Report shows Series A crunch getting more extreme

Companies are having a harder time raising Series A funds

It looks like the Series A crunch is getting…crunchier. A report released Monday by Fenwick & West reveals that while seed rounds are booming, tech companies are having a harder time than ever raising Series A rounds.

In a comparison of companies that raised seed rounds in 2010 and 2011, 45% of those that raised funds in 2010 went on to receive Series A funding by the end of the following year, while only 27% of those that raised funds in 2011 went on to receive Series A funding the next year.

Between 2009 and 2012, the number of seed deals increased 270% to 1,749 deals in 2012, up from 472 in 2009. Meanwhile, Series A deals have also increased, but at a much slower rate. In 2012, there were 692 deals, compared to 418 in 2009.

Interestingly, while companies may be having a harder time landing Series A financing, the Fenwick & West report shows that many are simply raising follow-on seed rounds. While only 12% of companies that raised seed rounds in 2010 went on to raise follow-on seed rounds the next year, a full 23% of companies that raised seed rounds in 2011 received follow-on seed funding the next year. As the report’s authors note, the follow-on funds provide a company with “a longer runway to hopefully demonstrate the traction necessary to obtain Series A financing.”

There’s also some evidence that the growth of “acqui-hires” is increasing as talented teams are coming together and raising seed rounds, and then getting acquired before they raise Series A rounds.

Additionally, it looks like VCs are displacing angels in the seed funding stage. In 2009, 43% of seed deals were led by seed funds, 31% were led by angels, and 26% were led by VCs. In 2012, 46% of seed deals were led by seed funds, 20% were led by angels, and 34% were led by VCs.

"These results show a continued strong and diverse seed stage financing environment in the internet/digital media and software industries," said Steve Levine, co-author of the survey and also a partner in the Fenwick & West Start-ups & Venture Capital Group.  "However, the decreased percentage of seed funded companies that had received Series A investment by the end of the following year emphasizes the importance of companies demonstrating traction with the seed investment they receive, in order to obtain Series A funding."

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