The Series A Crunch is Back: Why 85% of Seed-Stage Startups Now Fail to Raise Series A (And How to Beat the Odds)
The Series A Crunch is Back: Why 85% of Seed-Stage Startups Now Fail to Raise Series A (And How to Beat the Odds)
Remember when raising a Series A was just about proving you had a decent product and some early traction? Those days are over.
The stark reality: only 15.4% of startups that raised a seed round in early 2022 were able to raise a Series A within two years, compared to 30.6% of companies that managed this feat back in 20181. That's a devastating 50% drop in success rates. For SaaS startups specifically, the numbers are even more brutal—success rates plunged from 37% in 2020 to just 12% by the first half of 20222.
As venture investor Tomasz Tunguz puts it, "the Series A Crunch has returned" in 20243, creating the same funding squeeze we saw during the 2012 "Seedpocalypse." But this time, it's worse.
The Perfect Storm: Why Your Seed Success Means Nothing Now
Here's what's really happening: while everyone was celebrating the democratisation of seed funding, we created a massive supply-demand imbalance that's now crushing Series A hopefuls.
The Numbers Don't Lie:
- Seed investments have surged while Series A rounds remained relatively stable, creating an "orange crush" of seed-funded companies competing for limited Series A dollars
- Gaming companies—which often serve as a bellwether for the broader tech ecosystem—saw only 2.3% of Q1 2022 seed companies successfully raise Series A within two years4
- In Q1 2025, the number of seed rounds plunged 28% year-over-year while Series A rounds fell 10%5—fewer companies are even making it to the starting line
What Changed:
The explosion of micro-VCs, accelerators, and "spray and pray" seed investing created thousands more funded startups, but the number of legitimate Series A investors hasn't grown proportionally. According to original TechCrunch data analysis, we've seen a 33% increase in reported seeds and a 9.6% drop in reported Series A rounds6. The ratio of seed to Series A deals has gone from 1:1 in 2008 to roughly 2:1 by 2011, and the trend has only accelerated.
The result? More than 1,000 startups are getting "orphaned" each year—stranded between seed and Series A with nowhere to go.
Why the Old Playbook No Longer Works
The metrics that got you seed funding won't get you Series A. The old threshold of $1 million ARR that used to unlock Series A doors? That's now just table stakes. Investors have fundamentally raised the bar because they have so many options.
The New Reality Check:
- Most Series A companies now need $2M to $5M ARR just to be considered7
- Growth rates of at least 25% month-over-month are expected, not exceptional
- Median pre-money Series A valuations have hit $45M for primary rounds and $43.6M for bridge rounds in early 20258
But here's the kicker—even hitting these numbers doesn't guarantee success. As the Founder Institute notes, "The 'Series A Crunch' that started in 2023 has only grown wider as the supply of seed-stage companies trying to raise A rounds has increased, enabling investors to be picky and operate from a position of great strength”.
The Rule of 40: Your New Survival Metric
In this hypercompetitive environment, one metric has emerged as the ultimate differentiator: the Rule of 40. This isn't just another vanity metric—it's become the primary lens through which Series A investors assess whether you've achieved sustainable, scalable growth.
The Simple Formula That Changes Everything:
Rule of 40 (%) = Revenue Growth Rate (%) + EBITDA Profit Margin (%)
Companies scoring greater than 40% on a weighted Rule of 40 basis are getting rewarded with median revenue multiples of 10.7x9—that's the difference between a good valuation and a great one.
Why It Matters Now More Than Ever:
According to Bain & Company's foundational research, software companies that outperform the Rule of 40 have valuations double that of companies that fall "below the line," and they achieve returns as much as 15% higher than the S&P 50010.
The beauty of the Rule of 40 is that it allows you to be unprofitable while still demonstrating financial discipline. A company growing 60% year-over-year with -20% EBITDA margins still hits the 40% threshold, proving they understand the trade-offs between growth and profitability.
The Connected Financial Story That Wins
Surviving the Series A Crunch isn't about having perfect metrics—it's about telling a coherent story where every number supports your narrative of sustainable growth. Investors can smell disconnected metrics from a mile away.
Your Three-Pillar Foundation:
- Operational Efficiency (The Engine):
Your burn rate relative to revenue generation directly impacts your Rule of 40 performance. The ideal scenario is reaching £3 million ARR without burning significantly more than £3 million in total capital—this 1:1 ratio demonstrates efficient capital deployment.
- Customer Quality (The Fuel):
LTV-to-CAC ratios above 3:1 (with the best companies hitting 5:1) prove your growth is sustainable. These metrics support both the growth and profitability components of your Rule of 40. Cohort analysis showing improving retention rates across customer segments provides powerful validation of product-market fit.
- Revenue Quality (The Durability):
Monthly and annual recurring revenue breakdowns show investors that your growth rate is sustainable, while customer concentration analysis reveals whether your growth depends on a few large customers.
The Due Diligence Death Traps
Due diligence has become rigorous from Series A onwards as investment capital becomes larger and comes mainly from institutional investors who follow structured processes. The startups that fail often do so due to easily preventable mistakes:
The Financial Foundation Failures:
- Using spreadsheets to maintain books (seriously, stop this)
- Mixing personal and business transactions
- Missing comprehensive profit and loss statements or presenting unrealistic financial projections without supporting data
The Systems That Impress:
Having all your documentation together in one place before you sign a term sheet can cut as much as a week off your closing process. This includes:
- Three years of historical financials
- Monthly projections for the next 3-5 years that actually make sense
- Clean cap table showing exactly who owns what
- Revenue recognition policies that withstand scrutiny
The Market Reality: Why Timing Matters
2024 was the year of AI venture capital funding, with AI startups locking in 31% of global funding in Q3 202411. But don't let that fool you—while AI startups are getting bid up to 2021-level multiples, for classic SaaS companies, the Series A Crunch is brutally real.
The New Economics:
- The average Series A round now raises $16.6 million in early 202512
- Median round sizes have increased 11% to 30% across seed through Series C in the first half of 202413
- AI companies are achieving valuations 1.6x higher than non-AI companies
- 40% of founders feel less confident about market conditions than 12 months ago14, making realistic forecasts more valuable than aggressive growth assumptions
This means bigger rounds for the winners, but drastically fewer winners overall.
The Leaner Startup Advantage
Here's a surprising trend that's emerged from the data: companies that closed Series A rounds in the first half of 2024 had an average of 15.6 employees—16.3% lower than Series A companies five years ago15. Successful companies are doing more with less.
The median Series A round in Q1 2025 involved 17.9% dilution, down from 20.9% a year earlier16. Founders who demonstrate capital efficiency are keeping more of their companies while raising the same amounts.
Your Action Plan: Beating the 85% Failure Rate
- Start Tracking the Right Metrics Now:
Don't wait until you're fundraising to understand your Rule of 40 score. Calculate it monthly to understand the levers you can pull to improve it.
- Build Connected Systems:
Investors expect clear evidence that technology can support rapid growth, adapt to evolving customer needs, and withstand potential risks. Your financial systems need to tell the same story as your product metrics.
- Prepare for Marathon Fundraising:
The fundraising landscape has become significantly more challenging for startups. The latest Crunchbase data shows that for the 2021 cohort, only 36% of companies have graduated beyond seed, while for the 2022 class it's only 20%17. Compare that with previous years, when percentages were between 51% and 61% of companies that moved beyond seed. This decline means founders need to prepare for marathon fundraising: Start the process as early as you can (subject to showing the right metrics).
- Focus on Capital Efficiency:
To successfully fundraise in 2025, entrepreneurs must showcase traction, capital efficiency, and a strong vision for future growth. The days of growth-at-all-costs are over.
The Bottom Line: Darwin Was Right
The Series A Crunch isn't a bug—it's a feature. It's the market's way of separating companies that can build sustainable businesses from those riding the easy money wave.
Series A funding represents a critical transition where 60% of early-stage companies fail to reach. But the 15% that make it through aren't just surviving—they're thriving with higher valuations, better investors, and stronger foundations for the future.
The question isn't whether the Series A Crunch is real. The question is: will you be in the 15% that beats it, or the 85% that becomes a cautionary tale?
Your financial preparation isn't just about impressing investors—it's about proving you can build a business that not only survives but dominates in the most competitive startup environment we've ever seen.
Sources:
1. Carta. "State of Private Markets: Q3 2024." https://info.carta.com/rs/214-BTD-103/images/State%20of%20Private%20Markets%20Q3%202024%20-%20Green.pdf?version=0
2. Walker, Peter (Carta). https://www.linkedin.com/posts/peterjameswalker_cartadata-seed-seriesa-activity-7208861028799901696-As38/
3. Tunguz, Tomasz. "The Series A Crunch or the Seedpocalypse of 2024." June 21, 2024. https://tomtunguz.com/seedpocalypse-2024/
4. Konvoy VC. "Failure to Launch: The Series A Crunch." https://www.konvoy.vc/newsletters/failure-to-launch-the-series-a-crunch
5. Carta. "State of Private Markets: Q1 2025." May 13, 2025. https://carta.com/data/state-of-private-markets-q1-2025/
6. TechCrunch. "Are We In A Series A 'Crunch'? What CrunchBase Says." November 10, 2011. https://techcrunch.com/2011/11/09/crunchcrunch/
7. Founder Institute. "Startup Funding Benchmarks & Requirements." 2025. https://fi.co/benchmarks
8. Carta. "State of Private Markets: Q3 2024." https://info.carta.com/rs/214-BTD-103/images/State%20of%20Private%20Markets%20Q3%202024%20-%20Green.pdf?version=0
9. Software Equity Group. "2024 Annual SaaS Report." https://softwareequity.com/blog/rule-of-40/
10. Bain & Company. "Rule of 40 Study." 2017.
11. R&D World. "25 Landmark R&D-Heavy Tech Funding Rounds of 2024." https://www.rdworldonline.com/25-landmark-rd-heavy-tech-funding-rounds-of-2024/
12. AlleyWatch. "January 2025 US Venture Capital Fundraising Report."
13. Crunchbase. "After Slowing In 2023, US Median Round Size Again Growing." August 23, 2024. https://news.crunchbase.com/venture/us-median-round-size-growing-h1-2024/
14. Founder Institute. "Startup Funding Benchmarks & Requirements." 2025. https://fi.co/benchmarks
15. Carta. "State of Startup Compensation, H1 2024." September 30, 2024. https://carta.com/data/startup-compensation-h1-2024/
16. Carta. "State of Private Markets: Q1 2025." May 13, 2025. https://carta.com/data/state-of-private-markets-q1-2025/
17. Crunchbase. "Far Fewer Seed-Stage Startups Are Graduating To Series A — Raising The Risk Of Failure." January 29, 2025
Remember when raising a Series A was just about proving you had a decent product and some early traction? Those days are over.
The stark reality: only 15.4% of startups that raised a seed round in early 2022 were able to raise a Series A within two years, compared to 30.6% of companies that managed this feat back in 20181. That's a devastating 50% drop in success rates. For SaaS startups specifically, the numbers are even more brutal—success rates plunged from 37% in 2020 to just 12% by the first half of 20222.
As venture investor Tomasz Tunguz puts it, "the Series A Crunch has returned" in 20243, creating the same funding squeeze we saw during the 2012 "Seedpocalypse." But this time, it's worse.
The Perfect Storm: Why Your Seed Success Means Nothing Now
Here's what's really happening: while everyone was celebrating the democratisation of seed funding, we created a massive supply-demand imbalance that's now crushing Series A hopefuls.
The Numbers Don't Lie:
- Seed investments have surged while Series A rounds remained relatively stable, creating an "orange crush" of seed-funded companies competing for limited Series A dollars
- Gaming companies—which often serve as a bellwether for the broader tech ecosystem—saw only 2.3% of Q1 2022 seed companies successfully raise Series A within two years4
- In Q1 2025, the number of seed rounds plunged 28% year-over-year while Series A rounds fell 10%5—fewer companies are even making it to the starting line
What Changed:
The explosion of micro-VCs, accelerators, and "spray and pray" seed investing created thousands more funded startups, but the number of legitimate Series A investors hasn't grown proportionally. According to original TechCrunch data analysis, we've seen a 33% increase in reported seeds and a 9.6% drop in reported Series A rounds6. The ratio of seed to Series A deals has gone from 1:1 in 2008 to roughly 2:1 by 2011, and the trend has only accelerated.
The result? More than 1,000 startups are getting "orphaned" each year—stranded between seed and Series A with nowhere to go.
Why the Old Playbook No Longer Works
The metrics that got you seed funding won't get you Series A. The old threshold of $1 million ARR that used to unlock Series A doors? That's now just table stakes. Investors have fundamentally raised the bar because they have so many options.
The New Reality Check:
- Most Series A companies now need $2M to $5M ARR just to be considered7
- Growth rates of at least 25% month-over-month are expected, not exceptional
- Median pre-money Series A valuations have hit $45M for primary rounds and $43.6M for bridge rounds in early 20258
But here's the kicker—even hitting these numbers doesn't guarantee success. As the Founder Institute notes, "The 'Series A Crunch' that started in 2023 has only grown wider as the supply of seed-stage companies trying to raise A rounds has increased, enabling investors to be picky and operate from a position of great strength”.
The Rule of 40: Your New Survival Metric
In this hypercompetitive environment, one metric has emerged as the ultimate differentiator: the Rule of 40. This isn't just another vanity metric—it's become the primary lens through which Series A investors assess whether you've achieved sustainable, scalable growth.
The Simple Formula That Changes Everything:
Rule of 40 (%) = Revenue Growth Rate (%) + EBITDA Profit Margin (%)
Companies scoring greater than 40% on a weighted Rule of 40 basis are getting rewarded with median revenue multiples of 10.7x9—that's the difference between a good valuation and a great one.
Why It Matters Now More Than Ever:
According to Bain & Company's foundational research, software companies that outperform the Rule of 40 have valuations double that of companies that fall "below the line," and they achieve returns as much as 15% higher than the S&P 50010.
The beauty of the Rule of 40 is that it allows you to be unprofitable while still demonstrating financial discipline. A company growing 60% year-over-year with -20% EBITDA margins still hits the 40% threshold, proving they understand the trade-offs between growth and profitability.
The Connected Financial Story That Wins
Surviving the Series A Crunch isn't about having perfect metrics—it's about telling a coherent story where every number supports your narrative of sustainable growth. Investors can smell disconnected metrics from a mile away.
Your Three-Pillar Foundation:
- Operational Efficiency (The Engine):
Your burn rate relative to revenue generation directly impacts your Rule of 40 performance. The ideal scenario is reaching £3 million ARR without burning significantly more than £3 million in total capital—this 1:1 ratio demonstrates efficient capital deployment.
- Customer Quality (The Fuel):
LTV-to-CAC ratios above 3:1 (with the best companies hitting 5:1) prove your growth is sustainable. These metrics support both the growth and profitability components of your Rule of 40. Cohort analysis showing improving retention rates across customer segments provides powerful validation of product-market fit.
- Revenue Quality (The Durability):
Monthly and annual recurring revenue breakdowns show investors that your growth rate is sustainable, while customer concentration analysis reveals whether your growth depends on a few large customers.
The Due Diligence Death Traps
Due diligence has become rigorous from Series A onwards as investment capital becomes larger and comes mainly from institutional investors who follow structured processes. The startups that fail often do so due to easily preventable mistakes:
The Financial Foundation Failures:
- Using spreadsheets to maintain books (seriously, stop this)
- Mixing personal and business transactions
- Missing comprehensive profit and loss statements or presenting unrealistic financial projections without supporting data
The Systems That Impress:
Having all your documentation together in one place before you sign a term sheet can cut as much as a week off your closing process. This includes:
- Three years of historical financials
- Monthly projections for the next 3-5 years that actually make sense
- Clean cap table showing exactly who owns what
- Revenue recognition policies that withstand scrutiny
The Market Reality: Why Timing Matters
2024 was the year of AI venture capital funding, with AI startups locking in 31% of global funding in Q3 202411. But don't let that fool you—while AI startups are getting bid up to 2021-level multiples, for classic SaaS companies, the Series A Crunch is brutally real.
The New Economics:
- The average Series A round now raises $16.6 million in early 202512
- Median round sizes have increased 11% to 30% across seed through Series C in the first half of 202413
- AI companies are achieving valuations 1.6x higher than non-AI companies
- 40% of founders feel less confident about market conditions than 12 months ago14, making realistic forecasts more valuable than aggressive growth assumptions
This means bigger rounds for the winners, but drastically fewer winners overall.
The Leaner Startup Advantage
Here's a surprising trend that's emerged from the data: companies that closed Series A rounds in the first half of 2024 had an average of 15.6 employees—16.3% lower than Series A companies five years ago15. Successful companies are doing more with less.
The median Series A round in Q1 2025 involved 17.9% dilution, down from 20.9% a year earlier16. Founders who demonstrate capital efficiency are keeping more of their companies while raising the same amounts.
Your Action Plan: Beating the 85% Failure Rate
- Start Tracking the Right Metrics Now:
Don't wait until you're fundraising to understand your Rule of 40 score. Calculate it monthly to understand the levers you can pull to improve it.
- Build Connected Systems:
Investors expect clear evidence that technology can support rapid growth, adapt to evolving customer needs, and withstand potential risks. Your financial systems need to tell the same story as your product metrics.
- Prepare for Marathon Fundraising:
The fundraising landscape has become significantly more challenging for startups. The latest Crunchbase data shows that for the 2021 cohort, only 36% of companies have graduated beyond seed, while for the 2022 class it's only 20%17. Compare that with previous years, when percentages were between 51% and 61% of companies that moved beyond seed. This decline means founders need to prepare for marathon fundraising: Start the process as early as you can (subject to showing the right metrics).
- Focus on Capital Efficiency:
To successfully fundraise in 2025, entrepreneurs must showcase traction, capital efficiency, and a strong vision for future growth. The days of growth-at-all-costs are over.
The Bottom Line: Darwin Was Right
The Series A Crunch isn't a bug—it's a feature. It's the market's way of separating companies that can build sustainable businesses from those riding the easy money wave.
Series A funding represents a critical transition where 60% of early-stage companies fail to reach. But the 15% that make it through aren't just surviving—they're thriving with higher valuations, better investors, and stronger foundations for the future.
The question isn't whether the Series A Crunch is real. The question is: will you be in the 15% that beats it, or the 85% that becomes a cautionary tale?
Your financial preparation isn't just about impressing investors—it's about proving you can build a business that not only survives but dominates in the most competitive startup environment we've ever seen.
Sources:
1. Carta. "State of Private Markets: Q3 2024." https://info.carta.com/rs/214-BTD-103/images/State%20of%20Private%20Markets%20Q3%202024%20-%20Green.pdf?version=0
2. Walker, Peter (Carta). https://www.linkedin.com/posts/peterjameswalker_cartadata-seed-seriesa-activity-7208861028799901696-As38/
3. Tunguz, Tomasz. "The Series A Crunch or the Seedpocalypse of 2024." June 21, 2024. https://tomtunguz.com/seedpocalypse-2024/
4. Konvoy VC. "Failure to Launch: The Series A Crunch." https://www.konvoy.vc/newsletters/failure-to-launch-the-series-a-crunch
5. Carta. "State of Private Markets: Q1 2025." May 13, 2025. https://carta.com/data/state-of-private-markets-q1-2025/
6. TechCrunch. "Are We In A Series A 'Crunch'? What CrunchBase Says." November 10, 2011. https://techcrunch.com/2011/11/09/crunchcrunch/
7. Founder Institute. "Startup Funding Benchmarks & Requirements." 2025. https://fi.co/benchmarks
8. Carta. "State of Private Markets: Q3 2024." https://info.carta.com/rs/214-BTD-103/images/State%20of%20Private%20Markets%20Q3%202024%20-%20Green.pdf?version=0
9. Software Equity Group. "2024 Annual SaaS Report." https://softwareequity.com/blog/rule-of-40/
10. Bain & Company. "Rule of 40 Study." 2017.
11. R&D World. "25 Landmark R&D-Heavy Tech Funding Rounds of 2024." https://www.rdworldonline.com/25-landmark-rd-heavy-tech-funding-rounds-of-2024/
12. AlleyWatch. "January 2025 US Venture Capital Fundraising Report."
13. Crunchbase. "After Slowing In 2023, US Median Round Size Again Growing." August 23, 2024. https://news.crunchbase.com/venture/us-median-round-size-growing-h1-2024/
14. Founder Institute. "Startup Funding Benchmarks & Requirements." 2025. https://fi.co/benchmarks
15. Carta. "State of Startup Compensation, H1 2024." September 30, 2024. https://carta.com/data/startup-compensation-h1-2024/
16. Carta. "State of Private Markets: Q1 2025." May 13, 2025. https://carta.com/data/state-of-private-markets-q1-2025/
17. Crunchbase. "Far Fewer Seed-Stage Startups Are Graduating To Series A — Raising The Risk Of Failure." January 29, 2025
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How should a startup business prepare its budget?
To prepare a budget for your startup, begin by listing all potential expenses you anticipate in starting and operating your business. Next, organise these expenses into categories. After that, estimate your monthly revenue and calculate the total costs required to start and run your business.
What are the key steps to creating an effective budget?
Step 1: Determine and track your income sources.
Step 2: Make a list of your cost. Include both fixed and variable costs.
Step 3: Set achievable financial goals.
Step 4: Develop a plan to meet those goals.
Step 5: Put everything together to build your budget.
Step 6: Regularly review and revise your forecast to ensure it remains effective.
What does capital budgeting entail for a startup?
Capital budgeting for a startup involves allocating a set amount of funds for specific purposes, such as purchasing new equipment or expanding business operations. This process is crucial as it supports making strategic investments that are expected to yield long-term benefits for the startup.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How can a startup forecast its cash flow?
To forecast cash flow for a startup, follow these steps:
Step 1: Create a sales forecast by estimating the revenue your products or services will generate over the forecast period.
Step 2: Develop a profit and loss forecast to understand your expected expenses and income.
Step 3: Prepare your cash flow forecast, which involves calculating expected cash inflows and outflows. This can often be done for longer-term by using assumptions around payment terms to forecast a Balance Sheet, and using the movements in Balance Sheet and Net Profit/Loss to calculate the cashflow.
Step 4: Consider ways of improving cash flow by improving your invoicing methods, considering short-term borrowing, and negotiate better payment terms to manage cash flow effectively.
What is the most accurate method to forecast cash flow?
The most accurate method for forecasting cash flow in the short-term is the direct method, which utilises actual cash flow data. In contrast, the indirect method is better suited for longer term forecasting using projected balance sheet movements and income statements to estimate future cash flows.
How is cash flow calculated?
Cash flow is calculated by deducting cash outflows from cash inflows over a specific period. This calculation alongside forecasts of future cash flow helps determine if there is sufficient money available to sustain business.
How do you project cash flow over three years?
To project cash flow over a three-year period, undertake the following steps:
Step 1: Collect historical financial data.
Step 2: Identify all expected cash inflows, which could include revenue, investment, grant income, etc.
Step 3: Estimate all anticipated cash outflows including expenses, suppliers that need to be paid, investments into assets, debt repayments, etc.
Step 4: Calculate the net cash flow by subtracting outflows from inflows.
Step 5: Consider your cash reserves and explore financing options if needed.
Step 6: Regularly review and adjust your projections to ensure accuracy and relevance.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
When should a startup consider hiring a CFO?
A startup should think about hiring a Chief Financial Officer (CFO) when it begins to experience rapid growth, finds it challenging to manage finances, or needs to navigate complex investment scenarios. A seasoned financial professional can provide the necessary expertise to handle these challenges effectively.
What are the indicators that my business might need CFO support?
You might need to hire a CFO or consider outsourcing this role if you notice any of the following signs: a decrease in gross profit margins despite increasing revenue, uncontrolled business growth, lack of cash reserves despite having a financially successful year, or a halt in business growth.
Does my startup really need a full-time CFO?
Recruiting a full-time CFO is an expensive hire. Given budget constraints and the need to prove the viability of your business idea, founders will often need to prioritise investing into building and commercialising their product. That's where CFO services for startups are a cost-effective solution for founders looking to take their financial management to the next level.
.jpg)
