From Seed To Success: A Retrospective On Two Decades Of Series A Rounds With more startups eyeing the attention of a limited pool of Series A investors, investors are demanding that startups demonstrate a higher level of maturity and traction before they commit to Series A investments.

By Hisham Kassim

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The elusive Series A round is much coveted by entrepreneurs, but also misunderstood. Within the startup ecosystem, the key to a large exit or initial public offering seems to be a Series A round, and every founder wants one.

But despite its coveted status, how much do we actually know about Series A rounds and their history? There seems to be generally accepted common practices and industry consensus on many features of what the Series A signifies in the life cycle of a startup, but conclusive data is lacking.

For example, it is common practice that around the time startups close their Series A rounds, they start to formalize and institutionalize their operations. For example, they form a board composed of some outsiders (i.e. non-founders), adopt internal financial controls, formulate human resource policies, and a wide range of other internal policies and procedures– the things most creative types, like founders, dread and avoid. Additionally, after a Series A round, we know that the failure rate of startups drops dramatically. Finally, and perhaps of greatest significance, is that closing a Series A round signals to the world that the startup has entered early adulthood.

LOOKING AT THE DATA

We at Kassim Legal reviewed and analyzed 20 years of Series A data to identify quantifiable trends and features of a financial milestone that, once achieved, seems to hold the keys to the castle. But before we take a look at what we can learn from the data, there are a few caveats to keep in mind. First, to maintain consistent comparisons over time, all monetary amounts are listed in 2022 US dollars (US$). Second, the data provided by Systematic Ventures tend to be US-centric, because of the timeline we were looking at. Venture investing in the Middle East is a relatively new phenomenon that has only gained traction in the last 10 years or so. In contrast, venture investing in the US -at least the modern version- has been around for at least 50 years.

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With these pointers in mind, here's a look at what we learned about Series A rounds:

1. ROUND SIZES ARE STRONGLY CORRELATED WITH PRE-MONEY VALUATIONS

The relationship between the pre-money valuation of the startup and the total amount raised is closely correlated. According to our calculations, the correlation between the two variables is 0.85, which means that both variables are nearly (or perfectly) correlated. As pre-money valuations increase, the size of the round increases (almost in tandem). While many of us knew this intuitively, we have finally been able to quantitatively measure this relationship.

2. COMPANY VALUATIONS AND ROUND SIZES ARE INCREASING EXPONENTIALLY

The value of companies and their round sizes seem to have increased exponentially over the past 20 years. Pre-money valuations from 2002 to 2014 (a bit more than 10 years) have remained at roughly $8 to $10 million. Then starting in 2015, pre-money valuations increased each year to $15 million in 2017, and ending at $40 million in 2022. By 2022, the pre-money valuation of a startup closing a Series A round was almost four times the pre-money valuation of a startup in 2002. We see the same trend for round sizes as well. From 2002 to 2018, the average size of a Series A round was around $4 to $5 million. However, by 2021 and 2022, we see that the average size of a Series A round tops $10 million. While pre-money valuations have increased faster than round sizes, the average Series A round size in 2022 is still more than double the average Series A round size in 2002.

3. FOUNDERS ARE SELLING LESS EQUITY IN SERIES A ROUNDS

While pre-money valuations and average round sizes have increased in tandem, the percentage those rounds account for (on a post-money basis) has actually decreased. For example, in 2002, founders sold approximately 36% of their companies in Series A rounds. As of 2022, this number was closer to 20%. What this means is that while pre-money valuations and round sizes have both been increasing, pre-money valuations are actually increasing faster than round size.

Source: Kassim Legal

Source: Kassim Legal

4. MORE INVESTORS ARE SEEN PER ROUND

The number of startups that closed their Series A round in 2002 was around 900. By 2022, this number climbed to more than 5,300 companies. Despite the almost five-fold increase in the number of companies closing Series A rounds, the number of investors has actually increased faster than the number of Series A rounds. In 2002, there were 1.24 investors per Series A round, while by 2022, this number almost doubled and now there are almost 1.94 investors per Series A round.

5. TIME TO RAISE SERIES A ROUND HAS DOUBLED

Interestingly, and despite the increasing valuations, round size, and number of investors, startups are closing their Series A round almost five years after the date of their inception. In 2002, startups were closing their Series A rounds only two years after the date of their inception.

Source: Kassim Legal

WHAT THE DATA TELLS US

The startup landscape has undoubtedly undergone significant transformations in the last 20 years. We observed consistent, if not accelerated, increases in the pre-money valuations of startups and their round sizes. However, these two variables are not accelerating at the same pace. Pre-money valuations are increasing faster than the average size of a Series A round. Since pre-money valuations are increasing faster than the average round size, it means that startups are selling less equity during their Series A rounds.

The increasing pre-money valuations and round sizes could partly be explained by the increasing number of investors participating and investing in Series A rounds, and probably startups in general. As startups continue to gain prominence and offer investors the allure of unicorn-level returns, there has been a surge in the amount of capital being deployed to startups. This includes existing venture capitalists increasing their assets under management as well as new types of investors entering the market such as angel investors, corporate investors, family offices, and crowdfunding platforms.

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However, despite the surge in the number of investors, valuations, and round sizes, we are seeing startups taking longer to close their Series A rounds. In the early 2000s, startups typically closed their Series A round within two to three years of inception compared to the more than five years it typically takes current startups. Given that startups are delaying when they close their Series A rounds, it would make sense that older and more mature startups would (or could demand) higher valuations and larger round sizes. A startup that has only been in business for two years would not have achieved (according to common wisdom) the same milestones and traction as a startup that has been in business for five years.

The final question for this piece then is what is causing this elongated timeline. Are startups waiting longer to close their Series A rounds (as a strategic decision), or are investors starving startups for longer periods of time and demanding companies achieve greater maturation before investing? Our guess (we do not have the data yet) is that the elongated timelines is being caused by an uneven distribution of capital availability for startups. Our hypothesis is that there is an abundance of capital for pre-seed and seed investments (which gives startups a longer runway), but less capital for Series A investments. With more startups eyeing the attention of a limited pool of Series A investors, investors are demanding that startups demonstrate a higher level of maturity and traction before they commit to Series A investments. Of course, this hypothesis will have to be tested once the data becomes available.

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Hisham Kassim is the Managing Partner of Kassim Legal. Established more than 50 years ago, Kassim Legal has remained the MENA region’s leading corporate boutique law firm. Since its founding, its mission has been to provide exceptional service in only select niche corporate practice areas. In those areas, the level of service is unrivaled by even the largest firms operating in the MENA.

Kassim Legal is a small, independent, and family-run firm continuously striving to offer the best of both worlds- the personal touch and hands-on experience clients expect from a boutique firm, coupled with the same quality and caliber of service they would receive from a much larger firm. The firm represents some of the largest and most prominent private equity, venture capital, banking, and other institutional clients throughout the MENA region.

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