If you are building a startup today, it’s likely harder for you to raise money than it was a year ago. New data makes it clear, however, that not every startup stage is feeling the same headwinds.
A lack of uniformity in the startup fundraising climate is not novel. We have seen, variously, a Series A crunch at one point, and a Series B crunch at another. Today, however, we’re seeing something different altogether: A Series C crunch.
This does not mean that all early-stage rounds are in fine shape or that later venture rounds are healthy. Nearly everywhere you look, there are declines in venture activity that founders must contend with. But new data from Carta indicates that Series C is the current, and real, bottleneck in Venture Land, which means that this is the new crunch point for startups looking to raise their next tranche of cash.
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The data point isn’t that surprising. It’s somewhat common wisdom that the later a startup is in its maturity cycle, the more scrutiny it will be under when it seeks more money. With the IPO window closed, public-market valuations in the proverbial latrine, and crossover capital suddenly becoming scarce, late-stage startups are being vetted more like public companies today. And many of them are not ready.
This morning, let’s parse the latest Carta data to understand how tight the Series C crunch is, and if it will have a material impact on startup growth in the coming quarters. To work!
Measuring the crunch
This is TechCrunch, yes, but a crunch is not a good thing. In venture capital, a “crunch” denotes a particular fundraising round that is seeing a dearth of capital while rounds that come earlier and later in the startup lifecycle aren’t.
So if seed through Series B is hot and Series D+ rounds are coming together well but few transactions at Series C look good, you might say that there is a crunch at Series C.
Knowing where the venture hose is kinked can help founders prepare for a more difficult round. For those of us watching the larger startup market, knowing where the funding is slow can help with understanding the macroeconomic issues affecting Startup Land.
I’ve collected a few data points from the Carta Q3 2022 report to detail the scale of the venture slowdown that the corporate services company, known for its cap table work, is seeing in the third quarter (Q3 2022 vs. Q2 2022 for all deal count comparisons):
- Seed: Number of deals -33%; total raised -58% compared to Q1 2022 (ATH)
- Series A: Number of deals -19%; total raised -65% compared to Q1 2022 (ATH)
- Series B: Number of deals -40%; total raised -76% compared to Q1 2022 (ATH)
- Series C: Number of deals -52%; total raised -80% compared to Q2 2021 (ATH)
- Series D: Number of deals -40%; total raised -74% compared to Q3 2021 (ATH)
- Series E+: Number of deals -35% from Q4 2021; total raised -89% compared to Q1 2021 (ATH)
You can see why Series C stands out from the rest. Deal volume declined the most at this stage from Q2 2022, and the total amount raised in Series C rounds is down significantly from all-time highs. But you might ask why we aren’t saying that Series E+ rounds are also in a crunch. Let me explain.
Series E+ rounds are real, but they’re also somewhat not. We might, under more normal conditions, expect startups to go public by the Series E or Series F stage. Someone once told me that Series F is short for Series Fail, as in: You failed to go public by that point. A crunch at the Series E+ stage is more a failure to go public than a shortage of venture money. So we aren’t considering it for this analysis given the state of the IPO market.
Why are Series C rounds so difficult today? Well, some of the logic we applied to Series E+ rounds also fits here. The issue with super-super-late-stage startup rounds is that there is no exit liquidity. If you invest in a terrifically late-stage startup today, you don’t really know how to price the deal given how uncertain the stock market has been, and you also cannot project a reasonable timeline to an eventual exit.
Series C, in contrast to very late-stage rounds, is akin to a gateway to the later startup stages. If the late-stage market is more jammed up than Boston traffic after a stick-bat-and-ball-glove game, why would you put capital to work earlier in the late-stage cycle?
An active IPO market is critical for healthier Series C activity, as the prospect of an exit would engender more Series D and E rounds from investors looking to get their portfolio companies public. Moreover, the clearing effect of more public offerings would leave more room for startups to kick off their late-stage journeys, as they could be confident that more capital (fewer companies ahead means more venture attention) and an attractive exit timetable are on the cards.
Until we start seeing IPOs regularly again, the Series C round is likely going to be hard for investors to get excited about. Why would you pay more, and at a higher price, to launch a startup into uncertain waters? Since Series C is late-stage-ish, it is also easier to compare startups raising with public companies, whose valuations are in the basement these days. All that also makes it hard for Series B companies to raise a Series C at a price that they like.
It’s a double whammy, in other words. And since our expected cure for the Series C crunch — lots of IPOs — is far off, this could be the new normal for quarters to come. Not good!