1:58 PM
Jun 13, 2019
 |  BC Innovations  |  Finance

Sitting it out: Why some investors are staying out of mega-series A rounds

VCs discuss why more isn’t always better when it comes to series A rounds

As series A rounds continue to balloon, some VCs are opting to stay away from super-sized rounds, arguing the large boluses of cash up front can erode financial discipline and constrain exit options, hurting returns.

Large A rounds are becoming in vogue: this year’s tally of series A rounds breaking the $100 million barrier is already at four, roughly on track to meet last year’s total, when 10 companies raised over $2 billion on aggregate (see Figure: “$100M and up”).

Since 2014, 27 companies have raised series A rounds above $100 million, compared with one in the five years prior.

The trend extends to A rounds in the $50-$100 million range too. Since 2014, 74 companies have raised series A rounds in that band, compared with seven in the previous five years.

The average size of a series A round has jumped from $14.4 million in 2014 to $33.4 million year-to-date.

Advocates of these mega-rounds say they give companies the ability to pursue more therapeutic avenues and focus on development instead of fundraising.

Many entrepreneurs are riding the current capital wave and raising big rounds while they can.

But some investors are skeptical. Three VCs who spoke with BioCentury cautioned that super-sized rounds aren’t all upside -- either for the company or its investors.

While mega-series As can make sense for companies developing complicated new modalities, such as cell therapies and gene editing technologies, or with large late-stage portfolios that require substantial investment to reach an inflection point, the VCs said the huge series As can limit a company’s options down the line and increase dilution. They also can lead to a lot of waste.

“There’s so much money in the system that there is a lack of discipline emerging in the space,” said Atlas Venture’s Bruce Booth.

All three VCs are generally keeping the size of their rounds closer to the average.

“How much capital do you really need to burn in the early years to get to a value inflection point? That will point you to the best fund and the best fit,” said...

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