Decoding Early-Stage Startup Trends: Critical Insights from Carta's Data

One of my favorite data storytellers on LinkedIn is Peter Walker . Using Carta client data—Carta manages cap tables, compensation, and valuations for more than 40,000 companies in nearly 160 countries—Peter creates creative visualizations of the current happenings in the fundraising and early-stage startup scene.

As an early-stage investor and stakeholder in the startup ecosystem, I find the data points, charts, and storytelling visuals shared by Carta and Peter immensely valuable. In an industry with limited publicly available data and numerous contradictory signals, these insights are crucial for both investors and founders to understand benchmarks and trends. While I sometimes critique that these visualizations don't tell the whole story or that their interpretations can be skewed, I'm grateful for the data being shared.

I decided to take some of the recent data insights shared by Peter Walker and Carta, and provide my analysis in one post. If you haven't already, I recommend following Peter Walker on LinkedIn and signing up for Carta’s weekly newsletter here .

Let’s dive in:

1. The Importance of Early Traction

A timeless observation for early investors and angels is the importance of securing early traction. If a startup cannot complete a proper Seed funding round (raising a minimum of $1.5-2 million) within four years of its inception, its chances of raising further rounds decrease significantly. Although this data covers only January 2023 to June 2024, similar patterns have been observed historically. It's safe to say that if a startup can't gain momentum in its first four to five years, it likely never will.

Takeaway: If you're an investor and a company is still trying to raise Seed funding six years after it started, it may be prudent to pass on the deal.

2. The Rise of SAFE Instruments with Post-Money Valuation Caps

SAFEs (Simple Agreements for Future Equity) are meant to be post-money and with a valuation cap. If your attorney suggests avoiding a valuation cap because an equity round is imminent, ask when their clients last raised money on such terms.

SAFE is a quick and less complicated way to raise funding, but attempting to do so with a pre-money valuation or no valuation is unrealistic. Over the past two years, many early investors have witnessed Series A and equity rounds being delayed, causing founders to bridge multiple SAFE rounds. This is particularly dilutive for early investors, even with a good pre-money cap.

Example: If you're investing $350k at a $5 million pre-money valuation, expecting a $2 million funding round, you might anticipate 5% equity. However, if the startup raises $4 million at a $5 million pre-money valuation, your equity dilutes to 3.9%. Therefore, sophisticated early investors now push for post-money valuation caps.

3. Fundraising Challenges and SAFE Stacking

The difficulty in early-stage fundraising and delayed priced equity rounds have led to increased SAFE stacking. In 2023 and 2024, more than 20% of startups raising SAFEs are doing so with three or more valuation caps. This can be highly dilutive for founders. If not managed well, giving away more than 25% of your equity in the SAFE round can be detrimental.

Takeaway: Founders need to manage SAFEs meticulously to avoid excessive dilution and maintain control over their equity.

4. Capital Calls and the Role of SPVs

It might seem like good news that more capital is being called by VCs, but the increasing ratio of funds being raised through SPVs (Special Purpose Vehicles) indicates ongoing caution among LPs (Limited Partners). Even though the total amounts called are higher, the fact that 80% of capital is being called by funds versus 20% by SPVs shows we are still in a 'soft phase' of fundraising.

5. Seed Stage Underrepresentation and Valuation Markups

Carta's data shows 4,165 Seed rounds versus 3,184 Series A rounds from Q1 2022 to Q2 2024. This underrepresentation of Seed rounds suggests that larger Seed rounds are more likely to be included, skewing the perceived size of Seed funding rounds.

Interesting Takeaway: In Q1 2022, the markup from Seed to Series A valuations increased by 3.79x, 3.59x, and 3.21x from the 25th to the 75th percentile. In contrast, Q1 and Q2 2024 saw markups of 3.13x, 3.00x, and 3.10x. This indicates that higher valuation companies are not performing as well, likely facing more dilution and giving more upside to VCs. While liquidity preferences are not shown in these charts, they have also been increasing lately.

Explanation: The average valuation markups have decreased, indicating a more conservative increase in value from Seed to Series A. This suggests that higher percentile companies are facing greater dilution, making VC investments more attractive but challenging founders to maintain equity.

6. Mixed Signals in Fundraising

The fundraising environment presents mixed signals. While there are some favorable indicators, such as a slightly improved fundraising pace and a lower percentage of bridge rounds, the increasing time between rounds is concerning. This extended timeline, coupled with potentially unfavorable terms like liquidation preferences, indicates a challenging environment for founders.

7. Employee Turnover and Compensation Trends

The data shows an increase in employee turnover within the first two years, along with a net negative trend in salaries and equity grants. Startups are hiring less and more cautiously, reducing equity offerings, and employees are exercising fewer options. This reflects diminished trust in the value creation potential of these startups.

8. Widening Gap Between Seed and Series A Rounds

One of the most significant observations is the widening gap between Seed and Series A funding rounds. Data indicates that many startups which raised their Seed rounds since Q1 2021 are still waiting to raise their Series A. This delay means that startups are spending extended periods in the Seed stage, often relying on SAFEs to bridge the gap.

Implications: As interest rates decrease, more LPs and funds are expected to become active in the Series A stage. This will create a competitive environment where Series A-focused VC funds will have the upper hand, given their ability to choose from a large pool of startups awaiting Series A funding. For founders, this means preparing for tougher negotiations and potentially more stringent terms as VCs leverage their position of strength.

Strategies for Founders:

• Build Strong Momentum: Startups need to create compelling narratives and demonstrate significant progress to attract Series A investors.
• Competitive Fundraising Process: Engaging multiple investors and creating a sense of competition can help founders secure better terms.
• Extended Runway: Given the delays, it’s crucial for startups to ensure they have sufficient runway to sustain operations while waiting for Series A funding.

9. Managing Dilution in Extended Seed Stages

Given the extended time startups are spending in the Seed stage, managing dilution becomes critically important. Startups have managed to keep dilution at around 20.4% during the Seed stage, but the prolonged wait for Series A funding puts additional pressure on maintaining equity levels.

Implications: With Series A funding being delayed, only the top-performing startups are successfully raising Series A rounds. This increases the pressure on founders to maintain momentum and manage dilution effectively. Founders need to be particularly cautious about the terms they accept during SAFE rounds to avoid excessive dilution before reaching Series A.

Conclusion

The data presents a mix of signals, making it challenging to interpret the overall state of the early-stage startup ecosystem. With companies piling up and waiting for Series A funding, and investors still hesitant to dive in, the environment remains complex and difficult to navigate. However, there is palpable excitement among both founders and investors about the potential opportunities ahead. It's a time to closely watch the market trends and be prepared for shifts.

Despite the challenges, I remain optimistic about the future. Both founders and investors need to stay agile, informed, and ready to capitalize on emerging opportunities.

As we are looking for future, trying to read the mix signals of the past, I want to finish with a few of my favorite quotes:

"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today." — Laurence J. Peter

"Markets can remain irrational longer than you can remain solvent." — John Maynard Keynes

"The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday's logic." — Peter Drucker