Failure to Launch: Series A Graduation Hits New Low

Data published this week by Peter Walker of Carta caused a stir on LinkedIn. Carta tracked the fortunes of 4,369 US startups founded in 2018. The results were an eye-opener for many. On one side, investors appreciated the brutal clarity of the statistics. One the other, founders winced at the low odds of success.

A failure rate of 62% drew most people's immediate attention. Interestingly, some founders thought this figure was low considering all the usual talk about how 90% of startups fail. But, like most data of this type, the really powerful insights are often buried deep.

For example, by analysing the collapse in the graduation rate from Seed to Series A we can immediately understand why fundraising founders are having such an unusually hard time right now.

Today we delve into Carta's data set to reveal how the these graduation rates have dropped like a stone in recent years. We examine the Seed to Series A transition and highlight the implications for both startups and the investors that are backing them. We conclude with some big takeaways for founders.

The "Venture Capital Funnel"

First, the data. Starting with 4,369 US startups founded in 2018, Carta classified their current status (as of 1 January 2025) as follows:

1. By Funding Round
1,905 never raised a priced round
2,464 raised a Seed round (56.4%)
1,588 have raised Series A (36.4%)
643 have raised Series B (14.8%)
194 have raised Series C (4.4%)
50 have raised Series D or beyond (1.1%)

2. By Outcome
15 are now public companies (0.34%)
239 have been acquired (5.5%)
57 have become private unicorns (1.3%)
1,408 are still live companies (32.2%)
2.707 have closed down (61.9%)

But this 6-year period from 2018 spanned the crazy market high of 2021 and then the subsequent 'market reset'. If we zoom in more closely on the 'before' and 'after' data, we uncover very contrasting numbers. We can see why many startups trying to raise capital have suddenly hit a wall....

The impact of the downturn on outcomes

Startups and investors alike have witnessed tremendous upheaval in venture capital markets since early 2022. Founders have seen investment levels plummet and deal count collapse.

Similarly, fund managers have found themselves in a heightened competition for limited partner dollars. This has all been compounded by a liquidity squeeze across the board as IPOs and (high return) M&A deals have almost come to a halt.

In June 2024 Carta published its inaugural VC Fund Performance report. This excellent research analyses benchmarks for more than 1800 funds across six recent vintages. Funds disclose significant detail about portfolio performance, too much detail to go into here, but 3 headlines stand out:

• Slow capital deployment: Funds in the 2022 vintage have deployed about 43% of their committed capital at the 24 month mark, the lowest share of any analysed vintage. Prior vintages ranged from 47%-60% after 24 months.
• Distributions back to LPs remain elusive: Less than 10% of 2021 funds have had any DPI after 3 years.
• Graduation rates declining: 30.6% of companies that raised a Seed round in Q1 2018 made it to Series A within two years. But only 15.4% of Q1 2022 Seed startups did so in the same timeframe.

The last bullet provides a critical insight for startups. To spell this out:
Through 2018 and 2019, around 31% of startups that raised their Seed had made it to Series A within two years.
At the height of the market in 2020, this peaked: nearly 40% of startups that raised their Seed round had made it to Series A in 2 years - before dropping to 36% in Q4 2020.
Then through 2021 this rate collapsed: The comparable percentage for the Q1 2022 cohort dropped by more than half to just 15.4%.

Crunchbase data published in January also confirms this trend. Crunchbase counted the number of unique Seed-stage companies from the year they raised their first Seed round of $1 million or more, and looked at how many from that year are post-Seed.

"For 2021 and 2022, the share of companies still at Seed are proportionally much higher than prior years. For the 2021 cohort, the percentage of companies that have graduated beyond Seed is 36%, while for the 2022 class it is only 20%. Compare that with previous years, when percentages were between 51% and 61% of companies that raised a Series A or later round or had an exit."

Geography has a further impact on graduation rates

The Carta and Crunchbase data is for US startups. What about European startups?

Some of the best comparative research was undertaken by McKinsey back in 2020. This examined a cohort of startups that raised a Seed round between 2009 and 2014. The analysis showed that only around 14% (1 in 7) of European startups that successfully secured Seed funding eventually went on to exit or reach Series C.

By comparison McKinsey's figure for US startups was around 20%. In other words, graduation rates are generally around 30% lower in Europe.

Key differences between US and European markets that McKinsey highlighted:

1. The US consistently shows higher graduation rates across all stages, with the gap being most pronounced at the Seed to Series A transition.
2. US companies tend to raise larger rounds at each stage, which might contribute to higher survival and graduation rates.
3. The time between funding rounds tends to be shorter in the US market, averaging 12-18 months compared to 18-24 months in Europe.

If the latest Carta data shows that the Seed to Series A graduation rate for US startups is currently 15.4% it's reasonable to assume that the European figure could be in the region of 11%. This is a painfully low number.

Implications of declining graduation rates

Given the dramatic decline in startups graduating from Seed to Series A in recent years, the implications for startups and investors are profound. Here is a snapshot of the key challenges facing each group:

Impact on Startups

1. Increased Competition for Series A Funding – With fewer startups securing Series A rounds, founders must work harder to differentiate themselves and show stronger traction.
2. Extended Time Between Rounds – Startups are raising bridge rounds (often with SAFE notes and convertible loan notes) to extend their runway instead of shooting for classic Series A funding quickly. Carta says that 43% of fundraising events at Series A in Q1 2024 were bridge rounds (i.e., rounds raised by existing investors rather than new external lead investors).
3. Higher Pressure to Show Revenue and Profitability – Investors are prioritising companies with clear monetisation strategies over pure growth metrics. This poses a dilemma for founders who know that sacrificing growth will also make their investment propositions less attractive.
4. More Down Rounds and Flat Rounds – Many startups are being forced to raise at lower valuations than previous rounds, diluting founders and early investors. Nearly one in four rounds on Carta in Q1 2024 was a down round.
5. Greater Focus on Capital Efficiency – Startups must optimise their burn rate and reach milestones with less funding, reducing reliance on venture capital.
6. Shift Toward Alternative Funding Sources – Some startups are turning to venture debt, revenue-based financing, or strategic investors to compensate for the VC funding gap.
7. Longer Timelines to Exit – With slower funding progressions, startups take longer to reach M&A or IPO opportunities, delaying liquidity for founders and employees.
8. More Market Consolidation – Weak startups are getting acquired earlier, often at lower valuations, benefiting larger players and well-funded competitors.
9. Geographic and Sectoral Disparities – Certain sectors (e.g., DeepTech, hardware) and regions (e.g., Europe) may suffer more, as they typically require larger capital injections before profitability.
10. Increased Failure Rate – Many startups that cannot secure follow-on funding are shutting down earlier in their lifecycle.

Impact on Investors

1. Slower capital deployment: Funds in the 2022 vintage had deployed about 43% of their committed capital at the 24-month mark, the lowest share of any analysed vintage. Investors are slowing down the pace (number) of investments as the market reset continues.
2. Increased Use of Bridge Rounds – Investors are being asked to participate in internal bridge rounds more frequently to extend the runway of portfolio companies. This means that Investors must allocate more capital for follow-ons to support promising startups that struggle to secure external Series A funding - depleting reserves for others.
3. Higher Selectivity in Seed Investments – VCs are being more cautious at Seed stage, backing fewer startups with stronger metrics and founder track records. The hottest startups are securing record deal sizes and valuations.
4. Longer Holding Periods – With startups taking longer to raise Series A, investors are experiencing extended illiquidity in their Seed-stage investments. This slowdown in funding progression negatively impacts fund performance.
5. Elusive returns and distributions – Carta data shows less than 10% of 2021 funds had any DPI after 3 years. Median unrealised IRR for the 2021 and 2022 vintages remains below zero. Median TVPI for these vintages also remains below 1x.
6. Shifting Investment Thesis – Some investors are focusing on sectors with clearer paths to revenue e.g., B2B SaaS over consumer startups. AI is dominating the US investment scene as we reported recently.
7. Valuation Resets – With down rounds and flat rounds becoming common, early-stage investors face more valuation markdowns.
8. Fewer Exits, Longer Exit Timelines – A large share of the acquisitions happening today are for companies in the pre-Seed or Seed stages, which are unlikely to return a significant amount of capital to existing investors. A weak IPO and M&A market is delaying liquidity, leading to prolonged fundraising cycles for VC firms.
9. LP Skepticism and Fundraising Challenges – Given weaker returns, LPs (Limited Partners) are becoming more hesitant to invest in new funds. Fund managers face heightened competition for limited partner dollars and need better data to make their case.

The big takeaways for founders

These insights will hopefully provide useful pointers for startups considering their next funding round. As a final thought, we provide 3 takeaways for founders on the road to Series A. They all revolve around building a more intimate understanding of investor expectations in this more cautious market:

Extend Your Runway & Reach Key Milestones Before Fundraising
With Series A funding harder to secure, investors are looking for stronger traction and capital efficiency. You need to ensure you survive longer before raising again. Ensure the milestones you consider important resonate strongly with what investors in your sector are also expecting.

Focus on Strong Traction & Metrics that Matter for Series A Investors
The bar for Series A funding is now higher - growth alone isn’t enough. Investors want clear evidence of scalability, retention, and efficiency. Reassess the key metrics that are now foremost in investor minds for your sector, stage, and business model. Do not just take a generic approach.

Nurture Quality Investor Relationships Early
Investors are being more selective, and securing Series A funding requires stronger investor relationships and strategic positioning. Remember to pick the 'right' investors: Dealroom's "The State of European Early-Stage Investment" highlighted the significant impact of investor quality on graduation rates. This showed European startups backed by top-quartile investors had a 40% Seed to Series A graduation rate, while those with bottom-quartile investors saw only a 7% success rate. Quite a difference!

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