How startups can bridge the funding gap

Securing VC funding is crucial for any startup to transform innovative ideas into reality, fuel growth, and create value. Despite tighter market conditions, early-stage capital remains available for promising teams and visionary entrepreneurs addressing significant industry problems. Late-stage capital is also widely accessible once companies reach scale and prove their business models.

The problem is that there’s a gap in the middle, between the A and the growth round. Many startups struggle to secure funding, while even attractive, high-potential companies frequently underestimate the time needed to achieve product market fit and strong unit economics, to progress from their Series A to growth rounds, leading to cashflow problems and constraints.

Misjudging the Time Required for Fundraising

Raising a growth round is much more difficult than before as Series B investor demands have significantly increased, yet many founders continue to base their Series B plans on their Series A experience. The current average time between Series A and Series B is about 31 months (compared to just 18 months between Seed and Series A), meaning many companies end up running out of capital and runway.

Series B, the first 'growth' round, requires significantly larger funding than Series A. Since macroeconomic conditions began to worsen in 2022, it’s understandable that growth investors have begun to demand more from founders prior to writing cheques. Specifically, growth investors are paying closer attention to criteria such as team quality, proven product-market fit, a repeatable sales model and the ability to access an existing large and growing market. Once these are met, the focus shifts to unit economics: burn, churn, average contract value (ACV), revenue growth and run-rate, customer acquisition cost (CAC) trends and gross margin.

Investors also scrutinise the business model, total addressable market, growth trajectory, and the company’s ability to acquire and retain quality clients. For startups, particular attention is paid to the regulatory landscape, cross-border operational challenges, and the potential impact of these external factors on growth.

Promising Startups are Facing a Cash Crunch

Only 25% of startups make it to Series B, and even the stronger startups can face a long journey to secure their growth round. This leaves capable founders, who have built good teams, achieved product/market fit, and made smart strategic decisions, struggling for runway.

The time between Series A and B is now the longest it has been in 12 years, so founders face the challenging task of driving rapid growth and profitability while conserving cash. This often means drastic cost-cutting measures, such as reducing headcount or trimming product features. Although these actions can improve the balance sheet in the short term, they risk damaging the company’s long-term health and overarching mission.

As a result, founders may feel forced to adjust their fundraising goals, accepting a lower valuation and surrendering more equity to incoming investors, which can lead to complications in future rounds. Alternatively, they might turn to investors who are not aligned with the company’s vision.

Securing Extra Capital Without Dilution

The good news is that there are solutions to the funding gap: bridge rounds, venture debt, and of course Series A extension rounds. Often overlooked by founders, Series A extension rounds allow startups to raise additional funds via a small round from existing and specialised investors under the same terms as Series A, extending their runway and better preparing it for the growth round. This can be a particularly appealing option for founders who continue to enjoy the support of their existing investors. These VCs, who have already seen signs of product/market fit, high growth, and a repeatable sales model developing, are keen to see their promising young portfolio companies succeed.

The challenge lies in securing the necessary capital for an extension round, as willing VCs may be unable to provide the full amount needed. Fortunately, markets are finding innovative solutions. A handful of VCs now target extension rounds between Seed and A, or A and growth rounds. By partnering with a startup’s existing investors, they aim to fill the capital shortfall, benefiting all parties involved.

An example of an extension round in practice is the startup Quincus, a global Enterprise SaaS platform addressing logistics challenges for household logistics providers, e-commerce companies, airlines and freight services worldwide. By leveraging technologies such as AI, machine learning, big data and cloud computing, Quincus has driven significant innovation in the logistics sector. The company secured an extension round to support its technological advancements, accelerate market growth and extend its runway between funding rounds.

Investors in the post-Series A/pre-growth stage must be diligent and highly selective. Their chosen investments must raise Series B rounds at the expected higher valuation within a predetermined period to deliver the anticipated return and risk/reward profile. Nevertheless, their increasing presence in the market offers a new opportunity for high-potential founders to navigate the funding gap without compromising their business plans.

Extension Rounds Should Be Integral to the Investment Lifecycle

The leading cause of startup failure is cash depletion. As economic and market conditions remain challenging, founders must plan for a longer path to growth-stage funding. The global venture community should offer better options for founders needing more time and capital to reach Series B, avoiding cost cuts or dilution. Thankfully, Series A extension rounds provide an ideal and proven solution to bridge the funding gap.