Don’t Cheer The Series A Crunch
For a long while, observers of the startup world have warned of a financing crunch for B2C/social/non-transactional startups. Many of them were able to easily raise seed funding, but now they are finding it hard to raise follow-on financing from VCs. People are calling it the Series A Crunch.
Many interesting things are being written about this (see Pando Daily’s Sarah Lacy). Perhaps the dumbest one, however, comes from tech troll extraordinaire Dan Lyons, writing that we shouldn’t shed tears for “crappy startups that can’t raise any money.”
Lyons is not only wrong in his (as ever) oversimplistic analysis of what’s going on–he’s mean. “Mean” sounds like a schoolyard word, but it’s perhaps the best. Needlessly cruel would be another.
But let’s talk about what’s going on, first.
Here’s the thing: the reason why so many of these startups were able to raise funding and now are unable to very often have nothing to do with the startups themselves. The funding environment for social/consumer startups has been, for good and for ill, basically 1-to-1 correlated with Facebook’s valuation. When Facebook was valued at $100 billion on the private markets, investors poured money into consumer media startups; now that Facebook’s valuation has crashed, they are holding back.
Meanwhile, the Series A Crunch is also happening at least in part because the VC industry is undergoing its own trend of secular decline which, again, has nothing to do with the quality of the startups being created today. The VC industry is collapsing even as software is eating the world and creating more opportunity than ever. As Dave McClure notes, what hasn’t changed is that the internet keeps getting bigger, the barriers to entry keep getting lower, and the distribution channels keep getting more fierce. If anything, the Series A Crunch suggests that the time to start and invest in consumer platforms is now, as investor herds are more often wrong than right.
But wait, didn’t this mini-boom attract a lot of poseurs to build worthless companies that should never have raised money in the first place? Maybe, but these guys were going to go bust anyway. Meanwhile, you don’t know what silly social startups are on to something real, or not–or you’d have a better track record than Ron Conway. And it’s possible that many worthy projects are going to go underfunded.
After all, for all the talk about Pinterest’s “overnight success”, nobody remembers that the company struggled a lot in its infancy, with very low traction and almost no one using its product, until it hit on to the right audience and began its stratospheric trajectory. Now Pinterest is one of the top 50 websites in the US. (Read our report on Pinterest’s product and growth, and on whether Pinterest drives commerce.) If the Series A Crunch had happened earlier, maybe that weird little online scrapbooking site would have been written off as just another “crappy startup that can’t raise any money.”
The cardinal rule of transformative startups is that they look like a crappy toy when they get started, whether they are Pinterest, Instagram, Twitter, Facebook or even Google.
We recently met with an entrepreneur whose startup pulled back on the brink of running out of money by coming out with a hit product at the last minute. We met with another entrepreneur whose social app flopped; that entrepreneur is now working on a very interesting project and, because she had a previous large exit under her belt, managed to raise funding for it. She might not have if she’d been a first-timer–are we supposed to be happy about that?
Is a pullback in consumer seed funding healthy for the ecosystem? Maybe, maybe not. We honestly think there’s no way to know.
What is certain is that a healthy technology ecosystem depends on entrepreneurs and investors being willing to take risks on ideas that seem doomed, silly and toy-like. This macho, us-vs-them, real-men-vs-poseurs mentality is one of the things that makes the tech world noxious, with everyone trying to one-up everyone about how “real” they are. There is also a deeply Old World, quasi-Victorian mentality at work here: everyone should know their proper station in life! Only the Chosen Few can be entrepreneurs! Even if you think the Series A Crunch is a good thing, cheering it on is the height of idiocy.
So that’s for the analysis that, had Lyons had enough braincells, he might have written.
On the subject of his meanness, which is less important, and yet must be broached, because it is extremely distasteful–it is to this writer unimaginable to even envision cheering the failure of others, especially when that failure is often the failure of a dream and of incredibly hard work. When that failure often comes at the cost of relationships, personal and professional.
It is a fallacy to say that only entrepreneurs “know what it’s like” and can write about entrepreneurship. But writers should be expected to exhibit the very bare minimum of empathy that we have come to expect of civilized human beings, and not the morbid cackling of hyenas. And they should be mindful of the fact that waiting for people to fall down and then publicly defecate on them is the opposite of grace. If there is some truth to the idea of the man in the arena, it is that the prerequisite to writing about something you haven’t experienced is making a good faith effort to try to imagine what it is like and have a base level of fairness. To at least try to imagine what it is like to work around the clock for many months on a dream and watch it being crushed.
There are some things we know: The Series A Crunch is real. It may or may not be a good thing. Dan Lyons is wrong. Entrepreneurs can expect to be publicly trashed in their moments of weakness. Vanitas.