About 12 to 18 months ago, the whole tech & start up world was worried about the Series A crunch. For those who came in late, the Series A crunch refers to the mathematical funding constraint of an increase in funding for seed stage startups with no corresponding increase in total funding at the next Series A. We analyzed the data of startups that were supposed to die from Crunchbase & co-related that with Mattermark & other data to see what really happened.
Sarah Lacy of Pando Daily wrote on Nov 28 2012, after talking to about 20 investors , that "As many as a thousand companies who’ve received seed rounds won’t be around in a year — maybe six months". On April 8th 2013, TechCrunch followed up with their own analysis from Crunchbase data & published a list of 1291 startups that were likely to be most impacted by the Series A crunch. These 1291 startups were operating and raised seed money after Jan 1 2011 but not raised follow on funding since then.
We took the Crunchbase data set of the 1291 startups to see what really happened after one year to SF bay area startups.
The Crunchbase folks had mentioned that the file had only contained US startups. However, when we cross referenced it with their data extract of April 1st 2014, it showed that there were non-US startups as well.
# of Startups by Region in the Crunchbase file of 1291 Startups
Of the 143 startups based out of the SF Bay area, we whittled down the list to about 93 startups based on the following criteria.
Excluding startups that had poor funding data quality (e.g. Initial funding data was set to NA)
Startups that were mistakenly coded to SF when they were not.
Excluding startups who raised less than $100k (the list included startups who raised $20k etc as well!) which may not be reflective of a true seed round.
We found that of these 93 startups, 24 of them (or about 25% of these startups) managed to get follow on funding after April 1st 2013. These startups included RelateIQ, Comprehend Systems & Hampton Creek Foods who raised money from brand name VCs.
Of the remaining 69 startups who did not raise startup financing, we further divided this group into segments that raised more than $1M & those that raised below $1M. We found of these 69 startups, 23 startups had raised more than $1M.
We then analyzed each of these 23 startups in depth to see who was operating & who was not. We did not rely on the Crunchbase "Status" field to see who was operating since Crunchbase itself acknowledged that this field is not necessarily reliable. To see which startup was operating we did some significant additional work including checking the founders LinkedIn profiles, latest blogs posts, social media & other digital breadcrumbs. For example, NoiseToys showed to be operating in Crunchbase (as of June 2 2014) but the founders had clearly moved on to other jobs according to their LinkedIn profiles. We also worked with Mattermark data to understand company specific trends.
We found that of these 23 startups, 14 of them continued to operate, pivot & expand. For example, in this group, Vayable pivoted to a trip concierge model & Mixrank expanded their offering from a competitive display ad intelligence tool to an ad sales intelligence offering. The perception that these startups are in zombie 2-3 people mode is not correct as well. For example, Mattermark data for WeddingtonWay shows a team of 17 People.
Both these groups (23 startups who raised follow on money & the 14 startups who raised greater than $1M & who continue to operate) make up about 40% of the total pool of startups who were supposed to be impacted by the Series A crunch.
Given the above data, here is some food for thought & points to consider:
What was the real economic, employment & churn impact? Was it really a thousand startups? Or by the time we dig deeper do the numbers get dramatically reduced?
When we further break down these startups by region, what is the impact to the SF bay area?
Even if some of these startups do not go on to raise further rounds, could they survive by staying lean, pivoting & expanding like Vayable & Mixrank?
When firms raise seed money, is it better to raise $1M, even at the risk of more dilution, so that you have a better shot at survival if external funding dries up?
Is this increased seed stage financing OK if the fallout is not that bad?
Acknowledgements: We are a data, analytics & research service focused on the auto insurance sector but we love the startup and tech world so we utilize our skills to better understand the environment we operate in. We want to acknowledge the great work done by the Mattermark Team, Sarah Lacy @ Pando Daily, TechCrunch, & Crunchbase without whom our analysis would not have been possible. Any comments/feedback can be sent to firstname.lastname@example.org