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:
- 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.
- 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:
- 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.