The Mid-Stage VC Funding Gap, By the Numbers

In recent years, we’ve heard a lot about the “Series A crunch” for tech startups—lots of companies get seed funding but can’t raise a first venture round. Now we’re hearing more about a mid-stage funding bottleneck, typically at the Series B and C venture stages.

A recent tech funding deal in Boston highlighted the issue locally, so I tracked down the national numbers from CB Insights over the past year. Do they support the notion of a worsening mid-stage funding crunch? Yes and no; there is a bottleneck, but things haven’t changed that much over the past year.

This isn’t an esoteric issue that only startups care about. This cuts to the heart of how any business community builds big, successful companies and anchor tenants. Look at success stories like Facebook, Twitter, Tumblr, Tableau Software, Kayak, and Zipcar: all raised important mid-stage VC rounds. Not to mention some of today’s hottest companies, like Cloudera, Dropbox, Airbnb, and Uber (which are sort of a separate phenomenon; see below).

As mid-stage funding goes, so will a big chunk of potential leaders in any cluster.

The charts below show the percentage of U.S. venture deals and dollars (across all sectors) by stage, for the past five quarters. The first thing you’ll notice is that the proportion of deals of any given stage has been fairly constant over the past year:

VC funding stages by number of deals (image: CB Insights)

Mid-stage deals—which we define as Series B and C rounds—made up roughly one-third of all company financings (ranging from 29 to 33 percent over the last five quarters). Not surprisingly, seed and Series A deals made up slightly more than half of all deals. And late-stage deals (Series D and beyond) are a relatively small proportion, but have reached a five-quarter high at 17 percent.

And if you look at the dollars spent (below), those late-stage deals are pushing the rest of the stack down, thanks to mega financings for established hits like Airbnb and Uber. In the most recent quarter, Series D-and-later deals made up 45 percent of all venture funding, as compared to 32 percent a year ago:

VC funding stages by dollars (image: CB Insights)

Meanwhile, mid-stage deals made up 38 percent of all deal money, as compared to 43 percent a year ago. Not a huge shift, but a noticeable one.

Depending on whom you ask in the VC world, the relative dearth of Series B and C funding is either an important issue, or just the breaks of the game. Jon Karlen at Atlas Venture, for example, sees a Series B crunch around Boston at least. “We’re not doing it,” he says, as Atlas is more focused on leading seed and A rounds. If you look at most Boston-area tech companies raising B rounds, you’ll find “all West Coast firms” leading those rounds, he says.

Case in point: Boston payments startup Plastiq has just raised a $10 million B round led by Khosla Ventures. (Atlas and Flybridge Capital Partners, both Boston firms, led the previous round.)

Others don’t see a B crunch at all—but let’s keep in mind where they sit. Bain Capital Ventures’ Ben Nye says his firm has a “sector focus over stage” and will lead A, B, and C rounds (and beyond). He adds that there’s plenty of healthy activity at the B stage, but there’s also a telling difference compared to A rounds:

“Quality control is more stringent,” he says.

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