Series A Crunch: Why Startups Will Use Crowdfunding Instead

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Tanya Prive Contributor to Forbes

Bubble

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 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 risky startups, 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 + Partners 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, investment 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. Ready to take the investment world by storm, RockThePost is unveiling its investment crowdfunding application on March 5th, 2013 at 11am EST.

 

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