Watch Out for “Seed Snake Oil” – Silicon Valley Venture Capital Series B Round Recession – Market is Correcting
Posted by Pierre de la Fortune on January 22, 2015 @ 12:07 a.m.
Written by John Furrier
I’ve been saying for some time on SiliconANGLE.tv (over 500 interviews this year) that we are heading for a startup correction at the angel level. In essence a Series B recession. There are just too many companies getting seed Series A and most will not get follow on financing. As I said then which is true now that consolidation will occur.
The lucky or skilled startups will get to cash flow positive, close a VC B-round, or get a bridge from Bullpen Capital. For the rest it’s sell or fold. Most of the startup teams are small anyway so it’s a boon for the talent crunch we are seeing. For entrepreneurs it’s a missed opportunity or broken dream. My advice be careful for the “seed snake oil” – meaning it’s not just about money it’s about value add. Getting a startup to cash flow positive and/or follow on financing is the goal. That includes an investor who will align with the strategy and tactics of making that happen: team building, product help, and bus dev.
Seed financing has changed from added value to institutionalized funds. The old way was the good way. An angel was a “white knight” who was in it to win it with the entrepreneur not a spray n pray speculator. Watch out for the popular speculator who is selling “seed snake oil” – promises of their network, access to deal flow, talent, the best parties ,etc. What an entrepreneur needs is a wing man that experienced “white knight” who can really help them with the “hard things” involved in venture creation architecture/platform.
As the early stage investment world gets more crowded every day, it’s important for entrepreneurs to understand what works best in terms of selecting an early stage investor. At the end of the day it’s more important for entrepreneurs to get value add from their investors than money – it’s not about being popular or influential. Although popularity, drama, and influence are considered important today for some investors, the entrepreneurs are looking for trust, integrity, and value add.
Here is the text from Bryce Roberts post Pig Passing Through The Python –I’ve edited to highlight my point. Last Friday I received an email from a good friend at a high profile startup. He asked a question I’ve been thinking about a bit lately. From the email: “tons of startups have been writing in recently (i think there was one for every day this week) digging around to see if we might want to buy them. what’s really incredible is the timing…something we don’t know?” This is a trend we’re seeing accelerate as well. Companies running out of cash, unable to attract new outside money, and looking to find a home- preferably a home with a little upside for their investors. Another growing trend for those not finding homes at acquiring companies is to raise a seed+ round of a couple hundred thousand up to a million or two more dollars from angels and seed investors- as opposed to traditional early stage VCs. I’ve had the sense that this trend has been accelerating too and today we get a little more data to fill in pieces of the story. The venture capital landscape on which many of these angel investments depend for follow on investment is shifting dramatically. Many early stage funds are struggling to raise new capital and remain active investors. In fact, the recent NVCA numbers highlight that investment in early stage venture funds dropped nearly 53% in the third quarter marking it the worst fundraising quarter for early stage funds since 2003. But that’s not the whole story.
As Scott Austin, from Dow Jones Venture Source, reports there’s another dynamic at play here. It’s not just that investors aren’t backing funds, it’s that they’re only backing a handful of them As limited partners continue to show a strong preference for investing with only the most prominent firms, the number of funds and the amount of capital committed have shrunk. If this trend continues, entrepreneurs will face greater competition for capital and other investors. This steep increase in number of companies angel/seed funded, paired with fewer and fewer active investors up stream is creating a scenario akin to a pig passing through a python. As the time, attention and capital becomes more scarce upstream the number of companies who will attract follow on capital will continue to decrease.
Seed funding is for validating and de-risking, not scaling. As Josh Kopelman wrote: The goal of seed funding is to validate (or disprove) an entrepreneur’s hypothesis, and thereby “de-risk” the opportunity. Early stage companies should raise enough money to allow them to iterate – as long as their initial hypothesis is still valid and they are making demonstrable progress towards lowering risk…In the new funding model a startup is able experiment/iterate over an extended period of time for very little capital. Only once some of the venture’s risk has been eliminated through accelerating adoption does the company raise more money to further refine the model and expand. Overall the time and cost between the founding of the company and knowing whether both the entrepreneurs and investors should continue to pursue the opportunity is greatly decreased.
My purpose in pointing this out is to highlight the phase of the cycle we’re in. The pig is passing through the python- the pig is growing by the day and the python is shrinking. Follow on capital will become less and less available over the coming quarters so validate, derisk and plan accordingly. This is totally what is happening. To me it’s about “Seed Snake Oil” going away and venture capitalist doing what they do best “venturing”. For angel investors to be “angels” and help companies be successful. Venture capital and angel investing is moving fast to a “value” market not “volume” market.
Update: Jason Calacanis has a candid post on his observations as an active (part time angel) in this market. I think that Jason makes great points in that AngelList is great and this is a bubble popping. He talks in detail about the inside baseball of the “seed snake oil” that I’m talking about. Must read from the trenches from Jason. About John Furrier Founder and CEO of SiliconAngle.com
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