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The Series A Crunch Demystified

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My startup Speek is making free conference calls fast and easy. Speek has raised nearly $3 million in seed funding from a blend of angel investors and VC’s. We are currently going through the process of closing our Series A round. I’d like to give you a perspective of the “Series A Crunch” from the trenches.

There has been much hand wringing around the perceived Series A Crunch. Understandably so – It’s an indisputable fact that the number of startups and seed deals has exploded whereas the number of Series A VC’s has stayed the same:

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To be honest, I could pretty much stop here as the graph shows it all. Again, this “Series A Crunch” is really nothing more than an increase in seed funding combined with a plateau of Series A deals. That truly does sum it up.

It’s less of “Crunch” per se as it is an explosion in startups and seed deals caused by a perfect storm of co-working spaces for startups blowing up, an increase in accelerators, and ease of seed funding access for very early stage startups through a combination of legislation changes (JOBs act, etc.) and an overall bullish perception to startup investing.

To break it down:

Co-working Spaces for Startups Blowing Up

According to The Global Coworking Census, the number of co-working spaces has increased over 300 percent since 2010 when there were just 600 co-working spaces. The United States has the most shared workspaces (781), followed by Germany (230), United Kingdom (166) and Australia (62).

Joel Dullroy, the founder of Deskwanted, said, “We have seen the number of co-working spaces worldwide double every year since the first space opened in San Francisco in 2006 and, as these figures show, this new way of working keeps gathering momentum in the US.”

In case you’re not already familiar with co-working:

  • Co-working is what happens when a group of independent workers carries out various tasks in a shared workspace, usually called a co-working space.
  • One of the major benefits of a co-working office space is financial, making it conducive to startups – leases are usually inexpensive with a short length (usually month-to-month).
  • Some popular startup co-working spaces are Founders Den in San Francisco, General Assembly in NYC, 1871 in Chicago and 1776 in DC.

Increase in Accelerators

According to Wikipedia, accelerators are a modern, for-profit type of startup incubator. Through an open application process, they take classes of startups consisting of small teams. Seed accelerators support the startups with funding, mentoring, training and events for a definite period (usually three months), in exchange for equity. While traditional business incubators are often government-funded, generally take no equity, and focus on biotech, medical technology, clean tech or product-centric companies, accelerators are privately funded and focused on mobile/Internet startups.

There was a record number of startup accelerators and incubators in 2013. According to projections, there will be at least 170 worldwide by the end of the year. 

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Some of the most popular accelerators are Y Combinator, TechStars, and 500 Startups. Some startups that were born out of accelerators are Airbnb, Dropbox, RedditOMGPOP, and DailyBurn. 

Ease of Seed Funding Access

Seed funding is defined as early-stage investment (typically less than $1.5 million) made by either angel investors or venture capitalists, according to CB Insights. They also estimate that only 4 out of 10 startups that raise seed funding will go on to raise a Series A round of funding. Interestingly, it has been observed that seed deals in which VC’s participate have a historically higher rate of closing a Series A round compared to seed deals where VC’s are not participating.

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Conclusion

The “Series A Crunch” is a simple supply-demand imbalance:  The number of seed-funded startups is increasing whereas the number of Series A deals has plateaued. Despite the media attention around the Crunch, the reality is that the level of Series A activity has flattened out. At the same time, the number of seed deals exploded. The “Series A Crunch” is nothing more than excessive demand for a fixed supply of Series A deals.

To startups this doesn’t really change much: You’re either first or you’re last. You either execute and reach exponential growth or you don’t. If you do hit your user and/or revenue growth numbers, then you will not have a problem fundraising. If you don’t, you will.

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About the Author

Danny Boice is the CTO of Speek - a 500 Startups-funded startup that lets users do conference calls with a simple link (speek.com/YourName) rather than using phone numbers and PINs. A serial startup/technology entrepreneur and executive, Danny started his career as a software engineer working for startups like Network Solutions and MusicMaker.com in the 90′s. You can find Danny on Twitter @DannyBoice.

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