When will current Series A startups raise their Series B?

When will current Series A startups raise their Series B? 

Someone recently asked me this question, so I built a prediction model to help generate an answer. Keep reading as I discuss my process and give actual Series B predictions. 

Where to begin? 

I began by pulling together metrics that made sense for a company trying to raise a Series B. My thinking first went to a company’s finances and whether they seem attractive to venture investors.   

The issue here is that we are talking about private companies, and their financial information is not readily available. So, I started speaking about this more and more with my team and other fund managers. These discussions presented more data points that we look at:  

• – The amount of cash raised in the last financing round and total?  
• – What is the current burn rate?  
• – How many founder shares have been diluted?  

In reality, it is difficult to predict when a company would or could raise their Series B financing round, even if all of these variables are known. This problem motivated me to create a prediction model using data science and machine learning techniques.   

Building the dataset 

To build a predictive model using machine learning, you need to start with a dataset. I began scraping and extracting web content of over 700+ companies that raised a Series A and/or a Series B round in the last six years. Once this was generated, I cleaned the data by removing redundant variables, and also created new variables like the following:  

• – Year Founded  
• – Length of time between Year Founded and Series A  
• – Difference between Series A and Series B pre-money valuations  
• – Length of time between Series A and Series B  

(Actually, there were a lot more variables 😊 – appropriately showcased in Figure 1.) 

I used these inputs in a random forest regression analysis. The table below is a sample representation of how I trained the model. There are five companies below in Table 1 that have all raised a Series A and Series B rounds within the last six years. This makes it easy compare differences in employee count, pre-money valuation, and time between the Series A and Series B rounds. 

Company Name	Employees during the round	Raised to Date (USD Million)	Year Founded	Pre-money Valuation (USD Million)	Series	Deal Date	Round Size (USD Millions)	Post Valuation (USD Millions)
15Five	37	12	2011	43.9	Series A	29-Nov-18	8.2	52.1
15Five	160	42.7	2011	102	Series B	17-Jun-19	30.7	132.7
Abstract	17	8.25	2015	19	Series A	19-Jun-17	6	25
Abstract	32	24.25	2015	60	Series B	24-May-18	16	76
ActionIQ	40	14.7	2014	45	Series A	3-Apr-17	13	58
ActionIQ	40	44.7	2014	104	Series B	23-Oct-17	30	134
Algolia	21	21.21	2012	50	Series A	6-May-15	18.39	68.39
Algolia	115	74.2	2012	255	Series B	8-Jun-17	53	308
Allbirds	15	9.95	2014	25	Series A	7-Sep-16	7.25	32.25
Allbirds	80	27.45	2014	350.2	Series B	5-Sep-17	17.5	367.7

In looking at the random forest regression’s feature importance weighted scores, the following filters were given the highest weight for predicting an upcoming Series B Round. 

• – Difference in numbers of employees from Series A to Series B 
• – Difference in mark up in Pre Money-Valuation from A to B  

The new addition of capital is directly linked to an incredible markup in the employee count. A startup would receive a ton of inbound interest after publishing that they have raised a new round. See the histogram below for a complete list of weighted scores. 

Additional insights from the data: 

The three main data points I found interesting are: 

1. – Within 3 Years of being founded, 83% of startups raise their Series A, and 66% of these startups go on to raise a Series B.  
2. – Series A startups take 10-18 months before raising their Series B financing round. 
3. – A little less than half of Series A startups (44% to be precise) have a pre-money valuation of $20M-$30m before raising their Series B Financing round. 

So, who is likely to raise? 

This is the real reason why you kept reading. After running the prediction model – below is the group of Series A companies that could end up raising their series B Round in the next four quarters starting in Q2 2021. 

It would be fair to assume that the model does not take into consideration financing rounds that are pre-empted or companies coming out of stealth raising large Series A rounds. Startups closed out 2020 in a much stronger position than the one they started the year in, with global venture funding up 4 percent year over year to $300 billion. Moreover, deal volume has grown significantly through the decade. For Instance, 2011 featured 10,000 rounds from seed to late-stage mega-rounds, and now, the deal volume is close to 30,000 rounds (seed to late-stage) since 2017. 

However, after looking at the results and the histograms above, the model could do well. 

 *As I was writing this blog post, a Techcrunch article came out announcing that Privacy rebranded to Lithic and raised a $43M Series B round. According to my prediction, I was off by a quarter.  

Good luck investing! 

1. I hope you enjoyed reading. I would love to continue the conversation if you want to play around with the model or if you are one of the companies mentioned in the prediction analysis, and I got it wrong.  

To learn more about me and what is going on at Arc Ventures follow us both on Twitter: @MMaulik11 and @Arc_Ventures. Shoutout to Rachel Payne and Eric Kohlmann for helping me structure the blog post.

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About the Author: Maulik Mehta is an Analyst at Arc Ventures. His role involves deal sourcing, conducting due diligence and creating value-add for Arc’s portfolio companies through customer and venture firm introductions. If you are a founder or a startup in deep tech, enterprise, automation, digital health, or fintech, please feel free to reach out at mmehta@arc-vc.com.    

About Arc Ventures: Arc Ventures is a New York based venture capital firm invested in over 50 funds and startups across the US, Israel and Europe. The firm prefer to invest predominantly at the early stage (pre-seed to series B) and reserves a smaller share for late stage/ pre-IPO companies across Enterprise SaaS, FinTech + Prop-Tech, and FrontierTech.