The Struggle for Series A

[aaronwhite]

Speaking on the VC side, some the crunch premise is flawed. The crunch is due to a huge explosion of early stage companies (easier than ever to get seeded, less capital than ever needed to get started) w/o a corresponding explosion of A-level capital.

There is no formula for unicorns, I'd dismiss that outright, and even if we found one, every founder would bend their story to adapt superficially, and the forumla would prove useless.

My #1 theory on why people w/ a somewhat logical strategy/thesis fail to raise? Failure to tell a compelling, coherent story about their opportunity, and failure to come across as a compelling "force of nature" founding team.

[wylonis]

i partially agree with your point on an explosion in early stage companies. however, i think part of this explosion in seed stage companies is because companies are now raising 2-3 seed rounds and jumping straight to A rounds which in effect is the old "B round." i think part of this behaviour is driven by investors dis-interest in A rounds so entrepreneurs try to be "seed stage" as long as possible until then can raise 10 million dollar A rounds which is really a b round.

[calbear81]

The two sets of questions are asking fundamentally different things. The "bad" questions are all about the market your company has entered, the potential size and value of that market and who the competitors are that are in the space. This is important because your "good" questions are all about whether your team can execute and what growth/adoption rate but with an unknown market size. You can certainly grow to be a big fish but if it's a small pond you're playing in that may be less compelling to that investor. On the other hand, an investor may want to make a bet on a smaller fish in a big pond knowing that there's a lot of room to grow even if it means there's higher risk. Both sets of questions are important in my opinion. The 1st set establishes whether or not I even want to invest in this space and the 2nd is if your company is the one I want to place my bets on.

[cauterized]

Big fish in small ponds frequently (to stretch an analogy painfully thin) start to take over nearby larger ponds once they've dominated their niche.

A few examples that come to mind include:

Amazon (books -> retail in general -> streaming media, hardware, IAAS...) Google (search -> ads -> mail, calendars, etc. -> hardware and operating systems...) Facebook (social networking at Harvard -> social networking in the Ivies -> social networking at colleges -> social networking everywhere -> messaging, ads...) Zappos (shoes -> handbags -> clothing, jewelry, sunglasses...)

And those first three grew not just by taking over existing markets, but by becoming popular enough that they enlarged their own markets. Before Facebook became big, social media just wasn't something the vast vast majority of people over fifty had any involvement in. Now everyone I know (including two over-90-year-old great-grandmothers) has an account.

[wylonis]

hey calbear81. i'm not saying that investors shouldn't ask these questions - because it helps you understand the market. however, imo the most important questions are the ones i highlight and these are rarely the focus of discussion.

[StartupLSatoshi]

Cringeworthy post.

A post like this feels like a good way to seal your fate as a victim of the crunch.

It's true that investors make mistakes. Don't feel sorry for yourself or complain about it, figure it out. It doesn't get any easier (or so they tell me)

[ryanSrich]

I would say it's an interesting post, but lacks quality.

I do believe investors often ask the wrong questions. A lot of them have just been lucky. That's not to say all investors are lucky/asking the wrong questions.

It's a mentality thing. Often times West Coast investors are interested in how you compare to other non-competing but similar businesses. IMO they also focus too much on the sumo and how they might release a competing product, "what would happen to x if bigco launched a similar service"...there's not right answer to that other than...who cares? I think investors should focus much more on how much revenue you make and your potential for growth. Not how you compare to some flashy startup.

[wylonis]

i'm sorry to hear that you perceive this as some sort of excuse. that wasn't my intention. we haven't started fundraising yet so i don't know which side we'll land on. this was more meant as my personal observation on the VC ecosystem and how I can see some of the dynamics leading to the crunch.

[pbreit]

I was ready to dismiss the article because the first set of questions didn't seem that bad and Fitbay doesn't strike me as a "unicorn". Though the next set of questions does really nail it. But I think that's just a different way of saying "can this team create traction?"

[wylonis]

hey pbreit. i'm not saying that fitbay necessarily is a unicorn.. i'm saying that there are potential unicorns among series a start-ups that are not getting funded. but i agree that "can this team create traction?" should be the most important question that investors ask.

[alrs]

VC money has flowed freely because interest rates have been low, so capital had nowhere to go.

Interest rates are going up in June, so there is going to be less VC money.

[brianwawok]

Really? How much interest rate does it take to change things? Someone will invest in foobar.com social toaster app over putting in a savings account based on savings rate going from 1% to 2%?