Let’s start with what the Series A crunch is.*
For that, turn to how CB Insights defines it in its Seed Investing Report from December: “[The] Series A crunch is nothing more than excessive demand for a limited supply of Series A financings.”
Precisely. Lest we’re confused from the get-go, it’s important to know that the Series A crunch does not refer to any sort of contraction in the overall number of Series A investors doling out stacks of Benjy Franklins to cash-hungry startups.
Rather, the “crunch” represents what will happen as hordes of startups—those that have received seed rounds of financing from angel investors—find themselves chasing too few Series A dollars. Again, turn to CB Insights’ Seed Investing Report: 1,000 startups will be “orphaned” as they’re unable to raise successive rounds of investment capital following their initial seed raises.
Admittedly, this point about what “Series A crunch” means was muddled in the piece I wrote for Technically Baltimore, especially where I scoffed openly at even calling this phenomenon a Series A crunch:
“Series A crunch? Meh. What appears to be happening, rather, is that startups are starting to feel the effects of an excessive amount of poorly executed seed deals undertaken by inexperienced angel investors.”
I promise you I’m not operating under a misapprehension of what the tech world means when it says Series A crunch.
I am, however, being a curmudgeonly fuck. Let me explain.
In financial terms, a crunch is a shortage of cash or credit. We’ve already established that “Series A crunch” is a phrase that does not represent any shrinking in the overall capacity of Series A dollars. It’s not as if Thurston Howell Barnaby the Deuces is dropping dead, and therefore his $50 million in what could have been Series A funding is suddenly gone (with the appropriate amount extracted by the federal government in the form of estate taxes).
So why are we calling this phenomenon the Series A crunch instead of the Seed-Investment Glut? Or, you know, the Angel-Seed Glut? (Don’t laugh.) Or: “EXPLOSION!”
Forgive me for engaging in nothing more than a game of semantics, but I majored in English literature in college. Dissecting words, their meanings, and why certain diction is used in describing specific situations is more appealing to me than a jungle juice-soaked weekend in Vegas.
What I tried doing in my piece for Technically Baltimore was reframe the conversation. If a crunch is a shortage, then I don’t want to call this a Series A crunch. (Insert refutations by reporters/tech big-wigs—with far more experience/talent than a 24-year-old—asserting that all I’m doing is whining.)
Let’s call this something that focuses on the problem, namely: the deleterious effect had on startups when too many angel investors engage in seed deals, inflating companies’ relative worth, and, perhaps, founders’ dreams and aspirations.
Over the last four years or so, we’ve seen the volume of seed deals balloon. This “crunch” is now happening thanks to “pesky angel investors flinging dollar bills harder than Rick Ross out of a Maybach’s front, driver-side window, #LIKEABOSS.”
What that has created is an issue of supply and demand. With so many startups having received smaller rounds of seed financing, that means there are now more startups shooting for a limited amount of Series A funding. A portion of those startups are crappy startups that don’t deserve money, period.
Others, however—ones perhaps worthy of, and in need of, more investment dollars—will garner no attention from Series A investors. Which means those startups will receive no more funding. Which means those startups become subject to fortune (as well as a caffeine drip and the relative worth of whatever they’re selling). Will they make enough money to keep operating, or will they be forced to close shop? (Remember when unemployment was below 7 percent?)
CB Insights’ latest report shows that the volume of Series A deals in Q4 of 2012 increased.** So why the crunch?
Let’s pick a word that shines the spotlight on the problem: far, far too many seed deals.
*Rick Ross GIF unrelated to aforementioned crunch.
**Yes, yes, I KNOW even the smallest increase in Series A deals won’t alleviate the painful money-strapped smackdown many a startup will face as 2013 continues.