Last year I wrote an impassioned post meant for SpringTime Ventures portfolio companies, but really for startups everywhere. I was warning about an impending Series A Super Crunch.
After the dust settled on the first few months of quarantine it looked like the economy was not going to collapse, but we were in for a long haul. What was perhaps worse was the prospect of that “long haul” being for an indeterminate period. During this time I saw the convergence of three major factors in the startup ecosystem that had me worried. They were:
- More seed funds + more seed dollars = more companies at the seed stage
- Series A raising the bar = harder to raise the next round
- Private Equity raising the bar = harder to get an early exit
To me, that all added up to a huge fundraising bottleneck in everything leading up to Series A. In the second half of that post I offered advice to founders on how they can keep their business afloat until things settled out.
What happened over the next few months was more like a feeding frenzy and nothing at all like a crunch. At SpringTime we saw coastal funds get comfortable investing via Zoom and thus widening their aperture to include startups all over the country. That made funding rounds even more competitive than they had ever been, at all early stage levels.
But the big thing that I got wrong was this:
This is the Capital Overhang. Capital overhang is the amount of money raised by private capital funds that remains uncalled. Meaning, there is more money yet to be invested in the private sector than ever before.
With more money in the market, and with investors knowing they have more money yet to deploy, there was no bottleneck.
By June 2020 when I wrote that post, I thought I had seen enough of the trend ahead to call the shot. In October as startup investing was in peak frenzy mode, I was wondering what I got wrong. When I saw this chart earlier in the year, I knew what it was.
One startup in our portfolio I know heeded the advice I offered and focused on making it through the year on a slimmer budget than they anticipated. It turned out to be the best year yet for them, and they put themselves back on the right track. For others, they took advantage of the capital markets and pushed to raise another round. But for most, it really was business as usual, just via Zoom.