Pity the poor entrepreneur trying to raise a B round.
The second quarter stats are starting to come out and so far one number jumped out at me: Median valuations for B rounds. According to Pitchbook it hit a whopping $ 41 million in the first half of the year.
A few things are notable about this. The first is it’s sharper acceleration than we’ve seen for seed or A deals, as this graph shows:
As we’ve written with the rise of the pre-seed trends, rising tides only lift boats so far. While a macro climate can mean companies who would have never been valued at $ 1 billion, suddenly can be, it means VCs have to invest higher dollar amounts to get enough ownership to make the deal worth their while.
That means VCs are willing to deals they may not have in a more conservative cycle, but they are also looking for more traction earlier to go along with those higher deals and higher prices.
So while the news sounds good for entrepreneurs, consider what it means from a negotiation standpoint. In 2010, a company only had to show enough growth and traction between a seed deal and an A deal to justify a jump from $ 3 million to $ 6 million. And then by the B round, $ 19 million. If you are getting to the point where you are raising a B round, you better have a pretty serious business. You are showing revenues, you are beyond product market fit, and you have to at least be able to articulate a case why you could be a market leader in a market that means something. A company showing all that being valued at $ 19 million rewards the progress between A and B, but at the same time, doesn’t set a company up for an impossible bar at the Series C, should growth not happen quite as quickly as they’d like.
Let’s look at today’s scenario of the same startup. The median seed round has doubled from $ 3 million to $ 6 million. A big increase percentage-wise but, again as we’ve reported, seeds have really become Series A deals. Seed investors have bigger funds to work with, and are so concerned that companies won’t be able to show enough traction to get an A deal, that they are writing bigger checks. $ 6 million is a normal Series A price in any market. The checks are bigger and seed investors are demanding a product and some sort of traction at this stage, so even in a rational market they should be paying something that looks more like a Series A price.
The Series A then jumps wildly to $ 15 million. That’s pretty steep– almost what a B was five years ago. But at least companies have had more runway from their seed to get there. There is still some promise and upside to pitch to.
But pity the poor entrepreneur today who needs to go raise a Series B. Just a few years in, he or she needs to articulate why they have built something substantial enough to compete with other companies who are demanding– and apparently getting– a $ 41 million price. And those aren’t the outliers– that’s the median.
And the point about competing is key, because B rounds may be the only round that VCs still completely control with no external factors. As we’ve written at length, the “venture capital business” is really no longer dominated by venture capitalists. At the seed level you have angels, AngelList, incubators, and seed funds. Those can bleed into the Series A, at times. Then at the late stages D or higher usually, but potentially C rounds as well, you have corporates, mutual funds, hedge funds, lone billionaire actors like Yuri Milner or Carl Icahn, or even a surprising cadre of one-time seed investors who are leading special purpose vehicles to put more money into a company later.
In many respects B rounds is the last place where the VCs mostly have a company all to themselves. And most VCs will only do one to two deals per year. Worse: Most of the good ones want to get in as early as possible. So to get a partner at a top firm to do your deal, a startup not only has to articulate why it’s worth some $ 41 million and will be a good enough steward of the money a VC has to invest to get 20% or so of the company at that price. But it has to articulate why that’s a better bet for that VC than getting into a Series A company at about one-third of the price.
Clearly, it’s going well enough for the prices to be that high. But it’s not a round I’d want to be pitching right now.