Strong Opinions @marksbirch

Random thoughts from a NYC entrepreneur and investor about start-ups, technology and the people that make it all happen. Also find time for good tunes and good food.
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There has been lots of noise recently about the apparent slow down in Series A funding rounds.  What entrepreneurs need to understand is that “numbers” reported on blogs do not necessarily reflect the entire reality, that market dynamics should not affect your plans as it pertains to build a profitable business, and that Series A funding is one of many paths of financing your startup.

Ultimately, you need to decide if your startup is “Series A” material.  Not many are, though they can still be wildly successful for the founders and seed fund investors, just not to the degree of mega multiples of return, which gets harder and harder to achieve the more funding and higher the valuations get.  I think Rob Go in his post on the Series A cash crunch says it best when it comes to what startups make worthwhile Series A investments and which do not.

…repurcussions of this series A crunch is overblown and net-net will probably be good for the startup ecosystem.  I really don’t think it’s going to be bloodbath some people think it will be.  The main reason is that many of these companies that have been funded were never really candidates for investment from large VC’s anyway. Broadly, I think there are two kinds of companies that fit the bill.

  1. Companies that are capital efficient and can get to viability and a very interesting returns without VC funding.  Taking VC money is not the ideal path for every company, and the capital efficiency of internet businesses means that more and more companies can actually yield a successful outcome without taking large amounts of capital from very large funds.  So these companies aren’t really effected by the crunch since they weren’t part of the VC funding chain anyway.
  2. Companies that want to raise VC money, but probably never had a chance to begin with because they weren’t going after big enough opportunities.  VC’s have very strict incentives when they invest in companies. Because of their fund size and the return profile of VC portfolios, VC’s only invest in companies that have the potential to be very very big.  That’s why the #2 reason why VC’s pass is because an opportunity is not “big enough”.  Investors that work with VC’s often understand this, and it will usually factor into how they think of their portfolio composition.  Angels that have just been dabbling in internet investing will be hurt here because they may have invested in companies going after opportunities that likely would never be perceived as big enough to get large VC’s excited.  Institutional seed investors may have a handful of these too, but it usually is a minority of their portfolios and they have mentally expected to push these companies to get to CFBE quickly or find other non-traditional funding sources to keep these companies going.

Plot your course carefully and realize the regardless of what the market is doing, you need to focus on creating a sustainable and profitable business.

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