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Jan. 16, 2013 10:00 am

Series A crunch: fear not, Baltimore, for your startup shouldn’t be making something ‘unimportant or unproven’

It’s a crunch only insofar as startups with bullshit ideas and no revenue find themselves suddenly unable to dazzle seasoned investors with their pitch decks and boilerplate business jargon.

Talk of a Series A crunch in Silicon Valley shook the startup world in late 2012.

As Technically Baltimore reported at the time, the furor around any kind of investment crunch was raised as startups previously rolling in fat stacks — thanks to a deluge of seed and angel investment — were suddenly having a more difficult go at raising venture capital dollars during later rounds of funding, Series A being the first of such funding rounds.

Numbers from CB Insights suggest that early observers of the crunch weren’t wrong. Among U.S. tech startups, the number of seed investment deals ballooned from 472 in 2009 to 1,747 in 2012, while the number of Series A deals increased modestly from 418 to 688 over the same time period.

Seed deals in Baltimore city have ballooned as well. The Baltimore Angels group conducted eight separate deals in 2012 totaling more than $850,000. In the three years prior to 2012? Just six deals total.

In December, CB Insights expounded further on the crunch in its seed investing report. Analyzing 4,056 seed investment deals made since 2009, the report concluded that the volume of seed deals has “exploded.” As a result, more than one thousand startups will be “orphaned,” unable to raise follow-on financing. To add insult to injury, more than $1 billion of investment money will be “incinerated.”

Except — wait for it — this isn’t indicative of a Series A Crunch. Sorry, we’re not sorry.

In a new report published today, CB Insights notes that in the last quarter of 2012, both the volume of Series A deals and the amount of money involved in those deals increased, while the volume of seed investment deals decreased.

Screen shot 2013-01-15 at 5.50.17 PM

Bar graphs, for the win.

What gives?

To be sure — and CB, correctly, points this out (check page 11) — change from one quarter to the next isn’t a trend. But about its December report, CB Insights wrote that the “Series A crunch is nothing more than excessive demand for a limited supply of Series A financings.”

Or, to borrow some language from Dan Lyons of ReadWrite: a bunch of crappy startups are now panicking because they thought their crappy ideas weren’t so crappy and therefore can’t believe venture capitalists aren’t compelled to engage in a cash money-fueled lovefest with them by tossing more investment at their new app to help you deliver gourmet lamb chops to your dog. Named Thurston.

Series A crunch? Meh. What appears to be happening, rather, is that startups are starting to feel the effects of an excessive amount of poorly executed seed deals undertaken by inexperienced angel investors.

Venture capitalist and gung-ho Baltimore-lover Tom Kuegler, general partner of Wasabi Ventures, which has offices in Silicon Valley and Baltimore, saw this coming. “[A] lot of people are throwing money at a lot of early-stage companies,” he told Technically Baltimore. “A good chunk of those companies are not going to go anywhere. So they’ll get to a point when they need more money and nobody will give them any money.”

Bingo.

A Series A crunch ain’t much of a crunch if the overall capacity of Series A investment dollars, real or potential, is untouched, as LAUNCH Media blogger Jason Calacanis astutely notes. It’s a crunch only insofar as startups with bullshit ideas and no revenue find themselves suddenly unable to dazzle seasoned investors with their pitch decks and boilerplate business jargon that means a whole heap of nothing.

As Calacanis writes:

Here’s an absolutely crazy idea for folks “facing” the Series A crunch: Make $2,750 a day (about $1M/year). If you’re burning two or three times that amount, well, cut 1/3rd your costs. VCs will fund any company with a Series A if they are making $2,750 a day. If you can’t hit breakeven, well, shut your company down and go work for a startup that can. [more]

If a crunch does exist, it’s with those pesky angel investors flinging dollar bills harder than Rick Ross out of a Maybach’s front, driver-side window, #LIKEABOSS.

Greg Cangialosi, co-founder and present chair of the Baltimore Angels — which has invested in Parking Panda as well as in SocialToaster’s Series A round — said the increased number of deals in 2012 was a result of better organization more than anything. Twenty-one other companies that pitched the Angels this year were turned down. And the Angels, a group about 45 investors strong, routinely invests smaller amounts in seed rounds (saving money for follow-on financing), and doles out money to startups with a finished product, out of the beta phase, that has been proven in the market.

“We say no over 95 percent of the time,” Cangialosi said.

Where does that leave startups in all this?

“Startups that are making something unimportant or unproven, with low traction and revenues and who don’t have a network, will get weeded out,” said Dave Troy  — who was a co-founder of the Angels in 2009 and is a co-founder of 410 Labs, which has received funding from the Angels — in an e-mail. “It’ll be a gamble for everyone else, and the strongest will be fine.”

The strongest startups, indeed, will be fine. Well played, Charles Darwin. Well played.

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Andrew Zaleski

Andrew Zaleski is a freelance journalist in Philadelphia and the former lead reporter for Technical.ly Baltimore. Before moving to Philadelphia in June 2014, he was a contributing writer to Baltimore City Paper and a Tech Check commentator for WYPR 88.1 FM, Baltimore city’s National Public Radio affiliate. He has written for The Atlantic, Outside, Richmond magazine, Washington City Paper, Baltimore magazine, Baltimore Style magazine, Next City, Grist.org, The Atlantic Cities, and elsewhere.

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