The "VC Funnel"

I saw this image in my twitter feed this morning:

Which led me to this CB Insights post from last October.

You can scroll down to the bottom of that CB Insights post to see how they came up with this data.

There are two things about this chart that I would like to talk about:

1/ Getting VC/angel funding is hard, but even if you do secure it once (1st round), the probability that you will secure it again is only 50-70%, and the probability that you will secure it five more times is between 0-5%. That is what CB Insights calls the “VC Funnel.” Before you jump to conclusions, there are many reasons why a company would not raise a second round, a third round, etc. It could close down, which is probably the main reason companies don’t raise a 2nd round, but it could also sell or get profitable or ICO or go public, which is probably the main reason a company raises a 5th round but not a 6th round.

2/ The NY Metro area is the easiest place to raise capital that CB Insights surveyed. That may surprise people, but it does not surprise me. NYC is home to wall street and a lot of money. If raising money is what you want to do, there is no better place to do it apparently. I am not a fan of investing in companies that need a lot of money to be honest. But if that describes your company, you might want to do it in NYC.

#VC & Technology

Comments (Archived):

    1. PhilipSugar

      Yes, I can tell you firsthand China is investing in US companies as well.

      1. Twain Twain

        I’m for East+West cross-investment. There are best practices in design, process, reasoning, implementation that’s different and can be complementary.

        1. Lawrence Brass

          Absolutely.If one is aiming at world markets it is natural to seek investors or facilitators who know their market/culture and can collaborate with their expertise and knowledge.

  1. DJL

    This funnel doesn’t bother me – its the one that it takes to get to the FIRST round. As you hinted at in previous posts, even Angels are now looking for 100x home runs.I don’t think Texas even wants to be on the list. Despite the major business Hubs of Austin/DFW/Houston, the great research universities, and the large family offices in the State, fundraising is still disjointed and chaotic, and I don’t see anyone trying to make meaningful change. ‘No deal flow’ has sent many teams packing.

      1. DJL

        I have been following this in Houston for the last 20 years. Lot’s of great new organizations (Rice Alliance), events (Rice B Plan) and co-working spaces (Station Houston) creating some momentum. But the true deal-flow is still a trickle compared to what it could be.Based on my personal experience, the system is disjointed. These groups need to come together to create a well-defined funnel to move the dial and get outside of Texas VC money. If I wasn’t so busy trying to run my company and raise capital I would try to lead the fix myself. ;>)

  2. JimHirshfield

    In all seriousness, the chances other companies have of raising money doesn’t have any bearing on your own company’s chances. If you’re the entrepreneur, there’s only one company’s prospects you care about or have influence over.Yeah, I get it, don’t try to raise a round in Wichita.

    1. PhilipSugar

      I think you can raise a round. No issue. Not that it is easy. It’s hard as hell everywhere to raise a round. That people that haven’t done it don’t get.Now if you need lot’s of big rounds………then you need to be somewhere like NY or SV

    2. LE

      Could be also a bit of ‘make it there make it anywhere’. Here’s an analogy with appearing at comedy clubs.In the case of club “A” 80% of the comics who perform there end up going on and performing at many other clubs. But with club “B”, only 70% of comics go on to perform at many other clubs. You could then conclude that the screening process of club “A” was such that it excluded people that (edit: it thought in it’s humble opinion) didn’t have enough talent to go on to bigger and better things. (Not talking about a venue that can make a star either …)So if you are a comic (to your point) the club filter in theory should not be relevant to your eventual success, controlling for other factors. All you care about is getting the second gig. You should do equally well doing your first performance in either club (edit: regardless of the filter’s opinion).

    3. Matt Zagaja

      You can build the best boat in the world but it doesn’t matter if the lake is dry.

      1. JimHirshfield

        You’re right. But your analogy is better suited to the “product-market fit” issue than to that of fundraising. It will rain tomorrow.

  3. Pointsandfigures

    the real interesting stats are the companies that get next round funding, and how big of a seed round it took to secure a series A. I think the range is $900k-$1.2MM in a seed round, which means that teams should value their companies at around $3.5MM-$6MM pre-money based on rule of thumb (selling 15%-25%) of your company. Another fact is angel round or seed round investors don’t like to travel for board meetings

  4. jason wright

    is there an equivalent “LP Funnel” when VCs raise?I remember you wrote that coming to London for your first USV fund was a complete waste of your time.

    1. fredwilson

      we raised once. performed well. have not had to “raise” since.

      1. JamesHRH

        Happy customers.Although, in the irony of ironies, you are not in growth mode.

  5. LE

    Just a quick scan and the report and conclusions seem to be some nonsense. Just taking the fact that they say the following:Among our unexpected findings, we learned it’s easier to raise a 2nd round of financing in NY or Boston vs Silicon Valley. The Boston Metro area was the top area for raising a 2nd round of funding.In particular what you consider qualifying for ‘easier’ and ‘top’. Like being rated ‘top’ as if it’s sports and a few points wins a game and gets the trophy. Not the case with this type of thing. There are many winners and separation by a few points doesn’t mean much … to me anyway. Like an amazon rating 87% happy vs. 92% happy. Math tells you one thing common sense says who cares.Here is what the chart says and that assumes it is correct and that their methodology is appropriate:Boston – 68% chanceNY Metro – 65% chanceSilicon Valley – 63% chanceSo what.To me that is meaningless compared to all of the other factors that need to be considered (but not my area of expertise) when deciding how, when and where to raise funds.Los Angeles companies were less likely to raise a 2nd round of funding than in other US regions. Could also mean that LA investors (once again if you believe the numbers) are more willing to take chances on initial funding. That is good not bad if you are one of the companies that is given a chance and lifeline. Think of this in terms of college admissions and whether applicants did well in their second year or not. If you don’t look good on paper but are good perhaps you’d rather be at the school that others drop out of in future years (and maybe you might as well) but at least you got a chance at the school…. https://uploads.disquscdn.c

    1. JamesHRH

      I agree almost holus bolus.- LA has higher risk culture (they make privately funded movies for crying out loud)- NYC & Boston are actually tougher towns to raise in, because there is no froth (if you get funded, you get a second, b/c investors are committed, which is good)

    2. cavepainting

      These things vary so much by individual sector that any aggregated analysis is mostly poppycock.

  6. JamesHRH

    We are just dropping ICO in as valid funding model now? Sheeeeeeeesh.Do you think there is any cultural bias to the funnel (not pejoratively, just that certain cultures may have ‘get profitable soon’ norms? I am thinking, India in particular.

    1. cavepainting

      I think VC and startup cultures are converging around the world. India is just like the US. Growth trumps profitability. Until there is no growth and then everyone is swimming naked.You think we all would have learnt from previous cycles, but no, we are incapable of non-experiential learning.

      1. Vasudev Ram

        >I think VC and startup cultures are converging around the world. India is just like the US. Growth trumps profitability. Until there is no growth and then everyone is swimming naked.Good points, and borne out, IMO, by recent (about 6-9 months) Indian tech media news, more so about e-commerce companies, which have received huge amounts of funding in the last few years.I guess your swimming phrase is a reference to a Warren Buffet quote about the tide going out.…He has some other good ones:

        1. cavepainting

          Thanks for the link. They are all great quotes.

    2. Amar

      I did think that was strange 🙂 I don’t think ICO’s have been around long enough to merit a mention alongside {“sold”, “profitable”, “went public”, “broke”} as a valid outcome option.

  7. JamesHRH

    The single smartest thing you can do is locate and raise in the city that has a strong ecosystem for the industry you are trying to break or break into. SO:- media? NYC or LA- hipster doofus startup? Brooklyn or Portland- Consumer Tech? Valley- Enterprise tech? Seattle, KW/Tor, Valley or Boston- energy? Tx- auto? Rust Belt- manufacturing? where people who build what you want to build livePractically, living in a world class energy startup community while doing other types of startups – for over a decade – proved to me that most investors stick to their knitting.Fo example, the best consumer tech startups from western Canada all got first round funding in California (StumbleUpon, Penguin Club, BioWare – which had funding in place with Elevation when Elevation was bought by EA).Systemically, you are easily filtered in a deep ecosystem and conversely, easily advanced. Everybody knows the norms, has tons of experience. You stick out like a sore thumb if you are awesome or if you are a rube.That’s where you want to be.And, if you are dead serious about your company, you would move to the most fertile ground when planting your roots.Yes, there are lots of other non-business reasons to stay put, but ……. we are talking about eliminating risk points.

    1. jason wright

      “hipster doofus startup” – an example please.

      1. JamesHRH

        Point making jab Jas.

        1. jason wright

          i’m not trying to lay a glove on you :)I’m just curious about what that sort of operation might be like. no names necessary, but i’m guessing it probably involves a manicured beard.

          1. JamesHRH

            Organic foods, hemp clothing.

          2. jason wright

            you know me too well LOL.Nothing wrong with organic food… if it’s truly that. Demeter, Demeter, Demeter, my kingdom for Demeter organic food.

          3. awaldstein

            the large majority of organic food bought from artisanal sources is not certified in any way btw.almost no demeter certified bio d food shows up in the states. and bio d is a sub set of organic.certs for org and bio d in wine are decreasing (it appears) while the usage of those practices is increasing.this changes the trust paradigm to the distributors.good direction.

          4. awaldstein

            organic food waste market is a significant nut to crack and some are doing some interesting things to get there. 20-25% waste is a lot of produce and dollars.CBD supplements especially within liposomal formulas is turning this truly massive category on its head.

          5. TeddyBeingTeddy

            If you put a logo of a bird on it, data shows consumers in Portland willing to pay 33% premium to non-bird logos

          6. awaldstein

            not sure what you are saying.

          7. TeddyBeingTeddy

            Portlandia episode.

      2. DJL

        Dope Startup

  8. Joe Cardillo

    One data point that’s interesting to me is likelihood of someone who’s raised an angel or seed round to raise new round with a new startup (whether having moved on, failed, exited, etc.)It seems a heck of a lot easier, and I wonder how much of that is because of message match and/or having acquired the language and relationships vs. actually having traction to show.

    1. Girish Mehta

      Knowing how to play the game is different from knowing the rules of the game. People who have done this before successfully have a better handle on the how.Also, signalling plays a significant role in the fund raising game – both on the side of the entrepreneur and the investor. It shouldn’t, but thats human nature.p.s. The flip side – a bad reputation from previous work (on either side) spreads.

      1. Joe Cardillo

        Very true, and I’ve always found signaling to be a troubling part of venture capital world – ideally traction, validation, and real, useable data would drive that but too often it doesn’t.

  9. Lawrence Brass

    I don’t know many places, but I can clearly feel the energy that NYC has and understand why it attracts so many people. Very easy to fall in love with.Once during my explorations I was in NYC at “my office” which is really a co-working space and an address. I spent a few hours there doing some phone calls and paperwork. As we were leaving a young man approached us and introduced himself. I guess he was jewish because he was wearing a kippah. He apologized for hearing over his shoulder and asked about us and about what we were we doing. His team was raising a fund and gave us his card and invited us to reach him later.In the same trip I recall hearing two guys walking in the street talking about “chilean bonds” and other finance things as most people talk about the weather.Nothing special for most people here I guess but a great difference with my world in Santiago. It stroke me then as an expression of the city’s energy.NYC smells like and talks about money.

    1. Vasudev Ram

      I first heard this years ago in school, great song.Neil Diamond’s America:…And years later:Neil Diamond – America Live in Ireland 2002…

  10. Tristan Louis

    I find there’s a bit of a paradox here: Funding cash-intensive businesses seems to be a New York specialty but hardware businesses (usually cash intensive) are rarer in New York than in other markets (I’m assuming because as a region, we’ve generally agreed that manufacturing is not our future and thus do not built that many physical goods).In the same way, “pure” technology (ie. AI, VR/AR equipment, computer chips) tends to be a valley domain but those would strike me as the type of industries that could require more cash to get launched.