More Startups Stalling Out

February 16, 2014

In the highly competitive world of Silicon Valley startups, entrepreneurs need more than just a great idea if they want to become the next Google. Since new tech companies require huge amounts of cash to get off the ground, many startups spend as much time fundraising as they do developing products. Fortunately for today’s tech entrepreneurs, attracting a first round of investment may becoming easier for some. Increasingly eager angel investors as well as crowdfunding services have allowed the number of “seed-stage” companies to grow by 60 percent since 2011.

But many of these entrepreneurs come up empty handed when they start searching for a second round of capital. Part of the reason is that they need a much larger investment once they reach the “Series A” level of funding. While most seed investments range from a few hundred thousand dollars to a couple million, a round of Series A capital can run as high as $15 million. Venture capitalists tend to be more discerning when they’re doling out that kind of money. As a result, although more companies are starting up than ever before, only about 1 in 6 goes on to receive a crucial second stage of investment.

For instance, Benjamin Zises thought he was on the right track when his retail-centric online real estate service netted $1.9 million in seed capital. Once he needed another round of funds, however, Zises was met with a chorus of noes from the venture capital community. He was forced to ask employees to accept company stock as salary in order to keep going. Zises’ story is becoming common among entrepreneurs who have sustainable, successful ideas but not the once-in-a-lifetime appeal of a Twitter or Facebook. “It has nothing to do with how likely it is you’ll be profitable or whether you’re going to have 10 million users,” says Jason Freedman, a veteran entrepreneur. “There’s no room at VCs for companies that are going to merely be very good. If you can’t prove you have a chance of building a truly great company in eight years, no one will want to fund you for the next two.”

 

Questions:

  1. What message are venture capitalists sending to aspiring Silicon Valley startups?
  1. What’s an important fact to remember about venture capitalists?

 

Source: David H. Freedman, “Why the Series A Crunch Might Be a Good Thing,” Inc., October 2013. Photo by OTA Photos.

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