Far Fewer Seed-Stage Startups Are Graduating To Series A

Editor’s note: This is the second in a two-part series looking at the evolution of seed funding since the 2021 market peak. Part 1 looked at the increase in larger seed rounds since 2021.

U.S. seed-stage funding was somewhat resilient in the venture funding downturn, due in part to the preponderance of larger seed rounds. Crunchbase data also shows that since 2023, companies have been staying longer at seed and raising more seed rounds.

That growth, however, conceals a lack of progression beyond seed funding. As companies take longer to get to Series A, there’s the potential for a much higher failure rate for seed-stage companies, which in turn could wipe out many seed-stage funds in years to come.

“There’s going to be a higher death rate, much lower percentage of companies getting to [Series] A, which means a harder job for seed investors,” said Michael Cardamone, CEO of New York-based Forum Ventures, an active seed investor.

“It’s going back to where it’s two-plus years to get to an A,” Cardamone said in an interview with Crunchbase News. “And you really need to have meaningful traction, early signs of product-market fit and good growth.”

Companies stalled at the seed stage might be sacrificing growth to get to breakeven, which could further hinder their ability to show the traction needed to get to a Series A.

Given how long it takes for a seed-stage fund to deliver a return, the repercussions of the lower graduation rate to Series A could take some time to play out. Our data shows that small and mid-sized funds are already having a harder time raising follow on funds in this market.

Beyond seed

Since 2021, companies that raised their first seed round of $1 million or more are not progressing beyond seed at the same rates nor in the same timeframe they had previously, Crunchbase data shows.

For this analysis, we counted the number of unique seed-stage companies from the year they raised their first seed round of $1 million or more, and looked at how many from that year are post-seed.

For 2021 and 2022, the share of companies still at seed are proportionally much higher than prior years. For the 2021 cohort, the percentage of companies that have graduated beyond seed is 36%, while for the 2022 class it is only 20%. Compare that with previous years, when percentages were between 51% and 61% of companies that raised a Series A or later round or had an exit. (The 2023 and 2024 cohorts are still too recent to analyze.)

Not a whole lot has changed since we last ran this analysis six months ago. We found that in 2021 and 2022 the graduation rates beyond seed improved between 2% and 3%, for each year. Most companies have not progressed; they’re still in the seed pool or have shuttered.

Market reset

Paradoxically, faster death rates at seed can benefit seed investors — provided they have some winners.

In 2021, everything seemed to get funded and most of the firms we tracked invested at a much greater pace than the prior years, or since.

Venture investing has become less frenetic in recent years, which has its benefits too.

“It’s good for the firms to not have a bunch of not-great companies raise more money, because then you have to put more money to work, and you want to really be able to push your money into your winners,” Andy McLoughlin, a managing partner at seed-stage investor Uncork Capital said in an interview. “If something’s not working, you can figure out that it’s not working sooner.”

“It’s also good for the ecosystem as a whole because seed-funded companies soak up talent,” he added. “When they don’t work, that talent will need to go and find a job elsewhere at a company that does have traction and funding.”

Methodology

For this analysis we only include seed and pre-seed funding rounds for U.S.-based companies. Due to data lags, seed funding counts will increase over time for 2024 relative to prior years.