From Seed to Series A: decoding the typical journey in Europe
Hello everyone 👋
Just a quick reminder - every two weeks, I drop by with the freshest insights and discussions on the thriving European tech scene straight into your inbox.
Every entrepreneur and early stage investor understands the complexity of the fundraising process. But understanding the key metrics, timelines, and patterns can ease the challenge. In this edition, we offer insights into the journey from Seed to Series A, in the European landscape.
Let’s get started.
Context about Funding Rounds
Before delving deeper, let’s set the stage with some fundamentals.
In Europe, 80% of Seed rounds raise less than $4 million. Yet, the landscape saw an interesting evolution. From 2016 to 2021, Seed rounds between $4m to $7m have doubled, signaling a robust yearly growth pattern. Progressing to Series A, 72% of startups secure $15 million or less. European Seed-stage startups have valuations around $5 million pre-money, which is a significant 56% lower than US startups, as indicated by Pitchbook data.
Understanding the Conversion from Seed to Series A
Securing Series A funding isn't a walk in the park. Dealroom data reveals only 1 in 4-5 startups successfully transition from Seed to Series A. Another view from Atomico hints that nearly half of startups securing a Seed round will eventually raise Series A. An important facet here is the amount raised before Series A: those raising $2-3m in total pre Series A funding convert better than those raising less, but raising more than $3m does not improve conversion rate
Median Time from Seed to Series A
Timing plays a pivotal role in fundraising. On average, European startups take between 21-24 months to move from Seed to Series A, according to Atomico and Dealroom. Importantly, irrespective of the Seed round's size, 80% of these startups achieve Series A within 36 months. In contrast, US startups race ahead, transitioning in just 16 months on average.
The Role of Equity Story in Series A Success
A startup's early choices shape its equity story, directly affecting its Series A prospects. Those raising a Pre-Seed often have better Series A conversion rates (+6 percentage points) but face a longer journey—21 months versus 17 without a Pre-Seed, based on Dealroom's 2020 data. Moreover, while bridge rounds prolong the process, they don't necessarily improve Series A chances. Interestingly, startups with 2+ Seed round investors tend to fare better, highlighting the importance of not just funds, but also fundraising dynamics.
The Crucial Impact of Investors on Series A Aspirations
Investors are more than just fund providers; they're essential partners. Backing from Seed-focused VC funds can significantly boost Series A conversion rates, with some funds (e.g., Point 9, Local Globe) even exceeding a 50% success rate for their 2016-18 investments.
However, startups need to be wary of 'scouting cheques' from top-tier VC firms. If these firms don't follow on into Series A, it may deter other potential investors, a phenomenon known as the 'signaling effect.' In such scenarios, chances of Series A can plummet, from a good 50% to 27% in the US landscape, as seen in CB Insights.
Just to be clear, the n°1 reason why a top-tier VC firm wouldn’t follow on a scouting cheque is performance. And performance comes from execution. So entrepreneurs hold all the cards 😉
A Comparative Lens: The European vs. US Startup Landscape
Comparing European and US startup scenarios offers intriguing insights. US startups are over 50% more likely to exit after their first funding round, potentially indicating a culture that values swift iterations or "failing faster." In fact, while only 9% of European Seed-stage startups exit, this number climbs to 14% in the US. Beyond Seed and Series A, European startups raise similar median amounts than US startups across all of their funding rounds. However, the US notably outpaces Europe in average funds raised. This implies that a smaller number of companies raise significantly larger amounts that distort the average, suggesting a more aggressive investment strategy toward potential winners.
In Conclusion
Ultimately, performance is key in attracting investments. Yet, the subtle power of signaling and strategic partnerships cannot be overlooked. For startups, the recipe for success includes exceptional performance, astute investor choices, and a compelling equity narrative. For investors, the secret lies in looking deeper, identifying startups that exhibit true potential, resilience and clear paths to profitability in a down market.
That’s all for today’s edition folks. Thanks for tuning in. Stay curious and ready to dive deeper. See you in two weeks with more tech insights!
Take care,
Tim