The Series A crunch is hitting now. Have we even noticed?
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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.
you think the other 20% will just absorb that labour?
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.
global economy>us economy>tech economy>vc backed co's>series A needed co's>series A not avails to co's etc.
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 think if there is an 80% death rate, then nobody has to worry about aquihire deals: Companies will simply go back to normal hiring.
Or let's put it this way: 80% of startups will not reach $100M in revenue. Does that sound so bad?
More like Pander Daily, IMHO.
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.
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.
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.
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[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.
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.”
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.
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.
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.
As the size of seed rounds comes back to Earth this will be less likely to happen.
Could we eventually be heading for a world where companies go straight from angel/seed funding to IPO?
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 Finite theory of invention. Or appeciation.
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.
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.
My gut is that maximizing the actual-value creation per-developer is something to strive for, and ought to be good for everyone involved.
In any case developer salaries have risen very sharply in my experience.
How are the initial convertible notes valuated and equity assigned, in this case?
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
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.
Because investors never worry when 80% of their companies go up in smoke.
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.
Oddly, nobody has named any specific great companies that can't raise an A. Wonder why that is.
Off-topic, but what does this mean? (curious non-native speaker)
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.
-- One of the best analogies I've heard in a long time
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.