Fretting about the Series B crunch

businessman in boxing gloves isolated on black

Last year was a good one for venture capital. The IPO market caught fire, distributions rose and innovation steamed along at a brisk pace. What’s more, the Series A crunch that was to be the year’s dark chapter turned out to be little more than a footnote.

The A round shortfall could of course worsen in 2014. But many VCs worry more about a Series B crunch that gathered intensity last fall and threatens not just early-stage returns, but perhaps the pace of innovation itself.

The concern is that a bumper crop of angel-funded startups that returned for A rounds in 2012 and last year are ripening for Bs. Many could face a capital squeeze when demand exceeds supply, as it is likely to do, and the fallout could hit seed and A round investors, along with the current generation of entrepreneurs.

“I do think that it is real,” said Rami Elkhatib, a general partner at Acero Capital. “I hear companies talking about it. I hear investors talking about it. I believe it has begun.”

What’s most unsettling is that there is more at stake this time. Instead of the $500,000 to $1 million a seed investor has on the line when a company goes in for an A round, early investors could have $3 million to $6 million riding when they begin to pull together a syndicate for a B round. Not getting the funding has greater consequences. Adding to the danger is the recent decline in B round deals and investors.

Over the past seven years, B round deal volume has fallen almost 30% and the number of participating investors slumped 28%, according to data from Thomson Reuters (publisher of VCJ). In 2006, 938 investors funded 877 U.S.-based companies with rounds of $5 million to $10 million, the typical range of a B round, the data show. By 2013 the numbers had fallen to 677 investors and 619 companies, a substantial fall-off.

The impact of the crunch could be difficult round pricing, more bridge deals and companies that simply can’t raise new money. Entrepreneurs who took $4 million a couple of years ago on pre-money valuations of $25 million – many with Web-based startups – may find a dose of cold reality when they test their expectations for an increase.

“There is going to be a fallout for all but the best of these companies,” said Joshua Goldman, a general partner at Norwest Venture Partners. “There will be fewer companies that get funding. Those that do will get a lower valuation than they want or they may have to raise money at a lower valuation than their previous round.”

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the entire original story here. To subscribe to VCJ, please email

Photo illustration by Janet Yuen.

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