Good news! If you survive the Series A and B rounds, there's plenty of life at C

By Sarah Lacy , written on November 29, 2012

From The News Desk

As we wrote yesterday only a tiny 20% of companies who have raised a seed round of funding in the last year are likely to graduate to a formal institutional round of venture capital, the Series A.

We broke the math down yesterday: Some 2,000 firms get seed funding a year, and less than 100 VC firms are active enough that they have put $1 million or more to work each quarter for at least four quarters. And those VCs typically only do a few Series A deals a year.

Not pretty, but as we wrote yesterday, if you're going to have 80% of companies going under, it's best to happen at the seed level.

The pain doesn't stop at the A: While the bulk of the shakeout will happen between seed and Series A, the competition for B rounds is even tougher. There's no more mysterious and vague "traction" that can save you at the B. You're going to need some semblance of a business.

But, good news, startups: It appears A and B are the Valley of the Shadow of Death and if you can survive those, C and D rounds get a whole lot easier to raise. At least, that's how it looks now, according to valuation numbers released this week by the law firm Cooley, as reported on PEHub.

No surprise: In the third quarter, there was a softening at the early stages and the growth stages, aka those pre-IPO mega rounds. But competition for companies who could make it to a C or D stage was still pretty good.

When it comes to A and B rounds, the number of "up rounds"-- or when companies get a higher valuation in their new deal than they did in the previous one-- fell to 71% of all deals down from 77% in the second quarter. This backs up what a lot of investors are saying anecdotally; that the reckoning isn't showing up in valuations quite yet, but it's starting to. Specifically the average pre-money valuation for an A slipped from $8 million to $7 million and the average pre-money valuation for a B slipped from $35 million to $22 million.

But the average pre-money valuation for a Series C deal actually jumped from $55 million in the second quarter to $70 million in the third quarter. Meanwhile, the average pre-money valuation for a Series D held steady at $100 million.

To get this data, Cooley looked at 81 transactions representing $960 million in investments. They actually showed an increase in the number of Series A deals, even as the overall volume of deal making was down in the quarter. That's not a surprise as many worried companies facing this crunch are aggressively looking to extend their runways now.

With any quarterly venture capital survey, you have to be careful to rely too much on the trend lines. This is, after all, a business that makes 95% of its returns from the outliers. If a big deal happens to close in a quarter, it can greatly skew the numbers.

Cooley also noted an increase in harsher terms like tranches and pay-to-play provisions. Expect this to intensify for shaky deals going into 2013.