Data: Silicon Valley Startup Scene Getting Squeezed at the Series A Level Says Fenwick & West Law Firm

Fenwick and West, a Silicon Valley law firm, put out data from 2012 that describes the state of the seed financing landscape.   This is the firm’s third survey and it is mainly focused on Internet, software, and media startups.

Read : Seed Financing Survey 2012

Of the companies funded in 2011, 27 percent had raised a Series A financing by the end of the following year (2012), while 45 percent of the companies funded in 2010 had raised a Series A financing by the end of the following year (2011).

Conversely, 23 percent of the companies funded in 2011 raised follow-on seed financing by the end of the following year, while 12 percent of the companies funded in 2010 had raised a follow on seed by the end of the following year.

The percentage of companies in our survey receiving seed funding that were software companies increased from 25 percent in 2011 to 34 percent in 2012, while the percentage of such companies that were internet/digital media companies declined from 75 percent to 66 percent.

Note:  The information contained in this survey is based on 61 transactions in 2012, 56 transactions in 2011 and 52 in 2010. The vast majority of these transactions were for companies based in Silicon Valley, with some from the Seattle, Los Angeles and New York regions.

Other key findings:

  • The percentage of seed financings led by venture capital investors increased from 27% in 2011 to 34% in 2012.
  • The use of a preferred stock structure increased from 59% in 2011 to 67% in 2012.
  • The average investment size increased for preferred stock deals from 2011 to 2012, and declined for convertible note deals over the same period.
  • The median pre-money valuation in preferred stock financings increased from $3.8 million in 2011 to $4.6 million in 2012.
  • The median size of preferred stock deals increased from $1.0 million in 2011 to $1.36 million in 2012, while the median size of convertible note deals decreased from $1.0 million to $0.9 million.
  • The median valuation cap on convertible notes decreased from $7.5 million in 2011 to $6.0 million in 2012.

Key Trends

Venture capitalist doing more seed deals in both dollars invested and number of deals transacted.  Venture capital firms increased from 173 in 2009 to 388 in 2012, and the amounts invested in such financings increased from $119 million to $287 million during that period.

Incubators and Accelerators Increasing.  Accelerators are contributing to the seed funding and formation of new ventures.  The institutionalizing of angel investment is contributing to the rise in new venture creation but also increasing the amount of firms not getting follow on financing.   This is unlike the prior generations of early stage companies that were more likely to have less formal guidance and structure during their pre-seed and seed period.

Online Social Networks and Communities a New Dynamic.  New social platforms and added value networks for entrepreneurs is a big trend that SiliconANGLE and Wikibon are seeing.  For example AngelList, 500Startups, SiliconANGLE Labs, and other ad hoc founder-centric peer-networks have formed.   These are hybrid financing and management consulting firms designed only to add value to the entrepreneurs while aligning all the financial interests in the early stage between startup founders and angel investors.

More info on this trend:

During the time around Aaron Swartz death I commented on the entire venture capital industry’s changes and the changes in the startup landscape.


We are experiencing what I call the “middle class” startups syndrome– companies that should not have received funding from the get go.  These companies are often referred to as durable startups: firms that have turned in a profit and rely on a solid cash flow to gain market share, albeit slowly.  In the video above I explain that these ventures represent a good business opportunity, but not for VCs that are seeking a big return on their investment.

A another category of startups – “VC backable.”  Those that have raised funding and can afford to expand at a loss. This allows these companies to gain market share a lot faster than their profitable counterparts, making them worthwhile of investors’ attention.

As a result of these new dynamics we see another investment bubble as a result of this misplaced VC interest, and it is poised to burst in the near future.  I do see however that the consumer internet will thrive and that as predicted earlier enterprise market will see a massive growth in the same timeframe.

New Modern Era of Startups

Unlike the old era of entrepreneurship we live in a new moderner era where the frictionless environment of access to and sharing of information creates new levels of  transparency.  This dynamic is creating all kinds of new disruptions and efficiencies in the start-up eco-system.    Today’s founders are typically much more experienced.    I wrote about this here last year.

See: Breaking Analysis – The New Start-Up Founders Playbook