TLDR:
Series A fundraising is becoming more challenging in 2024, with higher investment bars and fewer startups reaching it. The median step-up in valuation from seed to Series A has increased significantly. Series A firms are now looking for stronger revenue performance, causing a decrease in the percentage of startups closing their Series A within two years. The root of the problem lies in the high-tide mark for venture capital between 2021 and 2023, leading to unreasonable expectations from Series A investors.
Article Summary:
In 2024, Series A fundraising is posing challenges for startups, with higher investment bars and a decrease in the number of startups reaching Series A. The median step-up in valuation from seed to Series A has significantly increased, indicating a higher threshold for revenue performance. Series A firms are now seeking $2 million to $3 million in ARR, compared to $1 million to $2 million in the past, leading to a decline in the percentage of startups closing their Series A within two years.
The root of the problem can be traced back to the high-tide mark for venture capital between 2021 and 2023, where there were a significant number of seed rounds of more than $5 million, creating inflated valuations and unrealistic growth expectations. This has resulted in two categories of startups seeking Series A funding: pre-crunch startups with generous seed rounds and inflated valuations, and post-crunch startups with modest seed rounds and less growth.
Series A investors are facing challenges in evaluating startups due to the market inefficiencies caused by the divergent performance of startups with varying seed round sizes. This has led to unreasonable expectations from investors and a decrease in successful Series A closures. The article highlights the cyclical nature of the venture asset class and the importance of avoiding procyclical behavior to prevent market inefficiencies and startup failures.
