1 billion. The unicorns’ total value comes in at a staggering $322 billion — slightly more than Amazon, a bit less than Microsoft.

In fact, given recent market conditions with planned IPO after planned IPO in the U.S. and around the world going on hold as 2015 enters into its final lap, the attention makes particular sense.

While big exits into the public markets seemed easy enough to take for granted when the year was new, the latter half of the year has brought an unpredictable stock market and international economic conditions that remain profoundly unsettled. That potentially translates into IPO exits not being feasible with public investors, facing somewhat uncertain conditions, less enthused to drop the same types of dollars and valuations that venture capitalists and private equity firms are.

However, with all the focus on the end of the road for startups — or at least the end of the road for startups as startups — it is easy to miss that the sort of funding inflation that is now making the public markets so nervous in late rounds is not even remotely contained to them.

The face of early funding is changing and has changed in the last few years as much as the face of late stage funding, with “seed round” and “Series A” meaning something quite different — and being much more cash intensive than ever before. What is life in the new early round like?


The Series A

As all startups are different, assigning an average price for Series A funding is tough.

Matternack’s data for 2014 indicated the average Series A by median was $5 million, with a mean of $7.2 million (with firms out of Y-Combinator clocking in with $10 million on average). Accel offered up the similar figure of $6.9 million for the same year.

Googling “Series A Funding” would lead one to a very different average these days. Out of 8 separate firms that recently made headlines with their Series A rounds, five had values north of the highest non-YC $7.1 million mean figure. The biggest funds go-getter, online booking platform for college students Uniplaces, snapped up a whopping $24 million. Of the remaining three, two were within last year’s average range and only one was below.

And, according to First Round Partner Josh Kopelman, that bias in Series A toward reporting the whopping rounds is exerting upward pressure that exists outside questions of merit.

“Founders often see a handful of data points and believe that a new normal exists. For example, a given founder sees their friend raise a large Series A and sees a few tech press articles on large Series As and they immediately believe they can do it, too,” Kopelman noted.

“We’re seeing startups seeking larger and larger A rounds. It’s pretty clear that the market can’t accommodate it, yet we keep seeing companies setting out to raise $15 million to $20 million Series A rounds just a few months after they’ve raised their seed round.”

And those seed rounds are also going up in value, Kopelman notes, which is part of the problem. Founders are finding it so simple to raise a few million in that initial round that they enter the formal Series A unprepared or underprepared for the new scope of the conversation.

“I talk to a lot of founders about their Series A experience, and more often than not they say they were shocked by how hard it was to get a term sheet, how long the process took, and how much more complex the conversations got,” Kopelman said.

This, Kopelman notes, are the underpinnings of the so-called Series A crush. New firms are coming out of the seed round running after an inflated Series A before they ought.

But, noted Michah Rosenblum of The Founder Collective, those enhanced seed rounds may actually be a part of the solution for Series A crunch — not actually the root of the problem.

The Extended Seed

Rosenblum’s argument is that the seed extension is essentially the product the market created to heed a “train wreck of epic proportions” that the feedback loop between seed and Series A funding levels was setting up to create.

Writing for Venture Beat, Rosenblum notes that seed extensions are unlike a classic seed that tends to favor new participants joining the funding party. Seed extensions can be for quite significant sums, often measured in the millions.

The extensions come both as a response to the emergence of more seed founders in the market and the changing priorities of A and B shops, which are growing larger and looking to spend more in hopes of bagging a unicorn in the making early on.

“[These firms] seem unwilling to take the risk associated with a promising seed-funded company that hasn’t quite nailed product/market fit,” he wrote. “In a sense, there’s a bit of a barbell in the market today.”

A market, he notes, that is just fundamentally changing, particularly when it comes to early investments.

“Today, A rounds are increasingly a sort of early growth capital,” he notes.

Whether talking about seed, pre-seed, seed extension and/or whatever term of art one is applying, the point he notes is that startup funding itself is simply getting more and more finely chopped as a process.

Taking part in that process, particularly when it comes to calling for more cash, may have a certain stigma associated with it today, Rosenblum notes. But ultimately, as it becomes more common, it will also simply become expected.

And it can likely be expected to keep pulling the prices of startup investing up, taking valuations on the rocket ride with them. What that will mean further down the line, particularly at the end — where concerns about top-heavy valuations are becoming increasingly sharp — remains to be seen.

Investments In The Week of Nov. 6, 2015

And we thought $750 million was a slow week! Would you believe that investment activity totaled $150 million to start the month of November? That’s how much activity has slowed — not to a trickle, but to a drip. The deal-making seems to limp toward, well, nothing, if this is the pace that will be on track for the remainder of the year.

Broken down by broad category, we can see that FinTech slightly dominated the activity, with a scant majority at 54 percent.

And drilling down to the week’s individual names, the biggest deal we found came to Meili Jinrong, which received $65 million in financing, led by Bertelsmann Asia Investments. Additional investors included Morningside Ventures and GX Capital.

Next on the list, though quite a bit down the line in terms of value, comes via the Expansion Capital Group, which provides small business loans, and which opened up a $25 million credit facility via funding vehicles that stem from Bastion Management and Northlight Financial. That credit pact is earmarked for lending growth, and, as the firm noted, doubling its lending capacity.
To see just how precipitously investments have dropped, it’s instructive, perhaps, to see just how much things have quieted down – and here’ s a snapshot of B2B, on a rolling basis, weekly, excluding large deals.

So, from a robust $600 million weekly tally, we’ve dropped to just about nothing. Time will tell if investment activity resurges. But in the meantime, the holidays will be fast approaching. And that means, perhaps, more torpor.

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