I have to believe that most of us are dealing with some degree of “Series A crunch” fatigue. I know I am!
Yes, it’s true that a majority of seed round funded companies won’t receive another round of financing. That fact doesn’t represent a problem, at least from a macro perspective. Markets can only support a specified # of players in a given space, so an early natural filtering/consolidation process is actually rather healthy.
While this Darwinian effect might be discouraging for some aspiring entrepreneurs, it more often than not serves as a blessing. “Failing” fast has intrinsic benefits such as minimizing opportunity costs by allowing entrepreneurs to move on to the next project rather than toiling in mediocrity for long periods of time (remember simply raising capital does not make for a successful business!).
However, the other side of the coin is failing TOO fast. Not having enough time for that 3:00AM epiphany or an ingenious pivot might prevent the next PayPal (remember Confinity?) or YouTube (which started off as a dating site!) from surfacing.
A byproduct of the Series A crunch is companies is certainly companies perishing very early, but I’d argue most companies that reach that point have had 2-4 years to figure out a plan.
More concerning is the potential downshift of the crunch to Seed rounds. It certainly hasn’t happened yet as Seed round activity has stayed steady (~194 deals/quarter). For the record, I’m defining a Seed round as a round between $500K-$2MM that includes at least one Venture Capital fund. I believe much of the steadiness in seed funding activity is a function of the glut of smaller ($5MM-$50MM) seed funds that have surfaced over the past 24 months.
However when examining the CB Insights produced chart below, it’s logical to conclude that as casualties continue to accrue at the pre-Series A level, seed investors will be focused on de-risking themselves by asking for more. More traction, better management pedigree, and bigger target markets will be sought.
First, I don’t believe that company formation in the US will slow down – it might even increase as we continue to see talented international entrepreneurs start companies in the US. As such, it’s feasible that the Series A crunch will flow downstream to create a crunch at the Seed level (at least as we’ve defined Seed rounds above).
Perhaps it won’t happen given the small amount of capital needed at that level. However, I’d encourage entrepreneurs to plan as if the Seed funding faucet will slow to a controlled drip. What to do?
A few tips:
- Be flexible with your fundraising plans. Explore all of the options available — Traditional equity, convertible debt, Kickstarter, Fundersclub, and AngelList (both through the platform and through the Second market partnership)are all alternatives present today.
- Focus on getting to Cash flow positive operations early on.
- Tranche, Tranche, Tranche – Yes it sucks having to raise money all the time, but don’t rule it out. Many companies these days follow the path of Bootstrapping>Friends and Family>Angel Round>Inst. Seed Round>Series A. Yes it’s distracting to raise all the time, but it beats the alternative of shutting down the doors before giving the business a real chance.
- Focus on bringing in the right partners early, and don’t optimize primarily on just getting the highest valuation.
Good luck. It’d be a shame not to see the next Fab.