2015 was a banner year for startup funding with over $2.3 Bn invested across 1000 deals.
Things are much slower in startup land and startups are complaining about how they’re finding it difficult to raise Series A. We lay out below, our analysis on what’s happening and why.
Our first finding is that the Series A crunch is real. According to VC Edge, Angel deals have increased more than 5x from just ~130 in 2011 to over 700 in 2015, following a steady upward trajectory. Whereas, the Series A deals have remained fairly range bound and the peak was probably in 2012/2014 where ~86 companies got funded. Series A is a much more deliberate round and can definitely be considered as a very important milestone for a startup. The seed to Series A conversion for a mature market like the US is 35% (average for the 2009–12 vintage source: Mattermark).
In India, driven by the meteoric rise of seed deals (50% CAGR, 2011–15), the Series A conversion has dropped steadily from 34% in 2011 to 22% in 2014 to just under 10% in 2015. Data suggests that ~ 85% of the Series A rounds are raised within two years of seed funding. This is in line with the general thought process of Seed funding as well, wherein seed investments are expected to give a startup a runway of 12–18 months and a bridge round might help extend it by a few more months (hence, we might not see the conversion for 2015 to be very different from what it is, currently).
Going a step further, we decided to analyse the portfolio, by the type of seed investment that the startup received. This is where the seed to Series A conversion metrics gets really interesting. Across the years, around 60% of the companies seeded by a top tier VC seem to convert to a Series A. While other fairly large VCs reveal a conversion of 30% to 45%.
(One caveat here is that some of the seed deals by VCs might not be reported publicly and hence the conversion rate could be overstated; it still nevertheless, should be higher than the average).