It’s no secret that a Series A crunch is happening, as 500 Startups‘ partner Paul Singh reminded the audience during a presentation he gave at Betamore on Feb. 11.
“The Series A crunch is a fact,” Singh said. “There are a lot of overfunded early-stage companies now.”
As Technically Baltimore has reported, the Series A crunch doesn’t represent a contraction in the overall amount of money available for startups as they shoot for follow-on rounds of financing after completing seed rounds. Rather, the term represents the effects soon to take hold of of thousands of startups that have successfully raised seed rounds, but will be unable to raise a Series A round of funding.
The number of deals undertaken by angel investors has ballooned in recent years, with no proportional increase in the number of later-stage deals. According to CB Insights, the crunch will leave more than 1,000 startups “orphaned.”
For startups, this means two things, as Singh said: don’t run out of money in Q4 of 2013, and don’t run out of money in Q1 of 2014. In other words, “raise 12 to 18 months of funding,” he said.
Watch Paul Singh discuss the Series A crunch during his presentation at Betamore:
In reporting on the Series A crunch at the time, this website attributed the crunch to “an excessive amount of poorly executed seed deals undertaken by inexperienced angel investors.” Mildly ironic, however, was Singh pausing in the middle of his presentation about how the next decade will mark the rise of the angel investors to assert that, indeed, the Series A crunch is happening.
“I don’t know if there’s too much money in the broader startup ecosystem,” said Singh in a follow-up e-mail, attempting to diagnose a potential reason for the Series A crunch. “But it’s safe to say that there’s more money than ever available.”
Indeed, there is more seed money floating around than in previous years. But Singh’s talk focused on corralling the flow of that funding by engaging in smarter angel investing: using a small portion of a firm’s funds, no more than 30 percent, for distributing to startups in seed rounds, and saving the other 70 percent for follow-on rounds of financing.
“[M]any angels would do well to start evaluating potential investments with a thesis-driven approach,” he added by e-mail. “In other words, angels are more likely to see positive returns if they consciously manage their investment activity.”
And, as 410 Labs‘ cofounder Dave Troy said last month, the “strongest” startups, those with traction, revenue and a network, “will be fine.”
It’s a point Singh echoed during his Monday night presentation, albeit with slightly gloomier implications. “Focus on revenue,” he said to startup owners among the crowd. “You’re all going to need it.”