Startup Financing, 2023 Edition

Terminology and norms for funding rounds are constantly shifting. Every couple of years, we try to publish our read on the startup / VC / fundraising market based on:

  • Angel investments we make (100+ in the last 8 years)
  • Norms we observe amongst customers (150+ startups in the last 3 years)
  • Ear to the ground in the ecosystem (LP in 10+ VC funds, participation in On Deck, South Park Commons, etc., vetting dozens of startup tools, investing in late stage secondary transactions)

Reversion to the mean

The most important thing to call out is how abnormal the 2020-2022 period was. Companies got funded way ahead of what they had proven, and their ability to spend this money effectively. Elad Gil describes this aptly, as a "free round."

This was particularly common in the third stage, "glimmers of PMF" – companies who hadn't definitively proven PMF still managed to raise fairly large "Pre-A" or even "proper" Series A rounds that they hadn't truly earned.

Really, we're better off now than we used to be in the 2016-2019 era for example, and *much* better off than most of the 2000s.

There are two major things that have reverted to the mean in the last ~year:

  1. The bar for a Series A = PMF has been reset. In other words, Series A rounds aren't "so hard" today – it should never have been easy.
  2. For a hot second, bridge rounds were "sexy" for some reason, in 2020-2022 (Seed+, Pre-A). Now, they carry a stigma again. If a company raised a Seed and hasn't gotten to PMF yet, there shouldn't be a "free" round to keep trying. The burden of proof should be high.

Back to fundamentals

Honestly, this is the opportunity for the tough to get going. This is where stellar reputations, rocketship careers, iconic companies, great leaders are minted – not in the boom times. It's refreshing to forget the distraction and noise from the VC funding dynamics, and focus on the fundamentals.

On the one hand: it's worth considering winding down and returning capital, if you don't see a path to PMF and efficient growth... life is too short to spend running around in circles. On the other hand: those who see the light at the end of the tunnel and keep working on their startup now really care, and will come out on the other side stronger.

The fundamentals never change, and that's where focus needs to be. If a company solves for things like unit economics, efficient growth, retention, defensibility, profitability... then it's best for the business, no matter what the macro environment is. Smart investors may see it and want to invest, but it presents founders & execs with optionality. But it's almost impossible to regret solving for the fundamentals.

These fundamentals are sorted into four ways to demonstrate feasibility (and hence "investability") as a company:

  1. Team
  2. Market
  3. Product
  4. Efficient growth

Here's an update to the startup & VC market, and the dynamics of each stage and round, as of mid-2023.

PS – if you want to think about what a fair valuation for your company is (anytime beginning with the "Provable PMF" stage, check out our Valuation Estimator.

Round Dynamics Over Time

You have…
An Idea
Proof of Concept
Glimmers of PMF
Provable PMF
Scaling Revenue
Round dynamics: ≥ 2022
Friends & Family $100 - 500K
Pre-Seed / Seed $1M - 4M
Seed Extension / Bridge $1 - 5M
Series A $5 - 20M
Series B $10 - 50M
Round dynamics: 2019-2022
Friends & Family $100 - 500K
Pre-Seed / Seed $1M - 5M
Seed+ / Pre-A / Series A $3 - 20M
Series B $15 - 50M
Series C $25M - 100M+
Round dynamics: 2012-2018
Seed $500K - $2M
Seed Extension / Bridge $1 - 5M
Series A $5 - 15M
Series B $10 - 25M
What it was called in ≤ 2010
Seed $100K - 1M
Bridge Round $100K - 2M
Series A $5 - 15M
Series B $5 - 20M

Persistent Characteristics of Venture Rounds

You have…
An Idea
Proof of Concept
Glimmers of PMF
Provable PMF
Scaling Revenue
Does it always happen?
Many don’t raise this round
Commonly raised — often the first angel / seed round
Not always raised — only if a) necessary to get to PMF, b) so easy to raise that you “might as well” (e.g., in 2020-2021)
Usually raised — the first “institutional” round
Often raised to fuel growth (with investment in marketing, scaling). Larger AUM VCs or growth capital get involved.
Based on
Just an idea, and maybe an earned secret. At least 1: market signal or credible team
Some derisked questions about the company At least 2 out of market validation, credible team, prototype
Additional proof points / maturity, even if PMF is not yet clear Stronger on some of those 3 dimensions; maybe some signs of a good GTM motion
Clear, repeatable PMF and metrics; “just add water.” At least 3 out of: - Tapping into big TAM - Team’s execution record - Product love (NPS, retention) - Scalable, efficient GTM (acceptable LTV / CAC)
They’re succeeding; it’s just a valuation auction: - Market leadership - Strong team including execs - Proven product success: high NPS / low churn - Strong traction: High NDR, LTV / CAC, marquee customers
Why raise?
Bring on essential founding team; validate hypotheses; build a prototype / MVP.
Build the team; invest in user acquisition; build the product to a “v1”; get to PMF.
Get to PMF
Begin throwing fuel on the fire; prove that the business scales well.
Who leads?
Founders’ network
Dedicated seed funds; sometimes “super angels” / angel funds
Anyone’s guess
Institutional VC firm ($100M+ AUM)
Multi-stage VC or Growth Equity Firm ($500M+ AUM)
Typical dilution
Convertible Note, SAFE
Convertible Note, SAFE, Priced Round
Usually Note / SAFE; if a priced round was already done, this might be a priced round as well
Always priced round with preferred stock issuance; almost always includes a board seat.
Always priced round with preferred stock issuance; almost always includes a board seat.

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