There is a Series A crunch and a YC bubble

Stewart Alsop, Jeff Clavier, Chris Hulls, Renata Quintini, Craig Sherman, Duncan Davidson

If you don't think that there is a Series A crunch, you'll change your mind after watching this panel. Four out of five panelists who were asked whether startups were having a difficult time raising their Series A round of funding responded with a resounding "yes."

The panel at Bullpen Capital and Vator's Venture Shift event was titled "Is there a Series A crunch?" If you missed it, and didn't catch the write-up, here's the video (finally!). 

Moderating the panel was Duncan Davidson, partner at Bullpen Capital. The panelists included Jeff Clavier, founder and managing partner at SoftTech VC, Stewart Alsop, partner at Alsop Louie Partners, Chris Hulls, CEO of Life360, Renata Quintini, partner at Felicis Ventures, and Craig Sherman, managing director at Meritech Capital. 

As you'll see, the panelists do make the case that there is a Series A crunch because basically there's just been an overwhelming number of seeded startups. YC alone pumps out 60 seeded startups per batch. The panelists have reports to back up their anecdotes. Steve Loeb, a VatorNews writer, just wrote a story about the fiscal cliff and its impact on the venture industry. In his piece, he points to a finding that shows that seed investing has grown 483% in the last 10 quarters vs 51% for Seres A deals, according to data from CB Insight. Also, the percentage of seed round vs. Series A rounds has been gradually increasing from the first quarter of 2010 to the first quarter of 2012.

Here's some highlights of what the panelists and moderator shared.

Duncan Davidson started the evening by laying out his view of the venture landscape. He said that there's too much money going into the early stages. At the same time, there's momentum investing happening in the later stages. He referred the activity as FOMO (fear-of-missing-out) investing happening at the later stages. He also thinks there's a structural change in startup investing, allowing startups to bypass the classic Series A stage. 

Clavier, who's invested in roughly 125 consumer Internet companies since 2004 and is currently investing out of a $55 million fund, said the reason there is a Series A crunch is that there's too much deal activity in the front end, given that the bar to create companies has been lowered, so logically the percentage of companies funded in a Sereis A will be lower. 

Alsop was the outlier, saying that there isn't a Series A crunch. Alsop calls it a "very enthusiastic cycle of investment, which is normall considered a bubble."  

Quintini referred to some statistics showing that the ratio of seed deals to Series A deals were 1-to-1 in 2008. Today, it's more like 2-to-1. She quickly brought up an issue she clearly sees with entrepreneurs - that is they focus too much on optimizing the cap tables, thereby raising the valuations of their companies so as to not get diluted. Rather than think more about how much of the company you want to own, think of the capital you need, she said. Then think about the next round of funding and whether you can reasonably get to the revenue run-rate you'd need to command a higher valuation. 

Sherman also groused about the valuations. Often he says he and his partners look at a company and say, "This is a really good company, but not a good investment." This means he often has to say 'No" because the price is just too rich. 

All panelists seemed to chime in on the Y Combinator "bubble." 

Clavier said that there's a concentration of "bubble-licious" deals around YC companies. Quintini echoed his thoughts, saying that the activity around YC is "insane" as the batches of companies that come out of there are more than 60 at a time. Also, the startups are done fundraising once they get off the stage at a YC demo day.