I was reading an interesting post by the MatterMark team this morning. The writer analyzed fundraising data from over 2,000 different software companies from 2009 to 2012. The goal was to outline the fundraising funnel from Series Seed through to Series F for companies started during that time period.
First of all, kudos is in order. The MatterMark team has a record of publishing terrific data-driven content that benefits the entire ecosystem by making it a bit less opaque, and this post is no exception.
Funnily enough, my personal takeaway from reading this post was the exact opposite of its title “The Startup Funding Graduation Rate Is Surprisingly Low”. My feeling was that the numbers cited are surprisingly high, at least when it comes to graduation of Series Seed stage companies: one in three of them makes it to the A round? That sounds way too high to me and at least a few other investors who I saw reacted to this post.
But I also can’t say I’m too surprised. As someone who’s worked with private company databases for years, I know how difficult it is for them to achieve a high degree of accurate data coverage. That is doubly true for private tech companies.
In fact, there are a few factors that I know are introducing biases into the data sets in question:
- Inaccurate taxonomy of very early stage rounds many times labels what are functionally seed rounds as angel rounds or “friends and family” rounds.
- Disproportionately lower visibility (in the press and other data sources) of Series Seed rounds and seed-stage companies, as opposed to Series A and more advanced rounds.
- Stealth-mode mentality that further decreases the visibility of young companies until the company launches a product or otherwise decides to “come out of stealth”.
It’s important to note that these factors not only drive the underrepresentation of Series Seed rounds but also the underrepresentation of orphan Series Seed rounds, i.e. such rounds in companies that didn’t make it to the A round. For example, getting to an A round means a company has money to throw at PR companies that drive more press visibility compared to seed-stage companies.
Nevertheless, I really enjoyed the post. I’d be really interested in seeing a follow up analysis of graduation time: how long it takes seed-stage companies until they raise an A round, etc. I suspect that would be even more instructive to founders.