With a plethora of venture capitals, the issue of funding used to be just finding the right match. Now, Series A investments are in a crunch, with investors shying away from the consideration to invest in startups taking risks via internet companies seeking funds. Nicole Perlroth of The New York Times calls it The Facebook Effect, citing the megacorp’s public offering plunge as the catalyst.
Because of this, and other similar industry failures, investors have become warier of startup investing, and have been spending more of their dollars on conservative and guaranteed profitable opportunities.
In the funding days of old (think three-four years ago), venture capitalists were throwing their money at companies with large user-bases without stopping to consider the plan (or lack thereof) for monetization. Businesses like Tumblr, Twitter, and Instagram were lauded for their growing numbers and flashy design, but all eventually reached huge struggles with the need for profit. While they eventually did prove successful and figured out a way to monetize, startups copying their business model will not be given the same chances these days. Monetization has to be given higher priority nowadays.
Another contributing factor to this crunch is the ratio of seed stage funding and Series A investments. While they used to be leveled, there is now a staggering difference. Series A rounds have flat lined, while earlier funding rounds have flooded the market, leaving thousands of startups floundering for follow-up funding.
Gregory Gretsch from Sigma West seems to agree.As he told me earlier this year, “We clearly have been in the midst of a big angel bubble, and it feels like some of the air is coming out of it.” CB Insights calls this crunch nothing more than the workings of supply and demand. According to their December 19th, 2012 Seed Investing Report “the reality is that the level of Series A activity is holding steady. At the same time, the number of seed deals have exploded. As a result, the Series A Crunch is nothing more than excessive demand for a limited supply of Series A financings.” Whatever the reason for this burst bubble, the repercussions are clear. Seed stage startups are now more than ever in need of funding.
While this sounds like bleak news for the startup community, every cut has its silver lining. In this case, equity crowdfunding is rising as a good prospective option. Sites like RockThePost, the startup-funding company I co-founded, are taking advantage of this downturn in the financial industry and scooping up the broken pieces to rebuild a new way of getting funding in the private sector.
Now more than ever, reaching out to a new pool of investors that are interested in the growing world of startups has become extremely accessible and almost imperative. The door of venture capitals may be closing, but the investment crowdfunding window is wide open, and ready to explode.
This opportunity only highlights the influence that the JOBS Act will wield. It is my strong belief that the SEC needs to consider startup investing for non-accredited investors as an urgent matter and finalize the JOBS Act regulations immediately. The delays in these regulations will also delay the creation of thousands of new jobs in the United States, not to mention the fate of this growing pool of fundless startups.