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This episode aired on BloombergTV on Jan 8, 2013

Series A Crunch

In recent years the number of start-ups has exploded, many being funded by friends and family of the founders. However, the number of investments in start-ups that VC funds are making has not expanded proportionately, meaning many founders are experiencing a Series A Crunch, and cannot attract institutional money.

Q. So this is a favorite topic of the VC community right now, the trouble that some startups are having getting institutional investors on board…

A. True, but what’s funny about it is that the problem isn’t because VCs have slowed their investment pace… its that there are many more startups being funded by friends and family and angels. So the denominator, so to speak,– number of startups– is expanding; but the numerator– deals VCs fund– is staying about the same.

Q. And what accounts for changing dynamic?

A. Several things. The biggest single one is how much the cost of starting companies has come down, and how easy it is to get something off the ground these days. That means more of them are suitable for the smaller investments angels make, and so more can attract that kind of funding. But another dynamic is that lots of younger folks are turning to entrepreneurialism instead of pursuing more traditional jobs — there are just a lot more entrepreneurs.

Q. So, as an angel investor, do you have to be more cautious that ever?

A. I would say more “selective” rather than more “cautious”. Some kinds of companies have much less funding risk than others, and those are the ones to fous on these days.

Q. So, then, what are the characteristics to look for?

A. Ideally, you want to invest in something that has three things going for it. One is some real traction… some sort of proof of market acceptance, not just an idea. Two, is a credible revenue model: in crunch periods, that will tend to attract subsequent investment better than the “we’ll figure it out after we get a zillion users” type of company.

Q. OK, that’s two. What’s the third?

A. The biggest one of all: a great management team that you fully trust. The one thing you can bet on is that the business plan is wrong: and you need a team that can quickly iterate and execute as circumstances change.