There Is No Series A Crunch

The Series A Crunch referrers to the fact that while angel-funded startups (think: $750k invested by angels in two founders) have grown 5x+ in the past three years, the number of Series A fundings (think: $3M invested by a venture capitalist in a 10-person startup) has stayed the same.

I'm telling you right now this is a complete non-issue.

Many folks are obsessing over the supposed "Series A crunch" because, quite logically, if there is a fixed number of Series A investments to go around and a lot more folks fighting for them, well, many folks will not get one.

Parents fleeing a public school system increase the demand for the (relatively) fixed number of slots in private education, making those slots more and more valuable. In fact, it only takes a percentage of actors to "switch teams" to cause an imbalance.

What these folks, largely journalists who have no experience in business, fail to realize is that "things" do not always stay the same in an equation -- and that founders should be wickedly good at adapting to changing conditions.

>> Fact one: the number of Series A fundings could dramatically increase.

The number of slots for players in the NBA this year was 435 (29 teams x 15 players). However, when the NBA started 60 years ago, there were only 11 teams, so the number of slots totaled just 165 (assuming 15-man rosters back then).

In the coming years, the NBA will, mark my word, add a half-dozen teams in Europe and Asia. It's safe to assume there will be a 40-team league some day.

Additionally, after the shortened NBA season last year, fans, players and the league realized 82 games was not as much fun as a condensed 50 to 60 game season. I believe the NBA will go to two shorter seasons a year: one US-only and one international.

With two seasons and a dozen more teams, it's possible the number of slots will grow to 500 or 600 -- or more.

Bottom line: Capacity increases along with opportunity.

VCs are a greedy lot (and us founders and GPs love you for it), and the world has mountains of money sitting in bonds, gold, corporate stockpiles and plain old devaluing C-Notes (aka cash).

If 10 companies with the metrics of Fab, Dropbox, Yammer, Uber or AirBnb were to walk into a VC firm with only the money to fund five, you know what they would do? Raise more money!    

Capacity expands all the time, and it could turn on a dime. Look how quickly Marc Andreessen and Ben Horowitz raised fund after fund in the last couple of years.

Television is another wonderful example of capacity increasing.

Just 30 years ago, your chances of being an actor in a TV show was something like 20 shows on each of three different networks with seven characters on each. That means there were 420 slots available (20 shows x 3 networks * 7 characters = 420).

Since that time, the number of channels has grown and therefore the number of shows with slots for actors.

Additionally, shows now have numerous plot twists per shows, which means shows need many more characters. Compare shows like ‘All in the Family’ or ‘Happy Days’ to more recent series like ‘The Sopranos,’ ‘Game of Thrones’ or ‘The Walking Dead.’ Tons of new characters are introduced into every episode of those later shows. I think you could count on one hand the new characters introduced on ‘Happy Days’: Pinky Tuscadero, Mork and Chachi.  

TV has experienced a double expansion: more shows and more characters per show.

This would be like the NBA deciding to make the court 20% bigger and putting 14 players on the court at a time rather than 10 (wonder what that would be like?).

>> Fact two: A Series A is not the only option to grow a business.

Most pre-Series A companies have under 5 to 10 people and no revenue. Therefore they "burn"  about $50k to $75k a month in my experience (think 5 people x $75k a year = $375k + $100k in other costs).

Here's an absolutely crazy idea for folks "facing" the Series A Crunch: Make $2,750 a day (about $1M/year).

If you're burning two or three times that amount, well, cut 1/3rd your costs.

VCs will fund any company with a Series A if they are making $2,750 a day.

If you can't hit breakeven, well, shut your company down and go work for a startup that can.

If you can only hit $1,000 a day, merge your company with another one that is making $1,000 a day and cut the bottom 1/3rd of the staff.
Not willing to do that?

Well, if you're not willing to give up  your diapers and put on your big-boy undies, then you need to stay in nursery school for another year. Series A is for folks who don't make wee-wee in the bed.

>> Fact Three: VCs are not the only source of funding.

If you have some combination of solid growth, decent revenue, a great team and a sexy product, you can easily -- yes, easily -- raise money from strategic investors or rich people. Is this ideal? Some have argued strategic money is bad, but those folks are usually VCs who are in competition with the strategics.

VCs really hate strategic money because it is valuation insensitive and can result in an early exit (e.g., if Home Away had invested in Airnbnb, perhaps they would have been talked into selling in the HomeAway IPO).

If you went to Mark Cuban with a company making $25k a month, no or low burn, a big vision and a reasonable valuation, he will put money into it. I know, he invested in my last company -- and many others -- with that profile. Rich folks are very, very smart and they know that businesses that have money in their bank accounts and customers paying for their product rarely go to zero.  

>> Bottom Line: You're in control of your destiny, and obsessing on the blogger-manufactured 'Series A crunch' will only distract you from the work you need to do survive the winter. And winter always comes. Always.

Have a great break everyone!

best, @jason

PS - The LAUNCH Festival is March 4-6th and it's going to be just awesome:

1. 1,500 developers, designers and UX professionals have received scholarships. There are 500 left here:  

2. Our first Hackathon will feature 100 teams of four developers and a kickass prize: $25k investment from me and it looks like a $25k investment from another angel (will have confirmation in the new year). The top five projects make the main stage, and those top five teams automatically get slots in the LAUNCH Festival 2014! We need someone to buy lunch for all these hackers:

3. We are only trying to break even on the event, therefore tickets are just $400 and available here:

4. Speakers: We're doing a new feature at this year's event called "Pairings," where we will pair a CEO/founder with an unsung hero from their team. So, we're thinking (these are not confirmed, just my ideas): Dave Morin of Path and his UX designer, Travis Kalanick of Uber and his data scientist or Aaron Levie of and his head of enterprise sales. The idea being that these 10-minute "pairing" presentations will help everyone learn about how the best founders make the best products: by having the best people! And it also feels more fair, interesting and generous to me. As a founder I know that my teams never really get to shine on the "big stage" and they really deserve to. Not sure why no one has ever done this, but I think it's going to be just AWESOME.

5. ‘This Week in Startups’ is sold out until May for ads, and we're doing a free live show every month as a thank you to super fans. Next one is Phil Libin of Evernote on Friday, Jan. 11 at 4PM @ Rocketspace. 100 superfans came to the last one with Jeff Clavier. Tickets here.