Quip turned heads this year when the company co-founded by former Facebook CTO Bret Taylor raised $15 million in a Series A deal led by Benchmark Capital. Last November Retrofit put on a command performance of its own when it secured an $8 million Series A led by Draper Fisher Jurvetson.
Times seem good for young Internet, software and enterprise companies. Disruptive innovation is everywhere. Companies are attracting huge rounds based on VC conviction that these early-stage bets will hit it big.
But there is much to worry about. The trouble is not with quality, but with quantity. The number of seed-stage companies descending on GPs has turned into a surge, and for every one that receives money, perhaps 10 do not. Not enough cash or partner time exists, and difficult financings, even down rounds, appear on the rise.
In short, the fearsome Series A crunch looks like it has finally arrived.
How long will it last and how will it impact venture? Some bubbles take years to deflate. Already a bifurcation in the early-stage market has evolved, with a top tier of startups able to win big deals and an underclass living on much less.
“The Series A crunch is a mathematical certainty steaming from how cheap it is to start a company,” said Paul Martino, managing director at Bullpen Capital, a firm looking for opportunities in the fallout. “This time it’s not a bubble of dollars in the asset class. There is a bubble in the number of companies created. This is the first time we’ve ever had that happen.”
Clearly there is an imbalance in the system. Just look at AngelList, the popular seed-funding site. As of August, there were 68,928 seed-stage companies listed on the site. Yet last year, venture investors funded just 1,699 post-seed, early-stage deals, according to the U.S.-focused MoneyTree Report, suggesting that the eventual odds of pulling in venture financing are long.
Illustration of lottery balls by Janet Yuen, VCJ.