Facing the Series A Crunch

Jan 31st, 2013 by Acton

You were able to secure your first round of funding before getting your startup off the floor. But those dollars only stretched so far,  now you have to figure out how to secure the next round of funding. For some, this crucial phase of entrepreneurship isn’t as easy to navigate as expected.  The “Series A Crunch” refers to the difficulty many companies experience when it comes to receiving follow-up financing after the first round of funding.

Research Says:

According to CB Insights, “The Series A Crunch is a supply-demand imbalance that will result in over 1000 seeded startups being orphaned and more than $1 billion of investment evaporating.” Calling the Series A Crunch “nothing more than excessive demand for a limited supply of Series A financings,” CB Insights claims that there is a surging number of seed deals available, yet only a steady level of Series A funding offered. With many businesses getting a boost at the start yet not as many receiving help for the phase that follows, an imbalance is inevitable. According to CB Insights, the demise of some companies is simply a process of “separating the best companies and investors from those which aren’t.”

In their report, CB Insights found that “on average, 39.4% of seeded companies go on to raise follow-on financing.” In addition, it’s the internet sector that is the “primary destination for seed investing.” News of the Series A Crunch is largely a concern for tech companies, because they’ve had more investment available for their early stage startup phase. This burst of investment activity has led to a wave of new companies in the tech sector. Not to mention, the Series A Crunch is a relatively new phenomenon, stemming from an increase in early stage startup investment.

The research points to the very real nature of the Series A Crunch.  CB Insights views the phenomenon as a healthy “natural selection” process. It’s simply a matter of numbers. If you invite 10 participants to run a race but only leave room for 4 to medal, the other six will not meet their goals. But if you want  your chance at success, you have to compete.

Weathering the Series A Crunch

When it comes to surviving the Series A Crunch, there are no guarantees. The numbers speak for themselves. Yet, awareness can be the  first step in forming a plan to stay on course. Here are a few tips that can increase your chances for securing that next round of funding.

1.      Be competitive. Buy an effective domain name, hire a professional to upgrade your website, and spend some time on strategic branding. As Jason Calacanis reminds us in a PandoDaily piece titled “The ‘Series A Crunch’ Survivor’s Guide,” “Design = credibility. Branding (eg, domains, Twitter handles, etc.) = credibility.”

 2.      Spend quality time acquiring clients. This one may seem obvious, but it’s not just about getting new clients. It’s about keeping them. Jason Calacanis writes, “Clients who love your product are the quickest way to close an A round.” Especially if those clients are willing to take surveys and share ideas with your investors (such as how much they would pay for your product).

 3.      Hire well at the right time. When is the right time to hire? According to Philip Beauregard in a recent PandoDaily article, “…don’t hire until your right arm is falling off.” In other words, only hire when it would be detrimental not to add an employee. Hire the best and pay top dollar, but make that call when your business has hit the appropriate milestones.

 4.      Know what your business is worth. Philip Beauregard also reminds us to be realistic about where the business is at, where it can go, and how it can get there. High valuations should be genuinely earned.

 Perhaps you never lent much credence to  the Series A Crunch while applying to a business MBA school, earning a distance learning MBA, or exploring the possibility of becoming an entrepreneur. Now that you’re on the entrepreneurial path, it’s time to face the facts and stay focused. Be aware. Be proactive. Be resilient. And be committed to making “Series A” your next stage of funding.

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