A Cover Is Not the Book
Here are two numbers from the venture world that tell the whole story of capital right now.
So far this year, at least 114 Series A rounds of $100mm or more have closed globally, and more than 70% of them went to AI companies. I’m going to repeat that last part for emphasis: 70% of them went to AI companies.
Meanwhile, the number of U.S. Series A rounds in Q3 fell to 272, down from 377 a year earlier. That's roughly 28% fewer deals in a market that, judging by the headlines, has never been hotter.
Those figures come from a sharp piece in Crunchbase News by Marc Schröder of MGV, and he nails it in one line: "The megarounds hide how few A rounds are getting done." (And in the spirit of attribution, the image above is from one of my daughter’s favorite movies, Mary Poppins Returns).
But wait, it gets starker.
Only 16% of the companies that raised a seed round of $1mm or more in 2024 have made it past seed. For companies through 2020, that number was 55% or higher. The checks are bigger. There are just far fewer of them, and the bar to get one keeps rising.
If that sounds familiar, it should, b/c it's the exact barbell I laid out in this morning's Top of the Fold.
And it isn't just a venture story. Look at our industry this fall and you'll see the same picture: giant headlines at the top, and a much harder market underneath.
Let’s start at the top of the barbell. In August, Owner, the "AI-native" restaurant tech platform, raised a $240mm Series D at a $2.3 billion valuation, led by Goldman Sachs, with annual recurring revenue north of $100mm. Back in March, Sysco agreed to buy Restaurant Depot for $29.1 billion. Those are big, confident checks, and they make it look like the money is flowing for everybody.
It isn't. For proof, let’s look at two deals that didn't happen.
Papa John's: the money was there, and the price was the problem. Over the past 18 months, Papa John's ran a strategic review that drew real interest. Apollo walked away from a roughly $2.1 billion take-private bid. Then Irth Capital, already holding about 10% of the company, bid $47 a share, about a 44% premium at the time.
The headline looks good, but let’s look at the fine print (aka: the financing terms), b/c that's where the real story is. Per PitchBook, Irth's bid was backed by $725mm of preferred equity from Brookfield at a 12% all-in yield (10% paid in kind, 2% in cash) with a minimum 1.6x return on invested capital, plus roughly $1 billion of bridge debt from Morgan Stanley headed for a whole-business securitization.
I know that’s a lot of math for a Saturday morning, but it’s too important to ignore.
12% on $725mm is about $87mm a year, most of it accruing rather than paid in cash. For context, Papa John's guided to $180mm to $190mm of adjusted EBITDA for the entire year, and that's before you service a billion dollars of debt. That isn't cheap money. That's a toll road.
On August 6, the board walked away and bet on its own turnaround plan instead. The same day it suspended the dividend, cut guidance, and reported North America comps down 8.3%. The board says it "remains open to other alternatives," and I'd expect to hear that phrase in a few hallway conversations at the Wynn next week.
MTY and Foodtastic: the money never quite showed up. This week, MTY Food Group's board unanimously rejected Foodtastic's proposals at $43 a share (about $982mm, per The Canadian Press) and ended talks. The detail that jumped out at me: MTY says it granted Foodtastic several exclusivity extensions so it could line up its financing, and the deal still didn't come together. MTY wrapped a nearly year-long strategic review, chose to "accelerate" its existing plan, and announced a CEO transition the same day.
Two very different companies, one lesson. A willing buyer and a willing seller are no longer enough. The capital has to show up, at a price the business can actually carry.
So, here's the pattern. In venture and in restaurants, the headline numbers are being driven by a small number of winners: the AI platform with $100mm in recurring revenue, the strategic buyer with a fortress balance sheet. Everyone else is meeting a capital market that's open, but selective, expensive, and slow. Bigger checks, fewer of them, and a higher bar to get one.
And Mr. Schröder's advice to seed founders works just as well for a multi-unit operator or a ResTech CEO walking into RFDC on Monday. "The Series A bar is now a revenue bar." In our world, the bar is margin. Size the raise to the milestone you can prove, not the valuation you'd like, and if the only capital on offer comes with a 12% coupon and paid-in-kind interest, be honest about whether your P&L can carry it.
The takeaway: A big headline is not a hot market. Don't confuse a mega-round with a money supply.
