Early Stage Startup Fundraising Is Super Confusing Because of SAFEs

Early stage startup fundraising has gotten super confusing - here's why:

The overriding reason is the expanded use of SAFEs.

Now are SAFEs good? Yes, for some things! They certainly have streamlined the acquisition of capital by super early startups. Better than priced rounds for speed and cost, better than convertible notes because who likes interest rates anyway.

But SAFEs are now gobbling up share in seed and post-seed rounds as well. And that introduces complexity, both for the individual deal and for those of us wondering what the heck is actually happening across the wider startup ecosystem.

Data below shows the benchmarks from over 1,000 rounds raised on Carta so far in 2024 by software companies. Everything from angel rounds at the very beginning to post-seed extensions at the upper end.

Big note - 𝗳𝗼𝘂𝗻𝗱𝗲𝗿𝘀 𝘀𝗵𝗼𝘂𝗹𝗱 𝗻𝗼𝘁 𝗲𝘅𝗽𝗲𝗰𝘁 𝘁𝗼 𝗱𝗼 𝗮𝗹𝗹 𝗼𝗳 𝘁𝗵𝗲𝘀𝗲 𝗿𝗼𝘂𝗻𝗱𝘀. You can skip around! No need to always bridge or hit every "Before Seed" stage, etc.

𝗔𝗻𝗴𝗲𝗹 𝗥𝗼𝘂𝗻𝗱𝘀 (𝗦𝗔𝗙𝗘𝘀)

• Around $150K-$200K raise to get started

• Small val caps

• Fairly light dilution

𝗦𝗺𝗮𝗹𝗹 𝗣𝗿𝗲-𝗦𝗲𝗲𝗱 (𝗦𝗔𝗙𝗘𝘀)

• $680K raised

• $9M cap

• 6%-8% dilution

𝗕𝗶𝗴 𝗣𝗿𝗲-𝗦𝗲𝗲𝗱 (𝗦𝗔𝗙𝗘𝘀)

• $1.5M raised on a $12M cap for 11%-13% of the company

𝗦𝗲𝗲𝗱 (𝗕𝗼𝘁𝗵 𝗣𝗿𝗶𝗰𝗲𝗱 𝗮𝗻𝗱 𝗦𝗔𝗙𝗘𝘀)

• Cash raised is almost identical around $3.3M

• Valuation is a big gap! $13.7M in a priced round but $𝟭𝟴𝗠 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗰𝗮𝗽 in a SAFE seed. What is going on there?

• Dilution fairly similar but maybe a little lighter on the SAFEs

𝗔𝗳𝘁𝗲𝗿 𝗦𝗲𝗲𝗱 (𝗯𝗲𝗳𝗼𝗿𝗲 𝗦𝗲𝗿𝗶𝗲𝘀 𝗔, 𝗯𝗼𝘁𝗵 𝘁𝘆𝗽𝗲𝘀)

• Extensions like these are WAY more common than they used to be

• Can be quite costly for founders in terms of equity sold

This estuary of SAFEs and Priced is creating uncertainty. I mean, look at the valuation caps on the seed and after-seed SAFE rounds. Those being elevated is partly why the jump to Series A is so difficult - the companies need to clear the higher bar.

I'm coming around to the view that SAFEs should be for initial capital and maybe one more injection of cash and then left behind in favor of priced round certainty.

Maybe I'm wrong! Convince me in the comments if you feel the opposite.

#cartadata #SAFEs #seed #founders #startups #fundraising