
The Series A crunch is hitting now. Have we even noticed? - sethbannon
http://pandodaily.com/2012/11/28/the-series-a-crunch-is-hitting-now-have-we-even-noticed/
======
il
I don't see any reason for the doom and gloom here. Series A funding isn't a
lottery with a random 1 in 5 chance. The 80% of companies struggling to raise
Series A are the ones without meaningful revenue or user traction. Why do they
deserve to get funded?

A $1M seed round should be more than enough to get a SaaS business cash flow
positive or get a consumer product to a meaningful user base. If you have
failed to get there on a seed round, the answer isn't "give me more money",
it's "the market is telling you to try something else".

$1M can be 2 years of runway. That's a long time to figure out what you need
to do to get to product-market fit.

Most successful businesses don't have anywhere near that level of funding and
are still able to make money on more constrained resources.

~~~
exit
waking up to the reality that 80% of economic activity is unproductive sounds
pretty doom and gloom to me.

you think the other 20% will just absorb that labour?

~~~
bryanh
> 80% of economic activity is unproductive

The parent comment is talking about 80% of _companies struggling to raise
series A_ , not 80% of the entire economy or even the entire startup
ecosystem.

~~~
001sky
This is a good point:

global economy>us economy>tech economy>vc backed co's>series A needed
co's>series A not avails to co's etc.

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sami36
Can I make a somewhat contrarian prediction. Feel free to trash it. I'd like
to hear where I went haywire with my assumptions.

1- The real glut is an abundance of capital. With interest rates depressed & a
stock market fairly valued, & that's not counting the immense wealth generated
in other parts of the world by the commodity bubble. There are very few
remaining outlets for productive capital. Say what you want about the valley
now, it's still a great investment _destination/asset class_.

2- If the returns on the seed side start to dip. What would stop stop seed
investors to graduate & become (smaller) VCs. After all, Investing is their
trade, they're not going anywhere.Slowly, by capillarity, Seed investors will
become series A, Series A will rise to being series B...& so forth. With the
500 investor limit being lifted. Maybe IPOs are going to be pushed even
further down the cycle..until profitability is established & business models
flushed out.

3- Crowd-funding is only getting started. It'lll get worse (kickstarter
awareness growing, slowly but surely displacing game publishers for example.)
& with the imminent enacting of the JOBS act, even more money will flood the
Valley, just look at what AngelList, FundersClub, CircleUp are doing even
before the law takes effect. All of this results in capital that's being
displaced & that's going to look for new outlets.

4-Startup capital needs are collapsing. ( Exhibit A :Amazon announcement
today.) Bootstrapping wil soon become a viable option (Just how much would you
need to recreate Instagram today.)

What if we're witnessing a strategic & irreversible shift in favor of
entrepreneurs & an expansion of innovation centers beyond northern California
. Money after all is a commodity, it's a miracle that a particular geography &
an investor class were able to quasi-monopolize the world's innovation for the
last 15 years.

~~~
DanielRibeiro
I believe pg summed it up nicely on this exert:

 _It’s just getting easier to raise early rounds and harder to raise later
rounds,” says Y Combinator’s Paul Graham over email, hewing to the latter view
that this has merely become startup life in the Valley. “Investors will pay to
see how an experiment turns out, but they are brutally unforgiving, if it
doesn’t turn out well… What used to be an obelisk is now becoming a pyramid.”_

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pclark
This is a pretty dramatic article. I think I have read other articles on
pandodaily where it feels like the author is told "to write a story on x _and
how it is bad_ " and then they shoe horn words to make it so. (for example the
VCs having smaller angel funds.)

Has anyone ever – in recent memory – declared that raising a Series A was
anything other than challenging? Not only this, but people have been saying
"it's going to get really bad in 6 months" for _years_ at this point.

And it kind of makes sense. If you're a $250M venture fund, why not throw
$250K cheques around and see what sticks: but then if you're going to put a
partner _on the board of a company_ you're going to judge this company very
very closely.

I'd hope that if investors actually believe there are companies worthy of
raising an A round and unable to due to a lack of funds, someone would start
the appropriate positioned fund.

~~~
sethbannon
It's true that raising a Series A is always difficult, but it's also true that
there are far more seed dollars available than ever before. It seems to me
like this has to cause some sort of shock to the ecosystem, even if the total
volume of Series A dollars hasn't decreased.

~~~
kapilkale
Agreed here. I'm not really convinced that there's a series A crunch so much
as there's a seed funding glut.

Anecdotally, it seems easier than ever to raise notes on a team, a dream, and
a powerpoint deck. And the amounts being raised seem higher than ever.

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guimarin
What I find most interesting were Maples comments on only about 10 'good'
companies a year. If I think about the early majority and late majority
segments, this makes a lot of sense to me. Friends in those segments are just
barely starting to use and understand Instagram, let alone, transportation
start-up X. I wonder if we're at a point where good ideas don't work simply
because the market is up against the we-can-only-learn-so-many-new-things-per-
year wall. Of course that would be born out by a lack of series A's for those
companies. Right idea, wrong time. Makes you kinda want people to open source
their failures, so that in the future, you already have a place to start from
on an 'old' idea.

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ajaymehta
I wonder if this is a one-size-fits-all phenomenon. Is this "crunch" happening
to every startup, or is it more concentrated on a specific type of company?

It reminded me of the Fred Wilson post a few days ago
(<http://www.avc.com/a_vc/2012/11/what-has-changed.html>), which makes me
think it might be more of a problem for consumer startups than enterprise/B2B.

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001sky
_“The tech industry creates roughly 10 awesome companies per year,” he says.
“That’s independent of how much money VCs have or how many companies funded.
There are 10 awesome companies a year, and they will get funded. It’s pretty
simple.” He says if a company is going to be successful you can see it in 18
to 36 months. If you don’t, that company simply shouldn’t get to take up any
more of the Valley’s rich resources — whether that’s talent or people. Sorry._

\-- The Finite theory of invention. Or appeciation.

~~~
erichocean
What'll be fun is when one or more of those roughly 10 awesome companies
_don't need to get funded at all_ in the traditional sense, thanks to the JOBS
act coming online soon.

My previous startup pursued a Series A last year (and failed), and I'm
completely forgoing VC for my current startup. Instead, it'll be JOBS act and
then straight into Second Market.

Ironically, we're raising almost twice as much money this time for a product
my last venture _already included_ amongst a panoply of other tech developed
over a 10+ year period.

Sometimes, it feels like the market is almost completely irrational in the
small, and only seems to approach rationality over huge numbers of ventures.

All in all, I'm very happy with the JOBS act. Instead of making a bunch of
already wealthy people on Sand Hill Road I just met even richer, I'll be able
to spread that wealth around far, far more than I could have otherwise.

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famousactress
This smells like probably-awesome news. Less bullshit spending dollars that
can go to not-bullshit... more talent to hire for companies better-prepared to
make a serious go of it.

~~~
michaelochurch
As always, we're facing a nonlinear system and it's unpredictable whether this
will be good or bad.

Less money for bullshit is good if it means more money for substance, but it
could also mean a decrease in engineer salaries, which means a future decline
in power for those who are more fit to have it.

~~~
famousactress
Sure, that's definitely fair. It seems to me though that developer salaries
haven't risen nearly as sharply as demand. Add to that the actual effects of
the entre-boom with regard to the average developer's wealth and it starts to
look like a lot more people are working a lot harder, for a lot less.

My gut is that maximizing the actual-value creation per-developer is something
to strive for, and ought to be good for everyone involved.

~~~
justin
Not sure how to measure developer demand, but as a "valley-insider" I
regularly observe directly engineers being paid about 40% more today than they
were in 2008. Also, I recently heard of a mobile developer getting a base
salary of 900k, but that's hearsay so who knows..

In any case developer salaries have risen very sharply in my experience.

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Pwnguinz
Something I've been curious about that wasn't entirely discussed, but briefly
touched upon in the article: Convertible notes are normally assigned some
value upon a more 'official' valuation being made by some VC firm. What
happens, then, if the company generates enough cashflow to bootstrap their way
to profitability and ends up not needing nor taking VC money?

How are the initial convertible notes valuated and equity assigned, in this
case?

~~~
amosson
Since they are debt, they accrue interest and the note is due and payable in
full at some point down the road (say 18 months). If the company successfully
bootstraps, they need to be in a position to pay back the note + the accrued
interest by the end of the 18 month period.

If the company can't pay back the note, they need to negotiate with the
investors to either extend it or to convert it at some mutually agreed upon
valuation

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jsherry
"Hands down the people who are most concerned about this trend are the angel
investors."

Wrong. This is not an investor's problem. This is an entrepreneur's problem.
The angels and VCs will shake this off as all of the combined seed dollars
invested over the past couple of years are a relative fart in the wind
compared to the greater startup investing arena, which doesn't become really
capital-intensive until at least the Series A, and more often Series B stages.

It's the entrepreneurs who are (or at least should be) most concerned. Not the
investors.

Edit: here's some cold, hard stats on the Seed VC phenomenon witnessed as of
late: [https://www.cbinsights.com/blog/venture-capital/seed-
investm...](https://www.cbinsights.com/blog/venture-capital/seed-investments-
series-a). Seed investing continues to be a very real, growing trend, and yes
- many startups will be left in the dust come Series A time.

~~~
paulsutter
Where's the problem? Anyone care to name high-growth successful seed companies
that can't raise an A? Sounds like a great opportunity. I'd love to hear about
that.

Oddly, nobody has named any specific great companies that can't raise an A.
Wonder why that is.

~~~
benologist
This comes to mind -

<https://appharbor.com/page/appharbor-status-update>

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eduardordm
Maybe we are reaching a point where we have more solutions than problems that
can be solved with just with apps in general. Maybe this is why hardware is
getting more attention.

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Timothee
_"What used to be an obelisk is now becoming a pyramid."_

Off-topic, but what does this mean? (curious non-native speaker)

~~~
bcbrown
The shape of an obelisk has a narrow, constant width. The shape of a pyramid
has a width that is wide at the bottom, and narrow at the top. The 'y axis' of
the shape is how far along in the startup life cycle the company is. The width
is how easy it is to get funding at that point in the cycle.

Here's how I interpret it:

It used to be that the ease of funding was relatively constant at all points
on the life cycle. Now it's easier to get funding at an early stage, and
harder to get funding at a later stage.

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salimmadjd
Isn't this just a simple supply and demand issue? With the cost and barrier to
starting a startup becoming so low and abundance of incubators and
accelerators there are so many startups who are chasing the same Series A
funding. So every VC is looking for the next DropBox or AirBnB to invest.

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itsprofitbaron
The fact that companies aren't going to Series A is because they're raising
more in Seed funding & the ones which are going to Series A are ones which
investors are doubling down because, those Seed investments have worked & they
don't want to waste their resources.

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unohoo
"What used to be an obelisk is now becoming a pyramid."

\-- One of the best analogies I've heard in a long time

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w1ntermute
Related article on _The Verge_ :
[http://www.theverge.com/2012/11/27/3696704/funding-
drought-m...](http://www.theverge.com/2012/11/27/3696704/funding-drought-
means-fewer-frivolous-startups-but-less-creativity)

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biznickman
It's not a big deal: startups are supposed to fail. Fortunately for most of
the failed entrepreneurs, they'll be able to get a job at one of the countless
startups that aren't failing :)

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rohamg
to be honest I haven't seen this. the lessons are same as always: stay lean,
stick to the customer, iterate to market fit. if you do all three of those
things your seed investors are quite likely to back you again (if you chose
wisely among seed investors!), giving you more time to find that market fit.
there's always growth capital available for companies that have found market
fit.

so, yes - there are many companies flaming out, but those companies would have
flamed out anyway. for good companies with good teams, i'm seeing multiple
"seed" rounds which sometimes add up to what would be considered a pretty
healthy series a. any of those folks if they're worth their salt will back you
again (at the same valuation if need be), as long as you fullfil all other
expectations, giving you plenty of time to achieve product market fit, at
which you bring in multiple VCs, bid up to high valuations, and lock in the
gains for your team, angels + early seed investors.

with the increasing ubiquity of angellist and ramp up of crowd-funding
activity, there will be tons of capital for some time to come. is it hard to
raise follow-on financing? fuck yeah. who said it had to be easy? was it
"easy" to get that first check?

the real story/"news" in all of this is that the combination of readily
available risk capital with the dramatic increase in capital efficiency by
companies means that many, many successful companies will be created, grown to
profitability, and exited without any participation from a non-seed VC.

