Series A Crunch - No Longer Just a Myth

Investing data from 2012 now supports the increasingly common perception that Series A funding is getting hard to find. In a recent TechCrunch article by Jeff Jordan, partner at Andreessen Hororwitz and former OpenTable CEO, he points out that historically the annual number or Series A funding rounds has been about the same as the number of Seed funding rounds. However, in 2012 the number of Seed rounds was 2.5x as great as the Series A rounds leaving many startups scrambling for a follow on infusion of cash. Angel investors now provide a substantial portion of startup seed investments. While most entrepreneurs are glad to see that angels have stepped in to fill the void left by the retreating VC community they soon learn that their investing philosophy is not the same as that of the venture capitalists. While most VCs will typically reserve an amount equal to their initial investment to provide follow on funds to a startup, angels are typically “one and done” as they prefer to diversify their risk by spreading their investments around to other companies. Further adding to this challenge, VCs have raised the bar for their investing criteria. Specific milestones set for revenue, profitability and rates for growth that were more typically found in Series B rounds are now hurdles for an initial investment. As Jeff points out in his article, Andreessen Horowitz has made a number of recent Series A investments in startups that were generating multi-million dollar revenue rates from their seed funding, resulting in higher expectations for similar future investments. His recommendation based on these observations is fairly straightforward although not necessarily easy to achieve. Startups need to assume a longer time horizon for their seed stage and increase their amount of targeted funding for this round accordingly. This is because they need to have “multiple months of metrics moving in the right direction” before they approach VCs for their next round of funding.

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