Wallen's

Web funding norms are a context, not guidance

Following my previous post on VC Web investments insights from CrunchBase, here is a small follow-up to illustrate a recurring subject for entrepreneurs. We are often looking for norms on deal size, valuation, etc. to guide our funding approach. However, norms or medians should not be used as guidance but just considered as a context.

To illustrate my point, the tables below depict the distribution of deal size of Web investments at various stages (A/B/C) over the period 2004-2008 (from CrunchBase database). What comes out is that, while there is a middle ground with most deals, there is also a high proportion of "outliers".

~50% of deals in series A are between $ 2-7m,  in series B between $ 6-13 and in series C between $ 10-25. As a reminder from my previous post, the median were respectively $ 4.8m, $ 9.5m and $ 15m.  However, nearly 15% of series A deal size are above $ 10m, ~12% of series B above $ 20m and 11% of series C above $ 40m. To take some extreme values, the 1st percentile is respectively $55m, $ 80m, $100m for series A, B and C.

Insights on Web funding from Crunchbase

In my CFO & Business Development responsibilities at pearltrees, I'm interested in reliable Web specific funding data but it's hard to find. Usually, Web start-ups are included in broader categories.  Actually, I haven't found any comprehensive funding analysis focusing on Web only. Discussing about this with Nicolas Cynober - a semantic Web expert and R&D engineer at pearltrees - we decided to find a remedy: we extracted the entire CrunchBase database of funding rounds. Zooming on investments in Web start-ups exclusively (since 2004 to end of October 2008, series A to F), we ended-up with a database of 914 start-ups, 1307 investment rounds by 817 investors worth nearly $14bn. While CrunchBase may have some pitfalls (e.g., fewer deals prior to 2006, US bias), it is one of the most comprehensive publicly available database on Web start-ups funding. You'll find below some "Web specific" insights such as the Web VC ranking or overall data on investment stage, deal size and implied valuations (the tables below and detailed investments by VC are in Excel here Download Tables Crunchbase).

VC Web investment ranking

As table 1 below shows, the usual suspects are at the top of the ranking with DFJ, Sequoia and Accel trusting the first 3 places. These 3 funds invested in more than 40 Web start-ups with a total of 127 individual start-ups (w/o double counting for companies with several VCs) representing 14% of all funded companies. They are followed by Benchmark, Index, Intel Capital, First Round Capital and DAG Ventures who each invested in >20 companies. In total, these 8 VCs invested in 215 Web start-ups (24% of total). Another 36 VCs invested in more than 10 Web start-ups. In total, these 44 VCs invested in 490 Web companies (54% of total). Finally, another 770 investors complement the picture with investments in ~760 start-ups (83% of total financed companies - note that companies having several VCs, the percentage sum up to more than 100%).

Web investment stage

As tables 2 and 3 illustrate, series A funding represented on average 57% of investments rounds (39% in terms of amount invested). Series B, C and D & above represented respectively 31%, 9% and 3% (35%, 19% and 7% in terms of amount invested). Overtime, investments tended to move towards later stage rounds reflecting the advancement of the investment cycle. In 2008 (year to date), series A represented only 44% of funding rounds and 27% of dollars invested.

Web round size and implied pre-money valuations

The median round size was $~5m for series A, $9.5m for series B, $15m for series C and $20m for series D & above. There is however a large variance as table 4 illustrates. For example, there is a ratio of nearly 1 to 3 between third and first quartile series A size ($2.5m vs. $7m) or above 4 between 80th percentile and 20th percentile ($2m vs. $ 8.3). Series B tend to be in the range of $6-14m and series C $10-25m.

There is one step between round size and valuation... unfortunately this data is not available. However, by doing some rough assumptions (series A tend to go for 25-50% of capital, series B for 20-30%, series C & above for 10-25%), we can infer some estimates of pre-money valuations that should be directionally correct. Table 5 shows the resulting rough estimates (the implied step-ups tend to be in line with market data): taking the median estimates, series A could typically go for $5-15m, series B $20-40m and series C $45-135m. With this estimation "technique", bigger round size mechanically come up with higher figures. A recent study by SVB argues that larger round size have on average higher valuation levels.  Hence, one could infer that "very hot" Web start-ups may go for >$25m pre-money valuation for series A or >$60m for series B (20th percentile high estimates).

That's it. I'll try to extract some further insights from this database for future posts so keep... posted.