Here Comes the Series B Crunch?

The startup-VC ecosystem likes angst.  First, it was the Series A Crunch which was mostly a mathematical fact.

But now, we’re seeing chatter about a coming Series B Crunch. Specifically, the conversation has focused on the crop of startups that have gotten over the Series A funding hump but who will have a hard time raising a Series B funding round.  The concerns seem centered around there being lots of money at the early stage and at the late stages for clear breakout companies but companies which may be solid but not “crushing it” might find it difficult to raise their Series B.  (Note: This was the exact same logic applied during the Series A Crunch woes)

So we wanted to take a look at the annual supply of tech Series B transactions and dollars (relative to Series A rounds) since 2008 to see whether such concerns have a data-driven basis.

The Data

In 2013, U.S.-based Series A rounds hit a six-year high across the tech ecosystem (internet, mobile & telecom, software, computer hardware, electronics). Series B tech transactions also hit a high but their rate of growth as can be seen by the more modest slope has not matched that of the Series A.  So 2013 actually saw the largest gap between tech Series A and B transactions over the six-year period.

The ratio of tech Series A deals to Series Bs has ticked up over the period, rising from 1.32 in 2009 to 1.87 in 2013.

Next, we looked at the total funding deployed to tech sectors at the Series A and Series B stages over the period. Here we see that while 2012 saw investors pour slightly more funding into the Series A stage than Series B deals in the same year, the ratio of Series B to Series A funding has also remained largely stable. (It’s worth noting that 2012 saw several Series A mega deals including to the likes of GitHub)

There definitely appears to be a gap in the pace of deal activity at the Series A vs Series B stages.  If the gap continues to widen, the calls around a Series B Crunch will likely intensify.  For M&A folks, this probably means more expensive acqui-hires.

For more exit and financing data, check out the CB Insights Venture Capital Database. Sign up for free below.