Insights and Opinions

Why Raising a Growth Round Is Getting Much Harder

Most companies that raise their seed and Series A rounds fail, primarily due to a few reasons:

Lack of product-market fit and team issues are common. The most common reason, however, is the lack of access to capital, especially growth capital. The result is that less than 25% of funded startups go on to raise a Growth round, according to Crunchbase News. Given the increase in seed-stage deal sizes, companies are more developed and demonstrate more traction when they raise their Series A. Given this environment, two converging trends are making it more difficult to raise growth (B) round. This leaves many startups in a difficult position, as they will need additional time and funding to bridge the gap needed to scale to the higher levels now required for a growth round resulting in higher pre-money valuations. This is due to many reasons:


  1. Allocation of Capital: Over the past several years, the vast majority of the capital has gone to the two ends of the spectrum; seed & early stage and late stage.


  1. Growing Number of Seed & Early Stage Funds: the significant increase in the number of accelerators, incubators, as well as pre-seed, seed, and early-stage funds in most geographies in the past few years has resulted in a growing number of startups being funded every year that will need growth capital beyond Series A to continue scaling toward an eventual successful liquidation event. That has increased the competition for growth rounds.


  1. Small Allocation of Capital to Technology Growth: The amount of capital allocated to technology growth is a very small portion of the total capital.



  1. The Desire by Growth Funds to Write Bigger Checks: The size of growth rounds has grown significantly over the years and with it the growth round valuations and expectations. They expect companies to be in the expansion stage at this point with, demonstrated product-market fit, repeatability, and an efficient go-to-market engine. They look for great teams, significant traction, strong metrics and unit economics, recurring revenue, and highly defensible models, resulting in a considerably higher bar that start-ups need to meet to qualify for growth funding, resulting in higher pre-money valuations.


  1. The emergence of the Mega Funds: There are now numerous funds over $10bb each totaling over a trillion dollars in dry powder. The desire to deploy this capital is resulting in bigger checks and higher valuations.



The Result: Startups looking to raise a successful growth round need to understand that it may take longer and require more capital to be ready for a growth round. They need to proactively look at the necessary metrics, unit economics, and required runway, and ensure they have enough capital to get there.

Ivan Nikkhoo an experienced entrepreneur, investment banker, and venture capitalist at Navigate Ventures.

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