This short blog is based off a Twitter thread from the other day in which we got a whole gaggle of nerds to argue about Series A rounds. It must have been a good week.
Depending on when you started paying attention to the world of venture capital, headlines like the following either make sense, or make you want to roll your eyes: “Company X Raises $50M Series A.”
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What’s your reaction? Does that fictional Series A make sense, or does it feel like some sort of joke, a bend in the natural rules of order so sharp that it reads as a joke?
I suspect that the longer you’ve watched venture capital (roughly, how old you are) the more you’re in the second camp. And the less time you’ve paid attention to the VC industry, the more you’re in the first group.
We’re not discussing a difference in values, mind. We’re understanding how things have changed.
Large Seed, Series A, and Series B rounds are a cause for consternation among some in the venture-watching community. After all, weren’t Series A investments just a few million dollars in 2009? That’s a Seed round today, at most. (We examined the phenomenon of the rise of the pre-seed round and increasingly larger seed and Series A rounds in this November 2017 piece). That sort of change might sound like a small distinction, but for some, the stretching of rounds that were once called “early-stage” to include dozens of millions of dollars is downright wacky.
At issue are two things contained in what a “Series A” might mean. First, the technical definition of what a Series A round is, and why it has a name at all. Second, the market expectations around how large a Series A should be, and thus what it should imply about the company receiving the capital.
In my (admittedly limited view) it’s the mixing of the technical definition (what a Series A actually is) and market expectations (what people want it to signal, and what it may now signal instead) that has created some tension. The previously-linked Twitter thread, for example. Let’s see if we can unpack the situation a bit.
The issue we’re discussing applies to a number of round types, but we’ll need to pick one as our focus. And Series A rounds are the best choice, as they exist after the somewhat fluid Seed and Angel worlds, putting them after a change in how many people think about private capital.
So, what is a Series A? Crunchbase News’s Jason Rowley described them as follows, writing in 2017:
“[A] Series A [is] typically the first priced funding round a company experiences.” 1
That’s simple enough. In short, what separates a Series A from a Seed round is that it is priced, which means that the equity sold in the financing has a per-share price attached. This helps give the company in question a valuation both pre-money (not counting the Series A investment) and post-money (including the Series A investment).
Series A rounds are often called “early-stage” rounds as it’s younger companies that tend to not have raised a priced round.
That youth point doesn’t always hold up, however. It is possible to found a company, run it at breakeven or even at a profit for a very long time, and then raise a first, priced round. This means that you can wind up with a $72 million Series A round, like we saw in the news this week.
In that case, Webflow raised its first post-Seed round in what the company called a Series A. The $72 million dollar deal came after the company reached eight-figure revenues. This was the funding event that triggered our Twitter thread, and this post.
Separately, you can see companies that are performing well raise Series A rounds that, thanks to the amount of capital available in the market today, look much more like traditional late-stage rounds (Bithumb’s recent $200 million Series A, for example). And you can see corporate spinouts and subsidiaries raise enormous Series A rounds as well, helping those freshly-extruded entities price themselves as they begin to walk on their own two feet (JD Health’s recent $1 billion Series A, for example).
So there are a host of ways in which the “early-stage” presumption regarding Series A rounds can be incorrect.
Who Gives A Dang?
Well, it depends. You don’t have to care at all that a Series A rounds are now often so large that they resemble a yesteryear Series D.
However, if you did grow up in the venture world when it was round size that appeared to demarcate a Series A from earlier rounds. And it can feel strange if “Series A,” to you,” once meant a very narrow range of dollars invested and valuation set. You may even sound a bit like I do when I say boring things like “back in my day, a Series C was $35 million, max, and now these companies are raising that much in an A? It makes no sense!”
This sort of thinking has broken down for the reasons we’ve listed above.
Naturally, given that there are a few ways that a Series A round or other, traditionally “early-stage” investment can get quite large, comparing them can be difficult. I pointed out earlier in the week that there have been a number of huge Series A deals this year. This was factual, but it was argued that I was mixing a few different large Series A rounds that were large for different reasons (see the previously-linked Twitter thread.) EXAMPLES COULD HELP
Our recent Twitter discussion led to a reasonable joke from Forbes’ Alex Konrad, who argued in favor of a new naming structure for rounds:
It’s a good tweet, and I honestly dig the names.
At the same time, the reason why a Series A is called an A — ie the start of the alphabet — is that it’s the first priced round that a company raises. This matters for the issuance of Series A Preferred stock, and later blocs of shares that are named after later Series Alphabet rounds. You could have Series Plankton Preferred, for example, for a first priced round, I suppose. But if that Series Plankton was a large investment, like one of our large Series A rounds, it would moot the nomenclature.
And you can’t force a company up the Series Zoology stack to, say, Series Tuna if Series Plankton meant first priced round. And if it didn’t mean that it wouldn’t really matter for our discussion, I suppose.
So Konrad’s line of argument is good fun, but not a solution to the tension between a Series A being the first priced round, and the folks who want it to mean something more than that.
The real solution to all of this, of course, is to log off the Internet and not care. That’s what I tell myself. But as I also get involved in the ever-recurring “was that IPO underpriced” game, I doubt that I’ll be able to follow my own advice.
And we can all just wait, really. In time there will be a correction. And when that correction comes, Series rounds will decrease in size as the pool of private capital shrinks. And then Series A rounds might look a bit more like they used to, and everyone will agree and Twitter will once again be harmonious.
Illustration: Li-Anne Dias.