Long gone are the days where a startup could raise a Series A round based on vibes and the networks of its seed investors. But today’s Series A funding environment isn’t just a return to pre-2021 trends and metrics.
Series A investors are still taking longer to do due diligence, are more focused on the metrics, and are looking to participate in rounds at reasonable valuations. But seed investors told TechCrunch+ that this new environment sends founders mixed messages, and tracking what companies need to have accomplished to raise a Series A has become hard for them to decipher themselves.
The muted late-stage funding and exit environments have left investors with few data points and examples of how to price companies — and that now affects the Series A stage, too.
“The goal posts seem to be moving a lot,” said Eric Bahn, a co-founder and general partner at seed and pre-seed focused Hustle Fund. “If you were to push me in a corner and say, ‘Dude, what does it take to get to the Series A?’ I’m not sure I’d know the answer myself.”
For one thing, it’s harder now for founders to start planning a fundraise because it isn’t as clear who is even actively investing or adding new portfolio companies, said Yoni Rechtman, a venture principal at Slow Ventures. Once that gets determined, what those investors are looking for is the next hurdle.
Rechtman said that he’s noticed that the base level of ARR that Series A investors are looking for has definitely gone up. He said that for the most part, the deals that are being made usually involve a company that has at least $2 million in ARR, though it’s also true that some companies are getting funded without it. Others that have reached this milestone continue to struggle to secure financing.
Loren Straub, a general partner at enterprise seed-focused Bowery Capital, said that while that isn’t a crazy ARR metric to look for by any means, it’s significantly different from what many of these companies were expecting to hit utilizing the seed money they raised a few years ago.
“For a Series A, I think everyone would say $1 million of ARR was 2020 and 2021, so $2 million is 100% more revenue,” Straub said. “That is a big jump.”
She said that investors are looking beyond those metrics, however, for companies that also have low customer acquisition costs. Plus, many are asking more questions about burn ratio or how much cash companies need to burn to reach their ARR metrics.
“Expectations have gone up and valuations have gone down, and something has to give,” she said.
But even companies that hit all of these metrics aren’t going to necessarily get funding in today’s environment; they’ll also need to have proven product-market fit and also likely a moat, Straub said. That means that certain sectors like consumer and startups with a long sales cycle have an even harder pitch.
Another complicating factor is how potential Series A investors are talking to companies. Straub said that many of her seed-stage companies are shocked by the fact that they are having such a hard time raising their Series A round when thinking about how much inbound interest they are getting from investors.
Plus, no one wants to back a company that has made so many cost-cutting measures that they are barely hanging on. If companies are cutting costs they need to do so in a way that still allows them the ability to continue to grow if they were to raise the money. “One thing that we are very big believers in is no one will give you credit for simply staying alive,” Rechtman said.
So what can companies do? For one, they could go into their future raise with appropriate expectations, Bahn said. If they thought they were going to be able to raise $10 million or $15 million, they may want to account for scenarios where they raise less and see if the back-end math will work. Or, best-case scenario, wait to raise the next round.
“We have been sending [our founders] a lot of messages like delay, or try to raise something a lot less,” Bahn said. “Where I’m seeing the most traction is raising at the last round’s terms. In this market, if you are raising flat, it’s almost equivalent to raising up.”
Of course, not every investor has experienced this dynamic yet. Some told TechCrunch+ that their companies haven’t had trouble raising their Series A rounds but that the dynamics had definitely gotten more challenging. Others said that the nature of their portfolio means they were only due for a slight correction — which will likely change if market conditions continue.
The majority of investors seem to be trying to adapt to the current changing funding environment. But even for those who will end up being less affected in this first wave, the implications of the current dynamics will have an impact on other areas of venture, too. Straub said she’s already passed on a seed deal that she wasn’t sure would have luck getting to the ARR needed to raise a Series A with the amount of capital it was raising. Plus, many startups just won’t be able to make it in these conditions.
“It really sucks for a lot of people,” Rechtman said. “I really feel for people who I think have been sold a false bill of goods. Oftentimes that is innocent, sometimes it’s not, and [founders] have been led to believe that if you grind it out, something will happen. And that’s just not often true.”