James Gelfer March 19, 2014
In 2013, VC investors, startups and the media were enthralled with the so-called Series A Crunch—a phenomenon where a growing number of companies received angel and seed funding, leading to a dearth of capital for businesses ready for the crucial Series A round of funding. While the data suggest that this has been a growing problem over the last several years, a new fear has gripped many in the VC community early in 2014: the “Series B Crunch.”
So, first we have reports of fewer companies being able to raise a Series A and now comes word that a similar bottleneck is forming for companies looking for a Series B. But isn’t that the natural progression of startup funding? Investors make smaller investments at early stages and the worthy companies go on to raise larger rounds while the underperformers fall by the wayside.
The real concern for those worried about the Series A and Series B crunches seems to be a general shortage of capital available to fund companies, meaning that even promising startups will be unable to access capital.
According to data in the PitchBook Platform, there has been a slight increase in the ratio of Series A to Series B rounds, but nothing that seems worthy of setting off alarm bells. And when it comes to the Series A Crunch, the institutionalization of seed financings has predictably led to an influx of seed rounds that are larger than ever. But with more startups being funded, there are inevitably going to be more that fail. This doesn’t necessarily mean there is an endemic problem.
But one key statistic that gives some credence to the Series B Crunch is that the amount of dry powder available to VC firms has fallen precipitously in recent years—from $86 billion in 2008 to just $58 billion midway through 2013. But even with less capital around, it seems hard to believe that promising companies will be unable to find the funding they need after raising a Series A round. What do you think? Is there legitimate reason to worry that there really is not enough capital to fund viable startups past the Series A stage? Leave a comment below.