The New Series A?

According to PitchBook’s 3Q 2015 U S Venture Industry Report, over the past several years, the number of completed early stage angel/seed rounds in the U.S. has steadily been increasing. At the same time, the number of completed early and late stage VC rounds has steadily been decreasing over the past five quarters, after hitting a peak in 2Q of 2014.

With 60% of angel/seed financings resulting in gross proceeds to the issuers of $1 million or more, these statistics are leading some to dub seed rounds as “the new Series A.”

This is an interesting development that merits attention. If the trend continues, the so-called “Series A crunch” will worsen because there will be more seed-stage tech companies left dying on the vine for lack of the necessary Series A/B funding for growth and eventual exit. As a result, we may see a shrinking in the number of companies that are fundable and funded in the later stages, coupled with larger round sizes being completed by companies that are.

So, while it is paradoxical, we will have more and more “unicorns” (that all of a sudden seem less rare and unicorn-like), but fewer and fewer opportunities to become one. If the tech world has always been a “winner-take-all” deathmatch, it’s about to get a lot worse.

I’m not sure anyone benefits from this situation.

Unicorns might love the good press they get from raising billions at valuations of tens of billions, but that might be more of a symptom of a prevailing problem in the capital markets for private technology companies than a result of the actual returns those companies will generate for their investors. Time will tell.

In the meantime, institutional investors really don’t have much of a choice but to pile into the Unicorn game due to sub-zero interest rates, low oil prices, European uncertainty and volatility in the public capital markets. So we might see that it’s the irrational exuberance of the most sophisticated investors that cause the next tech bust.

And way down on the stack is the seed-stage entrepreneur who has $1 million and six months to get to a Series A round. She is struggling the same as before, except now the roadmap to exit is slowly fading as later-stage investment appears more difficult than it is anyway. Maybe that’s a good thing, because maybe it confirms exactly what it should: whether or not her company is fundable. But maybe it doesn’t do that at all. Maybe it’s just a prevailing inefficiency in the allocation of capital resources – wild, unbounded, dangerous river on which she rides, completely at its mercy.

The upcoming months and year will be interesting to watch as runways are depleted and the Fed increases rates.

Stay tuned.

 

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