What’s up with the Series A?

On the one hand, $10-25M rounds; on the other, a “Crunch”

A couple months ago, I was chatting with a first-time entrepreneur who had recently raised a couple million dollar seed round after graduating from a well-known startup accelerator. He told me of his fundraising plan:

I’m guessing I’ll raise a $15-20M Series A in about a year… by that point, we’ll have shown product/market fit so we’ll be ready to step on the gas.

5 years ago, that wouldn’t have been “the plan.”

Series A rounds used to be different. The prevailing view back then was that the Series A, defined for our purposes as the first round of institutional venture funding for a technology startup, was typically a $2-6M round after which investors would own 10-30% of the company.

When Twitter raised a $5M Series A in July 2007, it had 300K users after usage had spiked to 60K tweets per day during SXSW in March 2007.

When Stack Overflow (now Stack Exchange) raised a $6M Series A in October 2010, it had grown to 7.1M monthly unique visitors in less than two years.

There are countless examples of the “standard” $2-6M Series A from 2007-2011 even for companies with significant usage or sales traction.

The $10-25M Series A

Yet something seems to have changed over the past year and a half.

Snapchat raised a $13.5M Series A in February of last year. RapGenius raised a $15M Series A in July 2013. Clinkle raised a $25M Series A pre-launch. Already in 2014, Teespring has raised a $20M Series A, StyleSeat raised a $10.2M Series A, Oyster raised a $14M Series A, Medium raised a $25M Series A, and Coin is rumored to be raising a $15M Series A.

Is this the new normal? Are entrepreneurs expecting to be able to raise larger Series As, and are investors willing to invest $10M+ at the Series A stage?

By analyzing Crunchbase data, I found that there were 102 Series A rounds between $10-25M in size in 2013, up from 35 rounds of such size in 2009.

Note that this data is limited only to US-based companies, excluding companies tagged as “biotech,” and is by no means complete. For example, it excludes “Series A” rounds that may be tagged as “Venture Round” or another classification other than “Series A” in Crunchbase.

The data indicates that there’s been a clear increase in the number of large Series A rounds being raised by companies, particularly over the past year, which confirms the anecdotal evidence that we’re seeing in the venture capital industry.

So what about the Series A Crunch?

There was much talk last year about the Series A Crunch. The number of seed- and angel-funded companies has exploded over the past few years, and the thesis behind the Crunch is that many of those companies are not able to raise a Series A given the lack of increase in investors and dollars going towards Series A rounds relative to seed rounds.

How can it be that some companies are facing the Series A Crunch while at the same time there are more $10-25M Series A rounds being funded by investors than ever before?

A further analysis of Crunchbase data shows that the average Series A round has actually declined in size over the same time period as the number of $10-25M Series A rounds has increased in number. The average Series A round size peaked in 2011 at $6.41M and declined to $5.82M in 2013. The median Series A round has remained at $3M for the majority of 2009-2013.

Note that this data is limited only to US-based companies, and is by no means complete. For example, it excludes “Series A” rounds that may be tagged as “Venture Round” or another classification other than “Series A” in Crunchbase.

Clearly, the $10-25M Series A, while a reality for more companies than before, is not the reality for all.

The reality is that the Series A Crunch has led to a Series A Bifurcation.

Series A Bifurcation: companies with momentum can raise $10-25M rounds, but companies without it raise much less. The median Series A round size in 2013 was $3M.

Companies with factors such as traction as exhibited by usage growth or revenue growth, or an all-star team, or an insanely compelling story are raising larger Series A rounds than in the past. But companies without such momentum are finding it harder to raise a Series A, often having to raise smaller Series A/“Seed+” rounds, or bridge rounds, or facing the reality of having to shut down.

What does this mean for entrepreneurs?

While there are many high profile companies raising $10-25M or larger Series A rounds, this is not the new normal for all entrepreneurs.

If your company does not have significant momentum behind it, you may face the dreaded Series A Crunch. And even if you do have traction and are able to raise a large Series A, be careful. “Maximizing runway can minimize success.”