The Series A Bottleneck Grows Tighter, Fenwick Survey Shows

While the number of seed financing deals has ballooned over the last few years as the cost of starting a company has fallen, the pace of Series A venture deals hasn’t kept up. Now it looks like the bottleneck between the seed stage and the Series A level has gotten even tighter, according to a survey from Fenwick & West, one of the best-known law firms for startups in Silicon Valley. In their annual survey of companies they work with, they tracked 61 transactions from last year, 56 the year before and 52 in 2010. What they found was that even fewer companies had raised Series A rounds by the end of the year after their seed deals closed. Only 27 percent of companies that raised in 2011 were able to pull a Series A round by the end of 2012. In contrast, 45 percent of companies funded in 2010 were able to secure a Series A round by the end of 2011. What’s interesting is that follow-on financings are picking up some of the slack here. More companies are relying on follow-on seed financings if they can’t get to a full A round. Twenty-three percent of companies funded in 2011 did follow-on seed rounds, compared to 12 percent of companies in 2010. Basically, the path from seed to proving you’re worth a Series A round is just getting longer. At the same time, traditional VC firms are getting more active at the seed level, and led about 34 percent of seed deals in 2012, compared to 27 percent in 2011. You can see that the average size of investment for VC funds in these seed deals rose slightly, while the average investment size from professional angels declined. Not only that, the deals themselves are starting to look more conventional. The use of preferred stock structures rose to 67 percent last year, from 59 percent in 2011. “It says two things. The leverage is changing a bit,” said Barry Kramer, a Fenwick partner in the corporate group. “Last year, the entrepreneur had a bit more leverage than they have right now to get the terms they want. But it’s also a reflection of how more sophisticated investors like venture capital groups are getting involved with seed financing and they’re saying — ‘This is how we do it.’” That said, it’s not all black and white. He pointed out that the

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