Bubble Crunch Cliff
More rare than a humble Kanye? A VC admitting he or she is wrong.
Guess what. I’m wrong every now and then and proud of it. It means I take risks. Believe it or not, failure is also a healthy part of the venture investor’s life.
There is a perceived bubble in seed investing. Industry stats by CB Insights show that the number of seed investments has increased almost six fold (6x) since 2009.
Series A (or follow on) investing, meanwhile, has remained relatively constant increasing only two fold (2x) over the same period.
The gap between supply and demand is being widely referred to as the Series A Crunch. It implies that there will be an orphaned class of startups left to starve on the mean streets. It is almost certainly true that a wave of startup natural selection is coming.
Bubbles, cliffs, crunches. All terms that have dominated recent pop tech journalism. Enough. All markets go through natural fluctuations and cycles. In venture, there are planting periods, growth periods and harvesting periods. We happen to be in the opening days of one of these transitions. It is entirely rational.
So strike bubble, cliff and crunch from the record. The operative word is experimentation.
Doc Brown knew all about experimentation and was able to, like the best technologists and investors, see the future. Without Doc’s willingness to push the boundaries, Marty never would have made out with his teenage mom or had the opportunity to ride a hoverboard. Experimentation will remain critical to building products that make the world a better place.
The dramatic drop in costs to build a company are well know. The tools to build a product are cheaper than ever. Investors have taken advantage of this and are taking the opportunity to deploy capital in lower amounts to test out ideas, teams and markets. As such, the size of the average venture round has dropped from ~$12m to ~ $6m over the last decade, according to the NVCA.
The perception is that all of this seed investing (read: experimentation) is contributing to a bubble, overvaluing companies and driving startups toward a Series A cliff. There is also a common misbelief that the Series A bar is being raised higher and higher. That shit is just wrong.
The reality is this:
1. Experimentation by investors and teams at the seed stage is good as long as valuations remain reasonable.
2. The Series A bar is no higher or lower. Companies need to execute on the plan, attack markets and make money. Period.
3. Dead startups that recycle talent and experience back into the pool are an important part of the ecosystem.
4. Any perception of bubbling is owing to poor expectation management. Accelerators have had a role to play in this.
5. Good venture firms stick to the long term thesis. For many, including us, this means continued deployment at the early stage.
For the sake of innovation let us hope that all of the rhetoric about impending startup doom fades away as quickly as the newest buzzword or the latest me too fad. The process of experimentation has stood the test of time and should be supported by all those who have a vested interest in the health of the technology industry.
[A great post by Brad Feld on small experiments came out today and makes a nice accompaniment]