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The Series A crunch is hitting now. Have we even noticed? (pandodaily.com)
105 points by sethbannon 1640 days ago | hide | past | web | 52 comments | favorite

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.

There are some areas where you do need a series A before you have revenue or user traction. Not all business ideas are php web apps or even SaaS.

I don't see any reason for the doom and gloom here.

More like Pander Daily, IMHO.

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?

> 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.

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.

And given that proviso:

1. Most of the labor is already in funded startups, because funded startups can afford to hire more labor.

2. Of the 80% of startups that can't get Series A, the founders and early employees can remain in the startup ecosystem. Some of them will eventually hit upon something successful as well.

3. If not, large companies and successful startups never have as many engineers as they need anyway because there is a shortage of engineers. It is not clear whether the pool of engineers stuck in unpromising, unfunded startups is larger than this shortage.

I wouldn't say unproductive. Some of these companies will continue without further funding. A lot of the ones that don't will have broken new ground, educated themselves further for another go or are ending up at a big company either just as an aquihire or actually selling assets to the company.

> either just as an aquihire

I think if there is an 80% death rate, then nobody has to worry about aquihire deals: Companies will simply go back to normal hiring.

I don't think so. Of the companies that fail at series a, a small portion of them will be most desirable for big companies and will get aquihired. There will be plenty of super talented teams with great tech that don't get the product market fit or the market turns out to be too small or crowded to get a series a.

Some of those 80% might be successful businesses and even exits that make the founders rich in the $20M-$50M range, they just don't have enough traction to be venture-scale startups.

Or let's put it this way: 80% of startups will not reach $100M in revenue. Does that sound so bad?

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.

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.”

"If the returns on the seed side start to dip. What would stop stop seed investors to graduate & become (smaller) VCs."

The math doesn't work. Early-stage investments are risky, by nature, and so investors take a scattershot approach to allocation -- it's safer to invest $10k in 100 startups than to drop $1M on one, because one of those 100 startups will probably more than offset the losses from the other 99. Thus, it's a conceivable thing for a moderately rich individual to do. But there are comparatively few people who can afford to invest $1M+ in a single company. The risks are too high.

The whole pyramid won't just "shift down" a level because at some point (the point we're calling "series A"), the investments have had some time to prove themselves in the marketplace. Investors get a lot pickier, because they have a lot more information.

TBH I used to take these warnings very seriously, but after the ominous "RIP good times" not only did everything keep going as usual but there were even more wantrepreneurs getting funded and valuations got even frothier.

As many have said before the beginning and the end of easy funding are low interest rates. The moment rates go up most VC funds will go dry and startups in general will have a hard time getting any funding.

Good points. vc requires some governance and BOD level skills. [1] angels may or may not have, they tend be more product focused and hands-off. etc. Look at the problems YC was having winding down with "founder breakups" etc.


[1] in addition to cash, business skills, contacts, etc which are obvious but omitted for brevity. angels if they have these skills is more likely from previous works, and not from being an angel per se.

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.

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.

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.

I think this is the flip side of 'easy seed money', which is to say smaller investments are made more liberally so the percentage of them that pass muster at Series A are inversely proportional to the amount of 'lenience' they saw in the seed round.

> If you're a $250M venture fund, why not throw $250K cheques around and see what sticks

Because even $250M venture funds don't like to waste their cash if they don't have to. There should be some vetting process otherwise they're in trouble with the LPs. And $250K is too low for a large fund because of the overhead of doing a deal. You're just as likely to pick up a few million in capital for a more solid plan that you'd be picking up $250K for a weaker plan.

$250K is middle ground, that's more a big sum for an angel than a small sum for a large fund.

Smaller funds might try to do a $250K deal for a disproportionate percentage, that's not really a win for the company.

Lots of larger firms participate in seed rounds with six-figure checks, as a kind of option on investing in the Series A.

As the size of seed rounds comes back to Earth this will be less likely to happen.

What's most interesting to me is that traditional VC is being squeezed from both sides. We're seeing earlier IPOs (I get the impression the Series D has more or less disappeared) and at the same time we've been seeing larger angel/seed rounds that could have passed for a Series A in older times.

Could we eventually be heading for a world where companies go straight from angel/seed funding to IPO?

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.

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.

“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.

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.

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.

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.

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.

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.

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?

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

"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.... Seed investing continues to be a very real, growing trend, and yes - many startups will be left in the dust come Series A time.

> Wrong. This is not an investor's problem.

Because investors never worry when 80% of their companies go up in smoke.

These just need the other 20% to go up in value 5x to break even, and with seed/angel money that is easy to do.

> These just need the other 20% to go up in value 5x to break even, and with seed/angel money that is easy to do.

Yes, picking 1-in-5 investments with 5x return is so easy it's a wonder that this investment style hasn't completely taken over the $1-$5M segment of the market.

Great reply!!

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.

To be fair, people are much more likely to brag about getting funded than about being unable to get funded.

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.

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

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

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.

It's not an idiom I've heard before but I think what PG means is that getting Series A has always been difficult and that's the top point of either an obelisk or pyramid. The lower rungs of funding (angel) just have a lot more activity than they used to, so the bottom is wider like a pyramid (as opposed to an obelisk which is narrow... as in the old days).

There's a much wider base of companies that get initial funding, but not much more that get later stage funding.

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.

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.

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

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

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 :)

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.

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