VC: There's no Series A crunch, there's a 'seed glut'

During the first CNET Community Series event, three Silicon Valley investors debated the state of funding today. The upshot, there's plenty of money, but too many companies wanting it.

CNET's Paul Sloan moderated a panel this evening with AngelList CEO Naval Ravikant, 500 Startups' Dave McClure, and Charles River Ventures' George Zachary. CNET,James Martin

SAN FRANCISCO--An article last fall suggesting investment was getting scarce for early stage startups stirred a major commotion in Silicon Valley. But one of the Valley's most prolific investors said tonight that the real issue is there are simply too many companies getting seed funding.

At the inaugural CNET Community Series event here this evening, Naval Ravikant, the founder and CEO of AngelList, rejected the notion that there is a so-called Series A crunch, saying instead that there is a "seed glut."

During the panel on "Startup Funding: Strategies and Opportunities" hosted by CNET's Paul Sloan, Ravikant and fellow investors Dave McClure of 500 Startups and George Zachary of Charles River Ventures debated the state of funding in Silicon Valley. And if one thing became clear, it's investors throughout the Valley have probably never been confronted with so many young companies looking for new funding that have already received enough money to get off the ground.

"What a lot of larger VCs are feeling right now," said McClure, "is that there's (way more) deal flow now than ever before."

In earlier Silicon Valley funding eras--read: before 2011--startups would get seed funding of several hundred thousand dollars and then before long look for a Series A in the low seven-figure range. But today, lower costs of launching companies have changed that dynamic, and entrepreneurs can now easily get going for $50,000.

That means, Ravikant agreed, that the terminology and the funding situation is changing dramatically. Now, he said, "the new incubator is $50,000, the new series A--what we call seed today--is $300,000 to $500,000, and Series A should be $1 million."

Added Ravikant, "Costs have come down, and you can hit milestones at those rates."

All three panelists seemed to suggest that VCs have plenty of money to invest in quality startups today. But because it's become so cheap to get a startup going, there are now huge numbers of companies scrambling for funding that by rights should be going to quality teams with a real chance at long-term success, or at least lucrative acquisitions.

As Zachary--who focuses on Series A funding--put it, in one day last week, he got 70 emails from startups wanting him to invest, including 40 that were "pretty serious." But even if he wanted to fund all of them, "I'm not smart enough to consider 70 companies' [proposals] in one or two days."

Of course, as investors who depend on evaluating large numbers of potential deals--McClure said he invests in between 100 and 150 startups a year, and Ravikant said he'd looked at 30,000 deals--the three panelists by no means wanted to give the impression that the current environment is bad for entrepreneurs.

Rather, they wanted to drive home the lesson that significant funding is not as easy to come by these days as it was during the dot-com boom that blew up in 2000. "We are not putting $5 million into stupid...companies shoved into the retail market," McClure said. "There's a lot more scientific process" now for determining who gets Series A money.

Still, for those determined to make it, Ravikant had some suggestions for mistakes that would be wise not to make. Among them? Technology companies with too many business founders; companies with no specific product, or a product that could have been built in the time it takes to put together a business plan; Business plans that are too long; Looking for Silicon Valley investment when you're based in places like Oklahoma; Founders with no experience in the space they're trying to enter; Products that have too long a development cycle; Founders who brag about minimal accomplishments; and pitch videos that ramble on for five minutes.

 

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