One of the most important functions of a CEO is not running out of money. A CEO has to manage her available cash on hand strategically until the next funding round, keeping the monthly burn rate in line while hitting key milestones. Given the importance of this metric, one would think that industry statistics are routinely published about it for entrepreneurs and investors. Unfortunately, this is not the case. Data about the time between funding rounds is hard to come by. The objective of this eShares blog post is to show data on how long it actually takes to get funded.
Objective: Present industry-level data on time between funding rounds.
At a minimum, entrepreneurs should know the median time to the next funding round, and understand how this key metric varies for different rounds.
The Naive Approach
Imagine it is May 1st 2017 and you have a list of three startups with their series Seed and A funding dates. The following table shows your hypothetical data set:
The first two startups in your list have series Seed and Series A funding dates, but the third startup has only a series Seed date. This particular startup (Machine Learning for Children, Inc.) got Seed funding ten months ago and has not raised its series A yet.
Knowing this, what is the median time between funding rounds of these startups? The question, of course, is what to do with the third startup. The naive approach is to simply dismiss this data point and only use the first two observations. But this would be incorrect, as that strategy would answer a very different question: “What is the average time between funding rounds of the subgroup of startups that got funded within the first 16 months?”. Dismissing data points that are still “open” provides an underestimate of the time to the next round. So, how could you get an unbiased estimate?
A Solved Problem
This is a solved problem in other disciplines. The problem presented by the third startup above is known as “right-hand censoring”. Key in epidemiology, this problem arises when a research study is not able to follow a cohort of patients (or costumers, companies, etc.) long enough to observe the time of the event of interest for all subjects. In our example, right-hand censoring prevents us from seeing today that Machine Learning for Children, Inc. will be able to raise its series A after 18 months (if we were able to see into the future).
Survival analysis is the methodology that has been developed to address the right-hand censoring problem. The idea is to create a cohort with a certain “original state” at the start of the study. In our example, the start date is given by the series Seed funding date of these companies. We would then analyze the number of companies reaching a series A round after 6, 7, 8, or more months. Each of these data points would then allow us to estimate the percentage of companies still “surviving” in their original state with only Series Seed funding. The following graph depicts this strategy.
So, How Long Does It Take to Get Funded?
eShares is in a unique position to provide industry-level statistics, as it serves more than 6,000 startups and investor organizations in Silicon Valley and around the world. The median time between funding rounds using eShares’ data set are the following:
Median Time Between Funding Rounds (Source: eShares Data)
Without controlling for right-hand censoring, the naive approach provides estimates ranging between 14 and 19 months between funding rounds. Only once we include all data points do we get estimates closer to the two-year timeframe. The data also indicate that CEOs need to plan for a longer runway in later funding rounds, as the time span between rounds increases for later stage rounds. The differences between series Seed-to-A, A-to-B, and B-to-C are statistically significant at 5%.
The following graph shows the probability of getting funded over time. As can be observed, this probability reaches a global maximum at 24 months (i.e., across all types of funding rounds). This means that a CEO should plan to raise at least two years worth of runway in order to maximize the probability of getting funded (while hitting those key milestones of course). If that were not the case, we would strongly recommend adjusting the monthly burn rate downwards.
Probability of Getting Funded over Time (Source: eShares Data)
In a future blog post, we will analyze how the time between funding rounds varies by sector and geographic region.