What is the Series A Crunch?
The Series A Crunch is a well documented phenomenon in venture capital. With the rise of micro VC firms and the growing popularity of sites like Angel List and FundersClub, it has become relatively easy in the past few years for startups to raise seed capital at the earliest stages. However, there was no concomitant increase in funding options at the Series A stage. Lean financing documents at the seed stage offered a shorter runway, and the consolidation of large venture funds forced investors to look to larger investments at the Series A stage.
Investors were quick to take advantage of this gap. Around 2012, Paul Martino of Bullpen Capital developed a thesis around investing in companies that had product-market fit and that were about nine to twelve months from a milestone event that would qualify them for a Series A investment. His first fund, based on the Series A Crunch thesis, may be one of the most successful of the 2011 vintage of funds. It includes FanDuel, Ipsy, Namely, DoubleDutch, Life360, Appboy, Jump Ramp Games, and others.
Soon after, Dreamit became the first accelerator focused on solving the Series A Crunch for startups through providing a support structure and customer network for founders to scale their businesses rapidly. We talk to hundreds of founders each year, and it is apparent from those conversations that the Series A Crunch is not going away. In fact, it may be exacerbated by certain factors.
Some firms, for instance, are throttling the flow of capital to new and existing portfolio companies because they are not seeing as many exits, i.e. they are having cash flow issues. From the perspective of LPs in venture funds, if they are not getting cash distributions from funds, they become unwilling or unable to invest back into the VC ecosystem, affecting the next crop of founders. Between seed and Series A, general partners of firms are watching as their investments face long gulfs between the seed and Series A round (or do not see their investments raise Series A rounds at all), so they tend to grow more cautious and reluctant to invest in new companies. (Semil Shah of Haystack writes about this phenomenon here.)
Data shows that the Series A Crunch is a real thing that seems to be showing no sign of letting up. According to Mattermark, the overwhelming majority of startups that raised Seed or Angel funding before 2012 successfully raised Series A rounds at a much higher rate than those that raised seed or angel rounds between 2012 and 2014.
What can founders do when they start to feel the Series A Crunch?
- Raise a top-up round. This is different from a bridge round that makes investors feel as if they are investing in your company just to keep you alive a little longer. Find a champion investor who will lead the charge in validating that this new funding is a great investment for them, not a sunk cost.
- Scale up paying customers more quickly. The Dreamit accelerator program is a 14 week program designed to scale up enterprise customers in the health and education sectors, but if your startup operates in other industries, you should shift your attention from non-revenue generating partnerships to deals that will put money in the bank.
- Cut the burn. The most obvious way to do this is to cut salaries or non-essential employees. While this may be difficult, it is sometimes necessary for your startup to survive. Show your employees that you have skin in the game by reducing your own salary.
- De-risk your startup. There are many ways to de-risk your startup. The main sources of risk are team, market, finance, and technology. If you can get a marquee customer to sign up for your product, you are reducing your market risk by showing that there is actual demand. Finish the build on the scalable version of your product to show investors that you are positioned to scale quickly. There are countless ways to de-risk your startup in the short-term.
More Resources on the Series A Crunch:
Josh Kopelman's Take First Round Review
2016 Will Be Rough for Startups Mattermark
Surviving the Series A Crunch 42 Floors
Seed Is A Process TechCrunch
Interview with Paul Martino Venture Studios