Earlier this week, Mattermark (a Flybridge portfolio company) posted an interesting analysis of the Seed matriculation rate from the over 2000 US-based software companies that received funding in the period from 2009 to 2012. What they found, to save you from reading the post, was that 32% of the companies that received seed funding went on to raise a Series A, 17% a Series B and 7% a Series C.
This inspired me to take a look at the software companies Flybridge seed funded during the same period. As the graph below shows, our data is quite different, with over 90% of the companies raising a Series A, just over 65% a Series B and about 50% a Series C.
As to why our experience is so different than industry-wide data, especially at the Seed to A fall off, I am not sure. I suspect it is a combination of factors. First, on the margin we have favored slightly larger seed financings (in the $1-2M range) and those companies have had, as a result, more runway to accomplish their goals. Second, we have favored strong, involved syndicate partners and it is often through us, and our co-investors, that the Series A investors learn about the company (virtually all the A rounds brought in a new investor). Third, we are active seed investors, but relatively selective, so we hope there is some level of quality at play. This also means our pool of companies is not huge, so I am sure serendipity is involved as well!
In their post, Mattermark noted that there are likely three reasons for the fall off: companies failing, companies being acquired, or companies becoming self-sustaining, but that they did not necessarily have all the data to determine the relative weight. We obviously do for our own companies, so here is our experience:
- Of the 10% of companies that did not go from Seed to Series A, the cause was generally a failure to find product market fit, resulting in an acquihire of some kind.
- Of the companies that did not move from Series A to Series B, three quarters were acquired, either in a highly positive way like Crashlytics (Twitter) or Firebase (Google), or less positively in one other case. The other companies that have not raised a Series B are still running on their Series A capital.
- Of the 25-30% of the companies that raised a Seed, an A and a B, but not a Series C, the vast majority (80%) are still executing on their Series B capital with the remainder having been acquired.
While it is hard to generalize from one firm’s experience, as a seed stage founder the most important lesson from this analysis is to make sure you raise enough capital to achieve critical milestones, including demonstrating product market fit, and that you align yourself with investors that have the network, relationships and credibility to help you raise subsequent rounds of capital. After that, it is all about performance with the hope that you don’t have to keep raising capital as revenue funds growth!