As part of our investment approach, we routinely analyze broad VC deal data, identify key investment trends, and compare that to what we are seeing internally. How startup companies are “labeled” today (pre-Seed, post-Seed, early stage, pre-A, early B, etc.) has certainly complicated this process. This is because in many instances, these labels have less to do with where a company is at in its lifecycle and more to do with external influences like fundraising history or investor PR concerns. Popular maxims like “Seed is the new A” or “A is the new B” may be easy to remember, but they can confuse the issue even further. In light of this labeling concern, how should we analyze industry deal data? Are there key trends we can identify by looking at Seed, Series A and Series B deals that can help us invest smarter? Or at the end of the day, is startup stage nomenclature just semantics?
When looking for interesting trends, we look at “early stage” deals – namely Seed, Series A and Series B rounds – and focus on data points like deal size, valuation, and the age of the company at a certain round. But before we can dive into the data, we have to understand how these deals are bucketed. Pitchbook (methodology[i] reproduced in endnote below) will label a deal as an Angel or Seed round based on press releases and government filings. For Series A’s and B’s (which Pitchbook aggregates together and calls “Early VC” deals), they look at the name of the stock being issued, or at various factors like prior financing history, participating investors, or “company status.” Bucketing massive amounts of deal data is an unenviable task, but what should be clear from this approach is that it is by no means perfect. We have first-hand experience with rounds being called a Series Seed or a Series A based on nothing more than using templatized documents. So, the data must be taken with a hearty grain of salt. With that caveat laid out, what does the data show?
The recent spate of large Seed deals has led many to proclaim that Seed is the New Series A. But is that supported by the data? Maybe. Before diving into the data, here is a brief summary of Pitchbook’s methodology for classifying Angel and Seed deals. The determinative factor is whether the round is done by individuals or funds. If a round is comprised of individuals only, it will be classified as an Angel round unless a press release explicitly states it’s a Seed. If there are funds involved in early rounds, it will be considered a Seed deal unless it’s specifically identified as a Series A. Looking at the data, as far as pace is concerned, Angel and Seed deals have been outstripping Series A’s and B’s since 2011. That looks to continue this year with Angel and Seed deals on track to account for a large percentage of VC rounds in 2018. But the pace of those deals is slowing. The estimated Angel and Seed deal pace for 2018 is on track to be 34% lower than the recent high pace mark in 2015. If Q4 2018 pace is similar to the first 9 months of the year, the overall number of Angel and Seed deals will revert to 2012 numbers. This decrease is a trend that we’ve seen internally, with our top of funnel dropping this year compared to 2017.
While Seed pace may be slowing, Seed deal size is increasing. Through Q3 2018, the median Seed round is $2M, which is nearly 3x the size of the median Angel round ($670K). Median Seed rounds have been steadily increasing since 2013, and if the $2M number holds through Q4, a Seed round in 2018 will be 4.1x bigger than it was 2010. In that same time frame, Angel round sizes have risen only 0.3x.
Yet somewhat surprisingly, pre-money valuations for Seed and Angel rounds are essentially the same – $7M (as discussed below, this number exceeds the median Series A pre-money valuation from 2010). As the following chart shows, Seed and Angel valuations have generally been increasing at the same rate since 2011. But with the dramatic increase in round sizes since that time, median dilution for a Seed round far exceeds that of an Angel round (22% compared to 8.5%).
To summarize, Seed pace is down, Seed round sizes are up, and pre-money valuations are at Angel levels. There may be a variety of explanations for these trends, but one factor is the “institutionalization” of Seed funds. As traditional LPs enter the Seed market, they not only provide more dry powder, but they also impose a higher expectation on returns. The response from funds has been to write larger checks and institute ownership thresholds. This explains why round sizes have dramatically increased while pre-money valuations have stayed at Angel levels.
So, is this enough to say that Seed ($2M on a $7M pre) is the new Series A?
A number of interesting trends emerge when looking at Series A deals. First, the median age of a Series A company in 2018 (3.7 years) is much higher than it was in 2010 (2.4 years). This increase looks particularly dramatic when compared to 2018 Series D+ companies who have roughly the same median age that they did in 2009 (8.4 years vs. 8.3 years).
Like Angel and Seed deals, the median deal size for an “Early VC” deal (A and B combined) has increased significantly. In 2010, the median Early VC deal was $2.6M, and this year it is on track to hit $7M. That equals a 2.7x increase, although because the data includes both A’s and B’s it is difficult to glean any significant insight from this information. Unsurprisingly, median pre-money valuations have also increased. The median Series A pre-money in 2010 was $6.2M, which is lower than the 2018 median pre-money valuations for both Angel and Seed deals. Today, the median Series A pre-money is $20M, a 3.2x increase.
While this large dataset shows Series A are getting bigger at higher valuations, this is especially true when you focus only on top tier VCs. Looking at 11 of the most active US VC investors in 2018 (NEA, Kleiner, Khosla, a16z, GV, GC, Lightspeed, Bessemer, Accel, Founders Fund and Sequoia), the early stage round sizes and valuations are significantly higher than the broader industry medians:
Median Series A Round: $14M
Median Series A Post-money: $48M
Median Series B Round: $25M
Median Series B Post-money: $116M
For Seed deals, the data shows (a) a slowed deal pace, (b) a steady and continued increase in valuations (although this increase parallels the increase in Angel valuations), and (c) a dramatic increase in round size compared to Angel deals, with year-over-year Seed round sizes increasing at a much faster rate than Seed valuations. This has led to significant early founder dilution that makes Seed deals look a lot like 2010 Series A deals. For Series A deals, it is taking longer for companies to raise, and rounds and valuations are increasing at a higher rate than even Seed deals. This is especially true for top tier VCs. These funds, significantly larger than they were a decade ago, naturally need more traction from potential portfolio companies to de-risk and justify a $14M median “Series A” deal. The takeaway for founders is that they need more runway to get the traction necessary to justify the top tier Series A deal, and it appears that entrepreneurs will accept greater dilution at the Seed stage to secure that capital.
The data cited above clearly tells a story…we’re just not sure it’s a story that truly matters. As we mentioned at the outset, the datasets regarding VC rounds are messy, arbitrary and by no means uniform. Whether a round is classified as “Angel,” “Seed” or “Series A” – even if a round should be considered “early” or “late” – can be based on factors wholly unrelated to the actual stage of a company. To that point, consider this example: Investor A participates in a $14M Series A round for a consumer internet company with significant traction and employees on the ground in three geos. Investor B invests in a $2M Series A round for a pre-revenue enterprise company without an office or employees. Both investors receive stock certificates proving they own “Series A” shares, but can we honestly say those two companies have the same needs? It would be foolish to say yes. Yet, when analyzing VC deal trends, the default approach is to put these deals in the same bucket. We think what you call a round is less important than how a company gets to the next inflection point. We will continue to look for companies who, with $1M to 5M in capital, can get to a place where top tier, $500M+ VC funds are fighting over the next big round. If we can identify and win those deals, it doesn’t matter what the convoluted VC alphabet soup says our round should be called. We can’t give up labeling companies entirely since we’ll continue to look for companies that are “post-angel” or “post-Seed,” but there will be instances where we jump on a pre-product infrastructure investment if there is a proven team and a de-risked go-to-market strategy. We saw that approach work to great effect in our time at Andreessen Horowitz, so we’re not going to take offense if Pitchbook decides to classify us as part-time enterprise Seed investors. If there is one actionable takeaway from the data above, it’s from our recognition that top tier firms need more traction than ever to invest in companies. With benchmarks getting more difficult to hit, we need to be flexible and patient when helping companies towards that next big round. Taking this approach, regardless of what the lawyers want to call that kind of investment, will better align us with the interests of founders, put our portfolio companies in stronger fundraising positions, and allow us to generate larger returns for our investors.