Your odds of raising a Series A just dropped from 30% to 15%—here's what to do about it:

New Carta data shows that 30% of seed-stage startups used to raise a Series A within 2 years of their seed. Now, only 15% do. The bar for Series As is as high as it's ever been. And the number of seed extensions that I see is going up as a result.

But for founders, this is NOT a bad thing. I remember as a seed-stage founder I was obsessed with raising a Series A. But now I've seen startup after startup that raised $8-12M Series A when they didn't truly have product-market fit. Most of those startups ended up hiring too many people, burning too much money, and not growing any faster. They are now money-losing startups with no growth. 

The VCs aren't happy, but they're okay. But the founders aren't. They are at the bottom of the stack. They can't sell their business and can't grow it either. They're stuck between a rock and a hard place.

The solution? If you're not performing at top quartile levels, if you don't have clear undeniable product-market fit, then raise a smaller round. 

Seed extensions might not be what you wanted—but in many cases, it's what you need.

Transcript

Pablo Srugo (00:00.11)
So looking at this new data from Carta, that's pretty drastic. They looked at over 12,000 startups that have raised seed rounds since 2018. And then they look at the graduation rates to see how many of the companies that raised the seed round went on to raise a series A. So if you look at it, the companies that raised the seed round in 2018, two years later, so different points of 2020, on average about 30 % of them had raised a series A.

And then three years later, so this is 2021, that number goes up to like 45%, 40 to 45 % of the companies that raised a seed in 2018 had raised a Series A three years later. The 2020 cohort is the hottest cohort. So if you raised the seed rounds in 2020, 35, as high as 40%, let's call it 35 % on average, raised a Series A two years in.

And that number goes up to sometimes above 45, but let's call it 45 % at average three years later. The latest data that we have is that that conversion rate, that graduation rate has dropped to 15 % on average. So the companies that raised the seed round in 2022, two years later, only 15 % of those have raised the series A. 85 % of them haven't been able to do it.

And I recently did an analysis of our own portfolio, the companies that we have deeper data into because we can actually see their revenue and trend lines and charted out all the companies that we have that crossed a million in revenue and that then grew in some cases to 10 and beyond in other cases that didn't make it and kind of just looked at those lines. And what I noticed is that in our older portfolios, companies that were on the bottom

In other words, that weren't necessarily growing all that fast. They crossed a million. So obviously they had real traction, but they weren't exploding. most cases, those still raised a series A. In our latest portfolio, the companies that are on that trajectory don't raise a series A. In most cases, you have to be not just beyond a million, two million or so in ARR, but your growth curve needs to be top, I would say top quartile, certainly top half in order for you to raise a series A.

Pablo Srugo (02:17.966)
And this all lines up if 85 % of companies are no longer raising series A. And the other way to think about it is in the past, like take the hype away because obviously the kind of 2021 era was a bit of an outlier. But even if you go a little bit further back and you think about that 30 % number on average, 30 % of companies that raise a seed two years later raise a series A and that number is now 15%. That means that if a hundred companies raise a seed 30 used to make it to A, now only 15 do that's about

a drop in half. And the other thing that I'm seeing in our portfolio that's become very common that is completely related to this is a huge spike in the number of seed extensions. It's becoming more and more common, not just in our portfolio, but I'm seeing it in other companies that are speaking with us that are raising seed extension. Seed extensions have always existed, but these days they're much more common. And the obvious reason is if there's fewer series A's, then those companies two years after they raise the seed are unlikely.

to be profitable, at least in most cases. And so they've got to do something. And in many cases, what they choose to do is raise the seed extension. This might seem bad by the way, but I don't actually think it's all that bad because if you think about it, a median Series A these days is $10 million. It makes sense to me that the par for raising $10 million should be absurdly high. The reality is pre-seed oftentimes is people with an idea. Seed stage is some amount of traction. Series A is product market fit. And going from

some traction, true product market fit is just a high bar. In many cases, when I look back and I look at the companies in our portfolio or otherwise that were never really growing that fast and never really had true product market fit, but managed to squeeze together or to raise an A in some cases with multiple term sheets, they're not in an enviable position because all of a sudden they use that money, they ramped up their teams, growth didn't move that much because they never had true levers, they never had true product market fit.

And so now they find themselves between a rock and a hard place. They can't go out and raise a B. And again, even if they could to one end because they don't have control over their own growth, they're not able to become profitable because their teams have gone way too big. They can't really sell the company because their prep stack is too big. And so if they sold the company for what it's worth now, the investors will get cents on the dollars and the founders would likely get nothing. That's not a good place to be at all. And so the way I've started to look at my portfolio is kind of a third, a third, a third. mean, you have a third of companies that are truly

Pablo Srugo (04:42.988)
hitting targets, they clearly have product market fit, and they should just keep going for it. There's the bottom sort of companies that never got any real traction, there's not much going on, and in the best of cases, maybe they stumble upon something which does sometimes happens, otherwise it's probably not gonna work, maybe it's a wind down, a shutdown, maybe in best case it's an aqua hire. But it's that middle set of companies where things have really changed, because that middle set of companies, if you go back to the data,

a few years ago, many of those would be in that extra 15. Like if you think about 100 startups, 15 make it to series A now, but 30 used to make it. That extra 15, which tend to be those middle of the pack companies in the sense that in a portfolio, they tend to be the middle of the pack. They're still performing companies that have half a million, a million, one and a half, two million dollars or so of ARR, but they're not doubling, tripling. They're growing 50, maybe doubling, but depending on where they're at in that range, but like.

at best doubling but probably more likely growing like 50 % year over year, don't have true product market faith. Certainly don't have levers they can pull on to accelerate growth. And again, in the past, many of those companies would go on to raise series A and they would be forced in effect to find those levers. And in many cases, in most cases, I should say, wouldn't find them. Today, they can't do that. They don't have that option. And that's not that bad because my advice to those companies is find a way to get to profitability, either with what you have,

or by raising a seed extension. I think oftentimes seed extensions are kind of looked down on. There's something wrong with a seed extension. I think for obvious reasons, they're becoming more more common. And I think it makes sense. think if you raised one, two, $3 million, and then the next round needs to be 10, I mean, that's just a really big gap. And some companies, top 15%, they'll get there, but the next 15 % might not get there. And it doesn't mean that they need to fail. They could still be decent outcomes. Certainly,

great outcomes for the founders who can make a few million and decent outcome for the investors who can make two, three, four X. It might not be the 10 hex home run maker, but it doesn't have to be a zero. And I think the way you do that is instead of going out for that 10, eight, 10, $12 million round, you go and you raise the seed extension, another two, another three, another four. But the plan with that money is to get the cashflow break even because clearly you haven't found product market sit. You need more time, either more time.

Pablo Srugo (07:06.04)
to just build a solid business that does three, four, or five million in ARR that's growing 20, 30 % a year, but profitable, which A means you have unlimited time, B means you have that time to like look for partnerships, to look for strategic outcomes, maybe it's a stock merger, maybe it's something else. And in any case, you're in control of your own destiny. And by the way, a company that's profitable has five million ARR growing 20%. You can easily get three, four, or five, maybe even seven X.

maybe that's on the high end, but like, let's talk 4X multiple. You're doing 5 million in ARR and growing 20 % of your profitable. 5X multiple, that's $25 million market cap. If you've raised a $2 million seed and then another $2 million extension, $4 million maybe you a pre-seed or friends and family, let's say you've raised $5 million in total. And if the prices were reasonable, then your early investors certainly can make some money. Hopefully the later investors can make some money too. And definitely you as the founder, after paying back that prep stack, there's still $20 million.

for you and all the other common shareholders. That again, is not the wind that any investor is looking for. I'm sure it's not the wind you were looking for, but it's a lot better than being in that exact same position instead of having raised $5 million, raising $25 million, which is what's happened to a lot of companies that were able to raise those series A's, but shouldn't have been able to raise them. And I think a lot of founders still haven't figured this out. And I've seen a lot of them figure it out the hard way, which is they go out and I've seen this probably three or four times in the last few months, companies that are not ready for a series A. Then maybe,

three, four years ago might have been able with these exact same numbers to raise a Series A, but in today's market probably can't. But they still go out and they do the whole Series A road show. They pitch all the VCs, they get the meetings, they spend a bunch of time and waste, and this is I don't think fully appreciated, a bunch of reputational capital. Because here's the reality, when you go out to a firm and you say, hey, I'm this founder, maybe you get an introduction, maybe you don't, that firm to you, from my perspective as a VC, that's a new opportunity. If it's somewhat interesting, especially becomes

recommended, I want to take a look at it. I want to know what it is. But once I've looked at it and I've passed, I'm not going to look at it again, unless things have changed drastically. So if you go out to raise a series A and you're like, no, no, I think I have the numbers, even though you don't. And you go and you get, you know, 20, 30 introductions and you get like 15, 20 meetings and all you end up having is nothing because everybody ultimately passes. didn't just waste all the time that it took to do that. You also burned a lot of bridges because if

Pablo Srugo (09:32.47)
in six months from now, you're doing better, but not three times or four times as well, but you're doing better. Most of those firms are gonna take that second call. They're just gonna say to themselves, well, I've already passed, so why would I take another look? But had you waited six or nine months until things were really there, or giving yourself the time to actually find product market fit, and then gone out and done this whole thing, they all would take the call, they all would take the meeting just like the first time, and you'd be able to drive a lot more momentum, a lot more FOMO, which are things you always need.

to raise a successful round. I think what a lot of founders have to think about doing instead is being a bit more intentional about the seed extension and going out to raise it. Obviously, oftentimes the seed extension comes internally, but it doesn't have to be that way. I think more and more VCs are waking up to the fact that if there's so many fewer series A's, then seed extension actually can be an interesting place to play. So you're one of these founders that when you talk to your current VCs, you're kind of getting the signal that,

you're probably not really there. Maybe go and take two or three, but not 20 or 30 series A type meetings. Figure out, kind of get a gauge on whether your gut and your VC's gut is right about where you are. And if you're probably not gonna get a series A at this point, then think about going directly for a seed extension and you don't need to limit it just to your existing VC's. You can go and run a process on that too and hitting up a bunch of seed firms, seed firms maybe that you've talked to in the last seed round.

or maybe firms that you've never spoken to before, but you'll be further ahead than where they normally look, but still raising an amount that makes sense for them. Obviously the valuation that you're gonna get if you're raising 3 million is in the valuation you're gonna get if you're raising 10, but you're here because you probably can't raise 10. And I think ultimately being realistic is gonna be to your advantage. Cause this is the question I had like from one of the portfolio companies I work with, it like, Hey, we're about like 20%, we're doing 2 million ARR, do you think we could raise an A?

you know, if we're at two and a half million or three million or whatever in a year and we're still growing 50%. And I'm like, why would you want to? Like probably you can't, but even if you could, why would you want to? Clearly you don't have a formula. Clearly you don't have the levers. Clearly you don't have full like product market fit yet. So if you raised 10 million because somebody gave it to you, what would that do for you? I mean, sure, if you put it in the bank and did nothing with it, then you know, you're winning, but we all know that's unlikely to happen. You're probably going to start spending that money. You're going to beef up your whole operations.

Pablo Srugo (11:56.578)
You're going to get fatter. And if top line doesn't grow any faster, then everybody is worst off. And the person that is most worst off as a result of that is the founder because you're on the bottom of the stack. I just gave you content that you liked so much. You actually listened to the end and guess what? You didn't pay a single dollar. Not only that, I didn't even put any ads in your face. So you just got a bunch of content for free. And now that I've delivered that value, I'm asking for something in return. Open your app.

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