In recent weeks, the tech media has been writing about the so-called Series-A Crunch as if it were a real thing. The story goes that hundreds of angel-backed startups are running out of money and institutional venture capitalists aren’t coming to the rescue. It’s apparently such a big problem that it made the front page of the San Jose Mercury News on Monday, bumping less important stories like cabinet appointments, world unrest, and community news to the inside pages.
Unfortunately, the Merc got it wrong when it cited the cause of the Crunch thusly:
As those fledgling companies now go hunting for the next funding round to help them grow,smacking up against a harsh reality: Widespread consolidation in the venture capital industry means there are fewer places than ever to find big cash infusions.
Undoubtedly, venture capital is consolidating and changing. Investment thesis shift faster than hem lines, and Silicon Valley venture has clearly retreated from seed (as it has been practiced over the last 36 months or so) to later stage. There are plenty of reasons for these changes, most of them of VCs own making (a topic for another post, to be sure), but none more significant than the overall under-performance of the venture capital asset class over the last decade. In short, when you’re not returning money to your investors, it’s harder to take very early stage risk.
Still, it is wrong to blame institutional venture for the Crunch. The root cause of the Crunch isn’t that VCs are not coming to the table to re-capitalize and re-invigorate the thousands of startups that got minor seed funding in the last few years. The problem started with over-agitated and under-informed angels and entrepreneurs who flooded the market with near-worthless startups in the first place.
There is a saying that it takes $10 million to train a venture capitalist. That’s about what a new VC will put into bad deals before he understands the finer points of diligence and deal-making and –management. The Great Seed Capital Flood of 2011-2012 is the angel investor equivalent to that truism. Individual investors with little experience beyond their own success invested in and mentored startups beyond their market or business expertise. They fell in love with trendy ideas and the idea of being trendy. In short, they invested in things that never had a chance of becoming interesting and growing businesses.
The anomalies – those companies that got seed funding and managed to find a business and execute to market – will find their Series A. It won’t be easy. It never is.
The rest will go to work, most probably at the very companies they hoped would acquire their fledgling startup. It will make hiring at technology companies a little easier and a lot cheaper. And it will take some money out of the market as individual investors write off what CB Insights CEO Anand Sanwal estimates to be more than $1 billion, according to the Mercury News story.
But don’t believe the doom-sayers who would have you believe that real, needle-moving innovation will be stifled. One could argue that most of the seed-funded, app-producing startups of the last 24 months weren’t exactly cracking innovation wide open. More importantly, though, innovation always finds a way. The companies that really are breaking and re-making the mold will emerge from this trendy soup to find their market, and their investors.