Does the shrinking time between early stage rounds signal market bullishness or disaster planning?
Winter is coming. Maybe.
That seems to be the message being handed down from the best VCs in the game to their portfolio companies, urging opportunistic fundraising and prudence around spending. We may not yet be at “RIP Good Times”-level panic, like the industry saw in Fall 2008, but the message of caution seems to be near universal.
Given this backdrop, it’s a relevant time to analyze changes in the median number of days between subsequent funding rounds. That is, how long does it take from the time a company closes its Seed round of financing until it closes its Series A, or from its Series to its Series B? That’s precisely what CB Insights has done with its Startup Burn Acceleration analysis. The results are revealing, both with respect to the anticipated financial winter and other macro shifts in the funding landscape.
Last year marked a five year high in the median number of days between a Seed and Series A round at 382 (12.6 months). This trend can likely be traced back to respective growth in the size of the average Seed round over the same period, but also to rising competition for Series A funds thanks to the so-called Series A Crunch. With both of these upstream trends remaining unchanged, it’s notable then that year-to-date Series A timeframes are tracking at just 349 days (11.5 months), a full month shorter than a year ago.
It’s not surprising that both founders and Seed investors would be more focused than ever on getting additional rainy day cash in the bank during this uncertain time. And it’s not as if the increasing fundraising urgency has had any negative impact on Series A valuations -- in fact, the opposite has been true.
A similar trend is emerging between the Series A and Series B rounds, with the year-to-date (YTD) median number of days between rounds falling to 441 (14.5 months), the lowest figure in the last six years. This marks an acceleration of the trend that saw this Series A to B timing fall from from 497 days (16.4 months) in 2012 to 473 days (15.6 months) in 2013. The median duration between Series B and Series C rounds has remained remarkably steady during this time, coming in at at 559 days (18.5 months), 556 days (18.4 months), and 553 days (18.3 months) in 2012, 2013, and YTD 2014, respectively.
Surely, these changes don’t map exclusively to concern over a weakening fundraising environment. As we explained in our earlier analysis of rising Series A valuations, the increasing size and accessibility of global market opportunities combined with the binary nature of startup success has contributed to growth in both valuations and fundraising velocity. But there seems to be evidence that early stage founders and investors are less comfortable in 2014 than they have been in the past with waiting to raise capital, even if doing so would, in most cases, mean more traction and thus more attractive terms.
For evidence that top investors are thinking about this climate change, look no further than Bill Gurley, Fred Wilson, and (Pando investor) Marc Andreessen’s respective treatises on rising burn rates and the massive risk they represent. NEA’s Jon Sakoda recently took this analysis a step further, recommending that VC firms make similar shifts toward capital preservation in light of the changing market environment. The fact that these industry leaders are now talking about this publicly almost certainly means they have been thinking about it privately for many months now, and taking actions to buttress their portfolio companies against these changes.
We remain in the early stages of any market correction, and while we appear to be seeing leading indicators such as shifts in fundraising cadence, larger indicators like valuations and fund availability remain unaffected thus far. Of course, all of this could change in short order.
As disconnected as early-stage startups may seem from Wall Street, that’s likely where we’ll see the first signs if a correction is coming. Until then, the best advice is likely to stay the course but establish contingency plans in case the market goes south. That, after all, is what most of these early fundraising rounds likely represent: disaster planning.