Series C Isn’t What It Used To Be

In startup life, getting to Series C is kind of like hitting middle age. You’ve been toiling away for a while now, and everyone knows what you do. Nonetheless, it’ll take a lot more money to keep forging ahead.

Lately, U.S. investors have gotten much stingier when it comes to furnishing middle-aged startups with capital to continue on their journeys. One metric to measure this is Series C funding, which is down 74% in the first quarter of 2023 from year-ago levels.

Since venture funding is down precipitously across stages, it should be emphasized that Series C companies aren’t the only ones facing leaner times. But because of the unique place this stage represents in the startup continuum — a sort of pit stop between finding product-market fit and prepping for exit — its decline seems to indicate sinking investor confidence in prospects for big investment returns.

To get a sense of how far Series C dealmaking has fallen, we chart out investment totals and round counts for the past six calendar years below:

Though we’re only a little over a quarter of the way through 2023, it’s shaping up as a down year, with Series C investment on track to come in around 60% below prior-year levels.

Quarterly declines are sharper

The picture looks a little worse when we compare the first quarter of 2023 to year-ago levels. For perspective, we charted out Series C funding for the past seven quarters below:

In addition to steep funding declines, round counts also fell. The Q1 total was the lowest in years.

Most-active VCs are backing out of Series C this year

One peculiarity unearthed in our analysis of U.S. funding data is that the venture firms which used to lead the most rounds have largely avoided Series C deals this year.

Five names that used to reliably top the most active investor  rankings — SoftBank Vision Fund, Andreessen Horowitz, Tiger Global Management, Insight Partners and Sequoia Capital — haven’t led any U.S. Series C rounds this year, per Crunchbase data 1.

Collectively, they’ve only participated in four C-stage deals in 2023.

Instead, many of the biggest Series C rounds this year were led or backed by strategic investors or firms that aren’t among the most active startup backers. This includes:

• Monogram Health, a Tennessee-based provider of in-home care for kidney disease patients, raised $375 million in a January financing that ranked as the largest Series C of the quarter. The round had no listed lead investor and half of the backers were strategic investors.
• Boston Metal, a developer of technology to reduce the carbon footprint of steel, picked up $120 million in Series C financing led by strategic investor and steel producer ArcelorMittal.
• Chronosphere, a developer of cloud data visibility tools, scored $115 million in follow-on Series C funding in January, with new investors Google Ventures and Geodesic Capital joining the round.

For a bigger-picture look at sizable Series C deals, we put together a sample list of 11 from this year below:

Are current trends likely to continue?

While investors may make a long-shot bet at seed stage, that’s not the case at Series C. At this stage you’ve got to really believe in the product, the management team and the path to exit.

So, does the absence of the “usual suspects” among Series C investors indicate they don’t believe anymore? Maybe, but not necessarily. It could be that they’re sitting things out for a spell to let valuations settle or are conserving cash.

There’s also the countervailing explanation that perhaps startups themselves are sitting things out. With valuations lower, why do a down round unless you really need the cash?

So will the pace pick up again? Lately, there are fewer companies raising Series B rounds, so further out we may see a smaller pool of Series C candidates.

Of course, lots of companies did raise good-sized Series B rounds in 2020 and 2021. At some point most will start looking for Series C capital.

Perhaps they’ll seek to delay. Inevitably, however, there comes a point when maturing startups will need more capital, perhaps at whatever terms they can get. That’s just how it goes when you reach middle age.

Illustration: Dom Guzman

Clarification: This story has changed since its original publication to correct a charting error.

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