The Series A Round Is The New Series B Round

　　Editor’s note: Jeff Jordan is a partner at Andreessen Horowitz and is on the boards of Airbnb, Belly, Fab, Circle, Crowdtilt, Lookout and Pinterest, as well as Wealthfront and Zoosk. Previously, Jeff was president and CEO of OpenTable, which he took public in 2009. Before OpenTable, Jeff was president of PayPal, and he was previously the SVP and general manager of eBay North America. Follow him on his blog and on Twitter @jeff_jordan.
　　The venture industry is awash with talk of the “Series A Crunch”, where it’s getting progressively more challenging for seed companies to land follow-on financing. In my short two-year tenure as a full-time investor, I’ve seen this crunch hit very hard at a number of quality, early-stage consumer companies. Why is this happening? A number of factors are coming together to create this crunch.
　　A significant supply/demand imbalance has emerged between seed and Series A financings coming out of the economic near-meltdown of 2008-2009. In 2009, there were about the same number of seed and Series A financings, but the number of seed deals have exploded since then while the number of A rounds grew only modestly. In 2012, there were 2.5x as many seed financings as A-round financings, whereas historically these were more in balance. This suggests something like 60 percent of seeds could be stranded.
　　Investor expectations have expanded substantially. It’s become steadily less expensive to launch many consumer-oriented Internet businesses over the years due to things like Moore’s law, improving programming tools, the cloud and the ability to access users from multiple large platforms. Now we often see the kind of traction that we used to expect from Series B companies in Series A companies, and from Series A companies in seed companies. For example, a number of our recent Series A investments built multi-million dollar revenue run rates on their seed rounds. We’re getting spoiled. Combine this with the above supply/demand imbalance and you’ve got a situation where the bar is being raised exactly when the competition for the A round is becoming particularly fierce.
　　The source of seed capital has been changing. In recent years, the amount of seed investment from non-traditional institutional sources has increased dramatically. More and more seed capital is coming from sources like angels, “super angels,” micro-VCs and incubators. To under-score this point, we have close to a thousand separate angels as co-investors in the consumer companies in our less-than-four-year old portfolio. This influx of new capital has arguably had an inflationary impact on seed valuations, which obviously has an initial attraction to many entrepreneurs but can create challenges in a “crunch” scenario. These non-institutional sources of capital are not inclined or structured to potentially help a company secure additional capital in a crunch. And the higher valuations provide a higher hurdle that must be overcome by potential new investors in a crunched company.
　　The number of potential Series A investors appears to be contracting. The venture business is showing early signs of a significant consolidation. The amount of capital invested has trailed the amount raised for a number of years, and the capital that is being raised is increasingly consolidating among fewer, larger firms. The number of investors who can write that Series A check is starting to fall.
　　The impact of these factors is playing out before our eyes. We’re seeing more and more potentially promising companies who have spent much of their seed rounds to generate solid early traction, but not the kind of traction that sets them up well for a Series A financing these days given the higher bar. These companies face a brutal situation. They are running low on money. Prospective new investors want more proof, particularly given the higher seed valuations. And many of the existing investors, particularly on the angel side, become “tapped out” or “want to stay diversified” when approached for bridge financing. These companies’ futures are rapidly called into question. It’s been very painful to watch.
　　So here are a few suggestions for entrepreneurs who are trying to start consumer-oriented Internet businesses: