Revenue - The new startup reality

Fenwick & West just released its most recent quarterly report of the venture capital industry based on a survey of Silicon Valley venture capital firms in the fourth quarter of 2012. The full report can be found here. The new report identifies a number of important trends, several of which have significant implications for startup companies. Probably the most critical finding is the substantial decline in Series A rounds as a percentage of total deals. The report says specifically that “Series A (post seed) was seen by far as the most difficult fundraising round”.

At PBG we see this trend as having a major impact on the way startup companies need to grow and finance their businesses. No longer can these firms expect investors to fund significant expansion of their businesses pre-revenue. Instead, they need to use their Friends & Family, Angel and Seed rounds as a proof of concept of their business model. This may mean selecting one target market and generating a small level of sales rather than attempting to penetrate the entire addressable market all at once. Like it or not, this is new reality in startup funding and companies need to be prepared to take this approach if they plan to seek VC funding for later rounds. The bottom line – startups need to use their early funds to demonstrate that their business concept can generate revenue before they consider soliciting venture capital.

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