It’s not you, it’s the post-seed gap

Record numbers of startups are failing to advance from their seed round to Series A. This glitch in the funding ecosystem is older than you may realize. Between 2009 and 2012, if 100 startups raised seed money, an average of just about 30 would secure a Series A, according to a new study from Mattermark. For founders, those are rough odds — and they only get tougher over the most recent few years.

Here’s the good news: It’s not you, it’s the post-seed gap. And some more good news: By changing your funding strategy, you can avoid the fate of post-seed startups that die for no good reason.

The post-seed gap is not a reflection of the quality or types of startups entering the market. The truth is that Series A funds grew unexpectedly large, so deal size inflated, too. As Mattermark reports, the average Series A round size for Y Combinator startups increased five-fold between 2008 and 2014, from about $2 million to $10 million. Preqin calculates that the average Series A round was $12 million in the first half of 2016.

Bigger funds write bigger checks, but not necessarily more checks than they used to. Series A funds with $800 to $900 million feel pressure to make headline-catching, risk-averse deals. So, Series A candidates must hit lofty milestones. Once upon a time, $1 million in revenue was enough to raise an A round. Now, $5 million is a common bar.

Most companies can’t hit $5 million in revenue with $1 to $2 million in seed funding. The result is that Series A funds make bigger investments in fewer startups. But many companies that got to $1 or $2 million in revenue on that initial $1-2 million deserve more time, as they have achieved non- trivial product market fit.

The changes in Series A funding sources have created an underserved cohort of entrepreneurs who are frustrated, stuck and scrambling. They have no reason to shut down, but they still struggle in the post-seed gap.

So how do you avoid this trap? Here are a few suggestions.

Raise bigger seed round(s)

In April 2014, I argued that seed is a process. Data from CB Insights shows that the average seed deal was $1.1 million back then. Now, I advise tech startups to raise at least $2.5 million in seed money.

Your seed process isn’t over until you’ve raised upwards of $2.5 million.

How you raise that $2.5 million depends on the capital efficiency of your company. If you build hardware or IT infrastructure, you may need one big injection of capital to create your product. If you make consumer tech, you can probably raise multiple seed rounds that add up to $2.5 million or more. Use AngelList to either pump up your seed round or complete multiple cycles of funding.

One company that raised a large seed round was Carbon Health (disclosure: I’m an investor). CEO Eren Bali, co-founder also of Udemy, knew he was going after a massive opportunity in a difficult-to-navigate market. As a result, a larger seed round made tons of sense for him.

Form a larger syndicate

Relying on just one or two seed funds increases your odds of starving to death in the post-seed gap. In addition to a VC fund, bring on at least 10-12 angels who contribute roughly $100,000 each. Again, try using AngelList.

Diversifying your investors is important because seed funds are unlikely to provide follow-on funding if you get stuck in the post-seed gap. They give a little money to a lot of startups expecting only a few to deliver massive returns. Their business model is to fold quickly on any questionable hand.

Big syndicates do save startups in the post-seed gap. WedPics provides a perfect example. When the company’s seed funding ran low, the founders returned to angels who had invested because of their strong personal belief in WedPics’ potential and mission. Not long after this top-off Bullpen led the post-seed round.

Raise a post-seed round

If you have existing angels, product-market fit and plans to raise a large Series A within 12 months, consider doing a post-seed round. Some people call it seed prime, seed extension, top up, build round or pre A. To be clear though, the post-seed round is not a bridge.

The post-seed round isn’t necessarily an alternative to raising extra seed money or expanding your syndicate. Those two pieces of advice might lead you to a post-seed round, or they might get you to a Series A. If you don’t have $5 million in revenue and a $10-$15 million Series A is out of reach, think post-seed.

Now it’s on you

I empathize with entrepreneurs who have to fold brilliant startups for a lack of funding. Now that you know about the post-seed gap, don’t repeat others’ mistakes. Your seed process isn’t over until you’ve raised upwards of $2.5 million. If that gets you to a Series A, congrats. If not, talk to investors who do post-seed funding.