The Exchanges

Q see it, and that almost always leaves this, like, overhang of preempt, of like, your likelihood to get preempted just based on that, even if your investors are the same, and your, you know, delivery is the same, just the fact that you raised a bunch of money, it's like, oh my god, how do I, you know, this must be hot, how do I get into the next round?

A Super well said. Yeah, there's a, uh, frenzy dynamic, right, where you're like, oh, it's oversubscribed, I didn't get in, I gotta get in at the A, I gotta get in at the B. Okay, so we looked at this data. And what it showed is that on a percentage of graduation basis, yes, the highest valued companies graduate to Series A a little bit more often than the other companies. But it's not a massive difference. It's within a couple percentage points. The companies that didn't had a big, big change were the lowest valued companies. So the lowest quartile, if you were raising a seed round and it's in the zero to call it 25th percentile of valuation, so on the very low end, those companies made it to series A about half as frequently as the other companies.

AI assessment note: “the highest valued companies graduate to Series A a little bit more often”

Q And so moving on to seed, then what's, what's a typical seed round?

A So seed can happen either on safes or in price equity. It's kind of fifty-fifty muddy middle now. We only include seed. We only call around a seed round on safes if it's for two million or more dollars. One of the advantages of being the system of record here is that we can split out really easily Primaries versus bridges and extensions. So because we see that actual information, we know if it, if you'd already raised the seed that this is a seed two, a seed plus, et cetera, and we can remove those from the medians. So it's not getting too messy. So proceed on Carta today. The median amount raised is about three to 3.5 million. And the median valuation, this is a pre-money valuation is 14. So if you add those up, that's, you know, call it seventeen million post or so. 17 to eighteen million.

AI assessment note: “The median amount raised is about three to 3.5 million.”

Q Um, like raising two, like two on 20, that's like 75th?

A Yeah, like two on 20 or one on five. Like both of those kinds of things are happening. A lot of that is just due to like, who is the founder? Are they a repeat founder, et cetera, et cetera. For seed, it's a lot easier for us to judge this because it's just price. If you just look at price round seeds, um, those have actually gone again, the valuations on those are still very robust. It's about 14 and a half million pre money. You add in about three million raise that's 17 and a half, eighteen million pre money, or excuse me, post money. That's a very healthy seed valuation. Uh, that's about as high as it's been in quite a while, not accounting for inflation. So maybe, maybe there's some inflation adjustment that needs to happen there, but those are very robust. And then Series A is again, you're talking about a 40 to forty-five million pre-money valuation on the Series A company on Carta. So that makes sense in terms of the jumps, but those are expensive.

AI assessment note: “Yeah, like two on 20 or one on five. Like both of those kinds of things”

Q includes all Like all the dilution, not just from other fundraising, but from options, from everything is all baked in there. I know that if I put a 1,000,010 post on a post money, say I own 10%, no matter what happens, all the dilutions on the founder, I don't know if you've had a conversation with founders, or have you seen this like surprise and kind of sticker shot?

A It is an epidemic. And you hit on the key point, which is the switch from pre to post money was not a founder friendly thing. YC sometimes makes it sound as though that was in service of founders, and you can make some case that it is more transparent, it's more certainty, et cetera, but that is primarily in service of investors. Um, because as you mentioned, with the post money safe, investors that invest on a following safe do not share in the dilution. So if you were to do all of this stuff on price rounds, those investors would have already begun getting diluted alongside the founders as new money comes in. If it's all on safes, the founders, and then eventually the employees are the ones who take that dilution when the price round happens. So safes, this, this dilutive, this anti-dilution provision effectively that exists in post money safes is a Real headache for founders, one. Two is a lot of founders feel as though like safes are almost free money, uh, at the very beginning because it feels like you're getting this cash and you're not even giving up equity yet. So it can feel really great and they overuse them. Like one of the things that we've seen, there are, there are companies on Carta that have raised on upwards of 15 different post money valuation caps. Now that's an outlier, obviously that doesn't happen often, but quite a few companies are raising on two or thre…

AI assessment note: “It is an epidemic. And you hit on the key point”

Q point, like on COVID, the way that, that we look at it is, you know, COVID was really the exception, because if you zoom out and you look at the five or 10 year view, it seems like basically straight up, you know, line up and to the right at a certain slope, and COVID was just this bomb that came and went. Is that, is that what you see?

A Yeah, I think that's, I think that's a very instructive way to look at it as in the, don't take the peak to trough as what reality is, you know, ignore the peak and just go, you know, from 2018 if you extend that line forward. The difference though is just in the quality of companies. I mean, you would know this better than I would even. The kinds of companies that are raising a seed or a series A today are just materially further along in terms of whatever metric you want to judge them on, ARR, financial health, growth rates, et cetera. Than many of those that we're raising in 2021. So I just think that the competition for the best, quote unquote, the best VC deals remains really high because the underlying founders are incredibly high quality.

AI assessment note: “Yeah, I think that's, I think that's a very instructive way to look at it”

Q about dilution and I, I often talk about a lot of these founders that, that I've interviewed on, on the show that have gone on to be, you know, unicorns are close to it. I've raised like really small rounds. They bootstrap at the beginning, but I saw post years with a lot of traction. Talking about not raising a small seed round. What's the point of driving it there?

A People had really strong feelings about this post. The general gist of it was that if you raise a small seed round, that is less highly correlated with your ability to raise an A round. So it, it looks to be that the smallest, and there's a, there's a bell curve here where, you know, at the smallest seed rounds tend to make it to A, the companies that do so tend to make it to A less frequently. But the biggest, biggest seed rounds don't have, like, some sort of magical, meaningful impact on the A's. It kind of levels off. Um, so one of the key actual takeaways there, it's not that raising a tiny seed round is in all cases bad. What it is, is that probably what the data is showing is that the founders for whom it's only possible to raise a very small round are probably less well positioned to make it to the A in the first place. So there's a little bit of, you know, chicken or egg in that data. But I do think it matters for founders to take a look at, for instance, the timelines between rounds and realize if you, if you sell. 15 to 20% of your company for a million bucks. Two things happen. One, that's a pretty low valuation for your company, but two, you have to get to the next round with only a million bucks. And that can be really hard. And then if you come back to the same investors, they're probably going to demand more equity if they're going to fundraise or help you fundr…

AI assessment note: “if you raise a small seed round, that is less highly correlated with your ability”

Q And what's that trend like? Was it always 30 or was it like 15% before?

A No, no, no. It's definitely gone up. It's gone up quite a lot. Like, so look, and obviously the time factor comes into play here. Like, If you raised a seed extension in 24, I don't know whether you're not going to raise an A yet. You, you didn't raise a series A in twenty-twenty-four, but that was kind of on purpose, right? You did a bridge. So we don't know what the ultimate value of those bridges are going to be. But if you take, I'm looking at data from, say, twenty-twenty, uh, the percentage of companies that raised a seed round in twenty-twenty and then have raised some sort of bridge capital since then on a safe or a note. Only four percent of companies that fall into that bucket have gotten to a series A. Four percent versus like, you know, 50% of companies that didn't raise a bridge round at all. So obviously if you're raising a bridge round, probably it's not the best thing because, hey, why did you need to bridge in the first place? So I get that. We should expect the numbers to be lower, but safes and notes as like this extension capital, the res, the end result of those, I think is almost always not Not good.

AI assessment note: “No, no, no. It's definitely gone up. It's gone up quite a lot.”

Q And so I think, you know, you guys have at scale and granular data, which is hard to get. So maybe let's start Let's start there. I mean, you just put out the report this week. What are kind of some of the big top highlights that you're seeing, uh, this quarter and especially focused like always on, on the early stage, right? Pre-seed, seed, series A more than anything.

A I think as you look over Q three, it was a pretty good quarter, all things considered. I think that one of the things that throws people off in this, and maybe we spoke about this last time, but I think it's probably worth reiterating. It's pretty natural as human beings to compare I mean, you know, I, I, I, I, I, I, I, I, I, I, I, I, I, I, Just kind of right at that 20 to twenty two billion dollars a quarter mark. And that, if you look historically in the beginning of 2020, it was pretty much, it was, it's a little bit higher than the beginning of 2020. So if you just remove all the craziness that happened in 2021, like this is normal. I'd expect as we look, maybe do a little projection ahead to 2025, like things are probably going to get a little bit better, especially with interest rates or, you know, who knows how this election is going to play into this, et cetera.

AI assessment note: “Just kind of right at that 20 to twenty two billion dollars a quarter mark.”