If you work at a startup, youve probably heard of the Series A Crunch the idea that first-round investor funding is decreasing due to a shift in supply and demand.
There has been an explosion of startups over the past few years a nationwide phenomenon thats more noticeable in areas with a startup ecosystem, such as the Triangle. Some say the boom is due to a reduced technical barrier to startup entry, some say its because of the poor economy. Others say its the result of an unprecedented increase in angel investments $10,000 to $50,000 seed rounds that allow more startups to get off the ground.
While the number of startups is growing, the pool of venture capitalists willing to do a follow-on Series A round usually investments of $1 million to $5 million is shrinking. There are more seed-funded startups clamoring for Series A, meaning that many of them wont get funding and will have to shut down.
The crunch does indeed exist. But in the Triangle, it probably isnt that big of a deal.
For one thing, its always been tough to raise money here. Lister Delgado, managing partner at Idea Fund Partners, a Durham venture capital firm that invests in local startups, agrees that the Triangle is already somewhat prepared for the crunch.
This has always been the case in underserved markets the ones that produce more good startups than resident investor dollars can fund, Delgado said. We, in the Southeast, are kind of used to this. The hype comes because Series A underfunding is now also a national trend.
But beyond the basic supply-and-demand issue, there is another trend of entrepreneurs focusing their efforts on revenue rather than investment. It might turn out that some of these startups wont need additional funds beyond the seed stage.
Aaron Houghton, founder and CEO of Durham startup BoostSuite and co-founder of iContact, the Durham email-marketing startup that was acquired by Vocus last year for $169 million, has always looked to revenue.
In 2003, Ryan Allis and I grew iContact from nothing to $2.5 million in annual revenue before raising a single dollar from VC investors, Houghton said. We did it by creating a software product that customers wanted and were willing to pay for. I will only get worried when customers stop buying products.
Thats not to say the Series A Crunch should be ignored, of course, and entrepreneurs can and should have it in the back of their minds as they plan for 2013 and beyond.
There will be casualties of the Series A Crunch here just like anywhere else, said Matt Williamson, founder and CEO of Durhams Windsor Circle, a startup that recently closed a $1 million Series A funded in part by Idea Fund Partners. My advice to the entrepreneurs is to manage your business to get across the desert and make sure your team is committed to live lean until you get to the other side.
Like any ebb-and-flow in the startup world, the Series A Crunch will end, and probably sooner than we think.
Joe Procopio is a serial entrepreneur, writer and speaker. Follow him on Twitter @jproco.