If what you mean by “crunch” is more Series B-worthy companies going unfunded because of a diminishing number of financings and opportunities, then no, we are not seeing a Series B crunch. Instead, we’re seeing a normal supply and demand issue play out that historically has resulted in about half of Series A companies becoming Series B companies. The Series B landscape actually looks very healthy right now for startups.
By the numbers, companies are getting better terms at the B stage, such as higher valuations and larger deal sizes, and they’re giving up less equity to boot. We at PitchBook are not seeing the kind of investors’ market we would expect to see if the Series B crunch was a real problem.
The fourth quarter of 2013 was one of the healthiest quarters (by count) for the series since the financial crisis. Valuations are also high at the Series B stage; for the past two quarters, the median pre-money valuation hovered around the $30 million mark, substantially higher than the $22 million seen in 3Q 2012. Round sizes are also going up. The median Series B round raised in 1Q 2014 commanded $10.5 million, the highest for a single quarter going back several years. The past four quarters have all been on the high end for round amounts, including a $9.6 million median in 2Q 2013 and $8.65 million median the following quarter. Looking back at numbers from 2009 to 2011, the median Series B round amount ranges from $6.1 million to $9.0 million.
Moreover, the median time between raising Series A and Series B rounds has actually gone down, shrinking to 16 months from the 18 months it was holding steady at between 2011 and the latter part of 2013. Burn rates certainly play into this, but Series A round sizes are up, so any increase in burn rate should be fairly muted by this development.
Concern over the Series B crunch (or even Series A crunch) stems from the fact that seed rounds have exploded in both size and number in the last few years, producing more candidates for future funding, while also creating a perception that fewer worthy startups will get the funding they need. There’s a limited supply of VC dollars available for investments, but it doesn’t appear that there is a shortage right now or on the horizon.
As of today, we’re tracking roughly 2,200 companies that have picked up a Series A investment but haven’t been acquired or received follow-on financing. Some of those companies, particularly those financed in 2010 or earlier, may not need follow-on financing, and have gotten by on their own. This “inventory” of 2,200 series B candidates has held flat the last couple of years and actually is on track to decline this year. The pace at which these companies are getting funded is also proving to be right on track with the 10-year historical average, again suggesting that raising a Series B round is tough but that companies are not worse off today than they historically have been.
For the startups themselves, raising capital no matter what is a difficult endeavor, but companies that are worthy of Series B capital are still going to get funding. That hasn’t changed in the last few quarters, or even years. The startups either perform at a level that justifies today’s lofty Series B investments, or they don’t.
Download the full Venture Capital Monthly June/July 2014 edition here.
Peter Fogel contributed to this article. Featured image illustration by Jennifer Sam.