A relative analysis on the shape & size of Series A rounds for ‘accelerated’ startups
I was intrigued by the numbers recently released by Mattermark on accelerators share of the US Series A market (tl;dr c. 10% of all Series A are raised by graduates of the top 3 accelerators, Y Combinator, Techstars and 500 Startups), so I did some digging to see what the situation is like over here in Europe.
The headline is that in 2016 18% of all European Series A rounds were raised by startups that at one point went through an accelerator or incubator programme.
This table has many more interesting numbers in it, which I will dissect below.
- 10x more rounds. The number of Series A rounds raised by accelerator graduates has increased more than 10-fold since 2012, from 6 to 61, while the rest of the A market ‘only’ grew by 2.8x over the same period;
- Bigger share of the volume pie. Series A rounds raised by accelerator graduates have taken a larger and larger share, trebling from 6% of all A rounds in 2012 to 18% in 2016. This year we can be pretty confident that at least 1 out of 5 Series A are of this type. Series A investors better show up at those demo days!;
- Bigger share of the dollar pie. Accelerator graduates have raised $456m worth of Series A rounds over the past 5 years, representing c. 8% of the total Series A capital raised over the same period, although that was 14% in 2016 and only 3% in 2012. So the pace of capital deployment is accelerating, literally;
- Smaller A rounds. The average Series A round size raised by accelerator graduates is consistently lower than that of non-graduates, with the average discount being c. 28% over the last 5 years ($3.6m vs $5.0m). It would be fascinating to have the data on how pre-money valuations (and thus dilution) compare between graduates and non-graduates. I would speculate that this discount can be attributed to either: a) adverse selection (i.e. the more confident, experienced and networked founders do not need an accelerator and/or are able to raise more capital); or b) once ‘accelerated’ a startups has less funding needs, having invested previous capital more wisely and achieved more with it;
- Less pre-A capital. The average amount of pre-Series A capital raised by accelerator graduates is 22% lower than that of their counterparts ($1.1m vs $1.4m). In other words, graduates get to a Series A more capital efficiently, ‘wasting’ less capital, or perhaps it is adverse selection at work again;
- More pre-A rounds. The average number of pre-Series A rounds for ‘accelerated’ startups is more than double the number of rounds than their counterparts require to get to a Series A event (1.5 vs 0.7). i.e. graduates needs an extra round to get to a Series A (which I guess is glaringly obvious if the acceleration is considered as a round per se);
- The A-crunch is real. Across the board it is very clear that the Series A bar has consistently risen, with the average amount of capital needed before getting to the A having increased 7x from $0.4m over 0.34 rounds in 2012, to $2.6m over 1.03 round in 2016.
While one can easily get stuck in it, it is always interesting to draw some comparisons to what is happening in the US, where in 2016 21% of all Series A rounds were accelerator graduates (so not too far from the 18% in Europe).
Other then the most obvious observation, such as that Series A rounds are generally larger in the US (just shy of 50% larger, whether or not the startup has been through an accelerator), it is interesting to note that:
- It appears hard to unlock a US Series A with less than $3m in pre-Series A funding, regardless of accelerators involvement;
- In Europe a Series A can happen with a lot less pre-Series A funding, particularly going though an accelerator which gets you there on about half the capital ($1.5m vs $3.1m) and fewer rounds (1.8 vs 2.3);
- The accelerator Series A ‘discount’ applies in similar fashion across the pond, with average size of Series A rounds 37% higher for non-accelerated startups in both US and Europe.
So overall, with various caveats, it seems clear that accelerators and incubators in Europe can be a very strong engine of Series A creation, just like they have been in the US.