Over the past few years, the seed VC market has seen a pronounced shift as micro VCs to multi-stage funds clamor for hot seed deals. Given the increase in seed deals, there has been some legitimate fears of a Series A Crunch and startup orphans, i.e. companies unable to get follow-on funding.
Our Seed Investing Report highlighted that, on average, seeded tech companies need slightly more than 13 months to raise follow-on financing. Using a cohort of U.S.-based tech startups that got seeded between 13-18 months ago (that is, between April and September 2012), we analyzed CB Insights’ data to see what has happened to them since, and how they have fared and if follow-on rates are improving or worsening.
Of the 762 U.S.-based tech companies that received seed funding between April and September 2012, 66% have not yet received any follow-on funding (in other words, 34% have received follow-on funding). Less than a year ago, the follow-on rate for seed investments made between 2009 and 2012 was at 40%. So seed-backed tech companies have raised follow-on financing at a lower rate. Of course, some more of the companies that have not yet raised may still do so, but, irrespective, a slight dip in follow-on rates looks to be occurring.
Interestingly, of companies that did receive follow-on funding, the data shows that 48% of them typically received another seed round. 31% of the companies received Series A funding, while the remaining 20% saw a variety of financings including debt, grants, etc.
Of the seeded companies that did not receive follow-on financing, a large proportion remain alive (or show signs of life). 6% have been acquired since while only 1% have conclusively died.
Next is a break down by seed follow-on rates by geography. As can be seen below, there is little correlation between the number of seed deals in a market and the follow-on rate of investment. The follow-on rates by state range widely between 20% at the low-end to a high of 62%. (Note: To reduce skew in the data, we eliminated the states that saw fewer than 10 seed deals in the period.)
As the chart below highlights, states that saw the highest number of seed deals are clustered towards the mid to lower range of follow-on rates. VC hubs with smaller seed deal volume, including Virginia, Texas and Colorado, find themselves on the far ends of spectrum with respect to seed follow-on rates.
Breaking down the data by sector reveals that while seed deals in the Internet sector have exploded, mobile companies have the higher rate of follow-on investment which is in line with mobile becoming a favored destination for venture capital. Although mobile only saw about a third as many deals as the Internet sector, the follow-on rate in Mobile was at 39%, much higher than that of Internet seeded companies which were at 32%. (Note: Hardware and Electronics were not included on the following chart because of low seed deal volume.)