2024 Fundraising Guide, Round Size per Stage, Time Between Rounds, Multiple Compression, Founder Fatigue & More
Digesting Insights From the Data
👋 Hi, I’m Andre and welcome to my weekly newsletter, Data-driven VC. Every Tuesday, I publish “Insights” to digest the most relevant startup research & reports, and every Thursday, I publish “Essays” that cover hands-on insights about data-driven innovation & AI in VC. Follow along to understand how startup investing becomes more data-driven, why it matters, and what it means for you.
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Welcome to another “INSIGHTS” episode where we cover the most interesting startup research & reports from the previous two weeks.
We read all reports, studies, and papers about startups and the wider ecosystem, and condense the most important insights for you.
The only source you need to keep up with data-driven startup insights.
Carta European Ecosystem Study
Hot off the press: Following some truly insightful research on the US startup ecosystem, Carta just published the first batch of resources for the European market this morning. They provide valuable insight into round sizes and time between rounds, informing founders what to expect in their fundraising journey. Check out the full analysis by Arik Oslerne and his team here.
Seed and Pre-Seed Dynamics: While the seed market observed a 26% decrease in deals and a 14% drop in median round size from 2022, there's a notable 56% growth in median cash raised since 2020. The pre-seed segment, despite a 30% reduction in opportunities, has witnessed a 40% surge in median cash raised, indicating a tight but fruitful market for those who make the cut.
Seed to Series A: The path has lengthened since H1 2021, with a pronounced acceleration in late 2022 and early 2023. Yet, Series A startups have managed to secure funding in a median of 1 ½ years post-seed, marking the quickest transition in the current cycle.
Series B Challenge: The leap from Series A to Series B now stretches to a median of 760 days as of late 2023, signaling a tougher climb for companies at this stage. Despite this, Series B rounds remain robust, buoyed by a significant influx of capital despite a 40% dip in deal volume in 2023.
✈️ KEY TAKEAWAY
While the timelines for progressing from one fundraising stage to the next have stretched, the amounts being raised paint a picture of a resilient and adapting startup ecosystem. The consolidation in deal volume suggests a more competitive landscape, yet the increased capital for those who secure funding signals strong investor confidence, particularly in emerging technologies like AI.
Multiple Compression: Understanding Valuation Multiples Throughout Funding Rounds
Last week, Michael Ho’s analysis of startup valuation multiples and their decline across funding stages—from Seed to Series E—captured some attention. Observing that valuation multiples naturally decrease with each subsequent funding round may seem alarming for founders, but it's a fundamental aspect of startup evolution. Here's the breakdown:
Rapid Decline Observed: Seed rounds enjoy multiples between 13-53x, but as companies mature they converge toward public market averages around 7x.
Reasons for the Step-Down: The highest multiples at the Seed stage reflect that companies rarely make revenues early on. As they start monetizing, Series A rounds consider commercial aspects, yet price in the high growth momentum. As this drops towards Series B and beyond, multiples compress.
Growth Expectations: For a startup to stay on the venture scale trajectory, it should aim to hit $ 1M (= good sign for product-market fit) within the first 24 months (depending on product complexity) and then grow three times 3x and two times 2x year over year in order to achieve the magic $ 100M ARR within a total of around 7 years from incorporation.
✈️ KEY TAKEAWAY
Understanding these patterns is crucial for startups aiming to navigate the fundraising landscape effectively. The initial high valuation multiples are not just a testament to a company's potential but also a reminder of the steep growth expectations embedded in venture capital.
+ Pro Tip: Early-stage founders should avoid over-capitalization to maintain flexibility and align with realistic growth and valuation expectations. Keep your long-term equity story in mind.
Investor Oversight Intensifies as Market Tightens
In response to a more challenging economic environment, investors are exerting greater control over their portfolio companies, a trend underscored by a recent Orrick report analyzing 350 European equity deals in the past year. Based on that, Amy Lewin from Sifted highlights several key developments in the relationship between investors and startups:
Rise in Consent Rights: Over 95% of equity deals now include consent rights for investors, marking a slight increase from 2022. This shift signifies investors' growing desire to govern critical business decisions amidst market uncertainties.
Return to Founder-Backed Warranties: Despite a trend towards company-backed warranties, 39% of deals in 2023 reverted to requiring founders to personally guarantee their business's condition, a mechanism designed to ensure transparency and accountability.
Board Composition Changes: There's been a noticeable push for investor representation on company boards, with 80% of deals granting lead investors the right to appoint board members. This focus has contributed to larger, potentially more cumbersome board structures, with a significant uptick in startups having six or seven board seats.
✈️ KEY TAKEAWAY
Startups should prepare for more rigorous due diligence and possibly more demanding terms, focusing on building strong relationships with investors that support mutual understanding and trust.
Founder Fatigue: Dealing with the Startup Struggle
A recent survey conducted by Sifted has unveiled a stark reality for startup founders: nearly half are contemplating an exit (not the cool one) due to the mounting pressures of entrepreneurship. The survey, capturing the sentiments of 156 founders, sheds light on the pervasive issues of work-life imbalance, mental health concerns, and financial instability within the startup ecosystem. Here are the key findings:
Mental Health at Risk: 45% of founders rate their mental health as 'bad' or 'very bad', with 85% experiencing high stress and 75% dealing with anxiety in the past year.
Considering the Exit: 61% have pondered leaving their company, with 49% actively considering it within the next year, citing unsustainable workloads and the current fundraising environment as significant stressors.
Physical and Social Toll: The majority reported exercising less, eating less healthily, and spending less time with loved ones. Over half have suffered from insomnia or burnout.
✈️ KEY TAKEAWAY
Founders; Your mental health is one of your core assets, worthy of protection. Take time to connect with friends or family, exercise, and talk about your struggles. You’re not alone on this journey!
Elevating Women in Europe's Startup Scene
In the last decade, the presence of women in Europe's startup ecosystem has notably evolved, with their share of venture capital doubling and the number of women-founded unicorns increasing substantially. Despite these achievements, growth in investment share has plateaued since 2017, an analysis by Dealroom reveals:
Steady but Stalled Growth: Women-founded startups accounted for 9.6% of all VC investment in Europe in 2023, a figure that has remained relatively static since 2017. Women-led startups have become unicorns 35 times in Europe.
Funding Dynamics: Investment rounds in women-founded startups tend to be smaller and at earlier stages, suggesting a funding gap compared to their male counterparts.
Health Sector Leadership: Women are making the most significant impact in health, securing the largest share of VC and number of rounds.
✈️ KEY TAKEAWAY
The progress and challenges highlighted underscore the need for continued efforts to support and elevate women entrepreneurs, ensuring their ideas and leadership are fully realized in the startup world.
2024 Fundraising Guide for Startups
The latest fundraising cheat sheet offers early-stage founders a clear view of the venture capital landscape as of early 2024. Focusing on the freshest data by Carta from the last 75 rounds in each stage since Dec 2023 until today for US tech startups, here's what you need to know:
Angel Rounds: Angel Rounds are seeing $6M valuation caps with $150K raised, resulting in a mere 2.3% dilution.
Pre-Seed: Pre-Seed stages come with a median $10M val caps, $695K raised, and 8.1% dilution.
The SAFEs have it (again): Seed rounds on SAFEs jump to $12M val caps, $1.52M raised, and 15.2% dilution, with priced Seed Rounds and Series A pushing dilution to 20.8% and 19.9%, respectively.
✈️ KEY TAKEAWAY
There is quite a bit of variance in these numbers so founders and investors alike must consider sector dynamics, founder profiles, and fund economics.
Thanks to Jérôme Jaggi for his help with this post.
Stay driven,
Andre
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