In 2012, early stage companies, investors and analysts began to take note of a slowdown in Series A financing for companies in the technology space, particularly for early stage companies with a consumer internet focus. With less A-round dealflow continuing throughout 2013, speculation continues about this pattern being due to shifting preferences by investors. More conservative opinions suggest that, because seed capital is so much more accessible, the volume of seed funded companies is on the rise, while the number of firms providing Series A funding remains constant, resulting in the number of Series A funded companies remaining fairly static. And with the emergence of newer options for seed funding like Kickstarter, the recent loosening of fundraising laws and the soon to be legal crowdfunding options, the number of seed funded companies is sure to increase. But like all situations, the cause of the crunch is most likely a mixture of many aspects, both known and unknown.
Regardless, the data tends to point towards a sustainable level of seed fundings but a flat level of Series A dealflow for today’s high-tech startups. The impact on these companies is felt in many ways, and most certainly impacts their ability to acquire talent. Seed round funding typically goes towards product development, early customer/user acquisition, marketing, and compensation for the initial startup crew. Series A funding tends to become a possibility when the concept is proven, revenue or traction is established, and the company appears to not only be sustainable, but presents the opportunity for growth with the right resources. Once these companies acquire their Series A, they go into expansion mode, which equates to startup hiring. Thus there is a huge impact that a decreased availability of Series A funding has on a startup’s ability to hire, let alone attract and acquire the top talent they desperately need. In turn, this hampers their ability to begin scaling the organization and take growth to the next level.
What should early stage startups do to wade through the tightening Series A funnel? Amish Shah, CEO of Millenium Search and Managing Partner at Sierra Maya Ventures, weighs in with some advice for these companies:
1) Focus on Revenue: “Today’s early stage technology startup needs to develop a strong revenue model early on. The freemium model sounds great, but to move towards the next level, you need to begin earning, grow your customer or user base, and create a strong proof of concept for revenue and profitability. Furthermore, the early generation of revenue can help prolong your need for the next level of funding, which can give you more time to wait, along with more leverage in negotiations.” That is not to say that companies, such as Twitter, can’t become successful despite this advice, but then again, most companies are not Twitter.
2) Run Your Company Lean: “Nothing new here, but it’s a good reminder. Prioritize your needs, and solidify the basics to launch and operate. And don’t pay for premium when you can get it for free or little to nothing, unless it’s really important. And no, not everything you want is important. You wage wars with the army you have, and not with the one you want.”
3) Unify Your Current Staff: “Make sure that your current team falls in line behind you (the founder), your vision and your passion. Conversation and debate is important during development, but at this stage, every person and every resource must be working towards a singular objective. There must be cooperation and singularity.”
4) Get to Know Your Future Funders: “You may not be looking for funding now, but for most companies, the need to pursue Series A is inevitable. And naturally, the people who can give you the best advice and criticism on getting successfully funded are in fact the people who will be potentially funding you. So go network, find ways to meet these investors, get to know them and get solid advice directly from the source.”
Millennium Search is an executive search partner to emerging startups and high growth technology companies. We help our clients achieve growth and success by creating relationships between the right companies and the right talent. To learn more about how we can help your startup, contact us today!