Late Stage Startup Capital Addiction

Startups are raising more capital than ever. Particularly in the later stages. How much cash does it take to win the market? Apparently, a lot.Our data shows that since 2008, companies are raising much more capital, and the time between rounds is shrinking. As a result, the velocity (rate of $ raised per day) of startup fundraising has increased dramatically.For example, the median Series D round in 2008 was $15M. By 2018, it was $50M. And the median number of days until the next round (Series E) went from 780 to 245.The rate of dollars raised went up by a staggering 8x for Series D rounds.

Chart 1: The median round size by round type (seed - series D) Chart 2: The % increase in median round size by round type (seed - series D)

Chart 3: The median number of days until the next round is raised, by round type. Chart 4: The median rate of $ raised since 2008 - (“Raised Rate” = Raised USD / No of Days to Next Close)Yes, startups are different than a decade ago. They may move faster. Some have successfully outspent competitors and won very profitable markets. Many startups are waiting longer to go public so continue to raise capital in the private markets, justifying bigger rounds for their more mature businesses. All of that is possible.

BUT an 8x increase in the velocity of fundraising for a typical Series D seems pretty dramatic to us. Even seed rounds have increased their raised rate by 3x. 

Now amid the COVID-19 crisis, private and public companies are scrambling to trim the fat. Expedia and Airbnb, two hard hit companies in the hospitality and travel sector, have slashed their marketing budget significantly to reduce burn. This is despite the cost of acquisition across digital platforms rumored to have dropped significantly. For example, Nikhil from Shasta Ventures mentioned in a Tweet that he is “seeing a 50% decline in cost of acquisition” for one of his portfolio companies. But does it really matter if CAC is cheaper than ever if it doesn’t outweigh dried up revenue from a drag in consumer spend? Only time will tell.So sure, some big fundraises have been justified. But this also looks a lot like an addiction to capital across the industry. And one could be led to believe that this is actually just a major increase in the burn rate for these startups. Capital can make things move faster. Capital can help you hire up a big team. Capital lets you pay higher prices for customers so you can continue at your current growth rate. But when a downturn hits, and capital dried up, sometimes it’s very hard to reset the culture and lower burn without losing it all.