July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Ask a venture capitalist if the much-bemoaned “Series A crunch” is real, and they’ll tell you it is.

And then he’ll spend an hour telling you why it’s not.

“Anecdotally, we’re as busy as ever with Series A deals,” said Bob Ackerman, one of the founders of Allegis Capital, a San Francisco investment firm. In a recent phone conversation with VentureBeat, Ackerman spoke about industry-wide yearly figures as well, saying, “There’s been an increase in activity.”

Let’s take a step back: Over the past week or so, news reports have suggested that some types of entrepreneurs are having a hard time raising Series A funding, which refers to the first round of capital a company gets from institutional investors. These entrepreneurs were able to seal smaller “seed” deals, no problem. But when it came time to raise a round larger than $1.2 million or so, they stalled out.

Pravin Vazirani, one of the partners at Menlo Ventures, said in another phone chat that his own data shows a similar story to Ackerman’s. “In aggregate, the total number of companies getting Series As is still going up. It’s better than it was a year or two ago. … I would say, the number of Series A deals that are getting done, it’s probably comparable or greater than it was in 2007.”

So, what’s everyone moaning about?

Without digressing into navel-gazing, the tech press has been running a few slow-news-day op/eds talking about the so-called Series A crunch. Some of the entrepreneurs cited blame the institutional investors in charge of writing those larger checks. Some of the media blamed the “crunch” on the entrepreneurs, whom they saw as less than deserving.

Crunch or bubble?

But the investors themselves are blaming a new breed of angel investor — a relatively inexperienced person with $50,000 burning a hole in his pocket and whose friend Greg has an awesome idea for an app. The angel gives Greg the $50,000.

What happens next is not Greg’s fault. Greg’s app could probably be a great success, and he even could sell to a big company within the next couple years. But the app doesn’t need a Series A-level investment — at least according to most of the Series A-level investors he’ll approach. So Greg feels the crunch that technically doesn’t exist, the perception of which is created by the big, dumb angel bubble.

Ackerman says he sees features, products, and apps that are great, but they’re not likely to generate venture rates of return. They’re not likely to become sustainable, large-scale companies that need venture capital. So he has to turn the entrepreneurs down.

“You take those same entrepreneurs and introduce them to angels, and there’s going to be a significantly different reaction,” he said. “Then they come back to the venture community looking for a Series A, and our perception hasn’t changed.”

The end result, said Vazirani, is that although actual number of Series A deals is going up, the number of seed deals is rising much faster, making the ratio more off-kilter than in previous years. “There are far more applicants than there are positions, if you will.”

Ackerman sees the downside of the scenario as one of false positive reinforcement. “It’s a lot easier to raise angel capital today, and that’s not necessarily a good thing … Just because you can write a check doesn’t mean you should.”

Throwing dumb money after bad

Angel funding, known as seed funding because its the money entrepreneurs get to build their early prototype and test it out, requires relatively small amounts of money — hundreds of thousands or low millions for a single round composed of several investors — at least for extremely early-stage companies. The low dollar amounts are attractive to less experienced investors, and these days, a couple hackers and hustlers can make a quick million go a long way, thanks to booming mobile and web distribution ecosystems and technology platforms.

“Whenever it’s easy to start something, a lot of inexperienced people are going to pile in, both as entrepreneurs and as investors, which makes a bubble. And that bubble will be corrected at the next stage of financing,” Ackerman said, with a chuckle.

He noted that some of the less knowledgeable angel-noobs seem to think buying into a new mobile app company’s equity is like buying GE stock. (I responded that, without loads of information and context, it’s more like throwing money down a well and hoping a fairy flies back up with a bucket of gold.)

“There are people who invest where they have tremendous area knowledge and experience and separate the wheat from the chaff,” Ackerman said, referring to longtime angel investors like Ron Conway or Esther Dyson or Kevin Rose. “But doing it because everybody’s doing — boy, that’s a recipe for trouble.”

“I would put a different spin on it,” said Vazirani. “It’s a very good thing that there’s capital available for people who want to start companies. And it’s great for [venture capitalists] because it creates more deal flow … We see it as a very healthy, positive thing.”

VCs might relish the sounds of more doorknockers thumping up and down Sand Hill Road, but entrepreneurs aren’t so enthused about hearing more noes and realizing they can’t grow their app beyond just another app.

The new angel

The venture capital community is beholden to the SEC to disclose tons of information about the deals it does; ergo, there’s tons of information available from research firms on VC deals for various geographies and sectors. Angel money and seed money can be different. It’s hard even to find data on the deals making up a lot of the seed-stage froth.

“It’s angels, it’s super-angels, and there’s been a huge growth in the number of seed funds out there, too,” said Vazirani. But Vazirani said the deals are often more casual affairs — deals between friends, between former coworkers, between family members or first-exit fellow entrepreneurs.

“That’s why [the crunch] doesn’t show up in the data: The number of seed and angel deals being done are not reflected in that data,” he said. “If there’s a huge increase in those deals, you wouldn’t see it. And that’s what people are seeing when they talk about the Series A crunch.”

And while Hollywood gets a fair amount of crap for interfering with Silicon Valley’s business, Vazirani said, “[Celebrities] are not responsible for a meaningful percentage of the growth we’ve seen. It’s definitely on the upswing, but more of the growth, I’m guessing, is coming from these institutional seed funds and super-angels.”

Ackerman echoed Vazirani’s comments about the general lack of reporting on these very early-stage deals, but he also said that in spite of the massive influx of underqualified and nonaccredited investors in spite of the drastically higher numbers of unsuccessful San Hill Road door-knockers, “There’s still capital out there.”

The end of the bubble is nigh

Ackerman did say that consolidation within the venture industry means there might be fewer doors to knock on. And he also pointed out that a combination of capital gains changes and difficulties with raising money for early-stage funds might lead to a slight decline in the appetite for Series A deals, driving more investors toward private equity and late-stage funding deals.

Still, Ackerman expressed confidence that a qualified entrepreneur with a great idea wouldn’t be left out in the cold by the greater venture community, angel bubble be damned.

“The access to capital for good entrepreneurs with good ideas is as good or better than it has ever been,” said Vazirani as we wrapped up our chat. “I don’t think … it’s going to be more difficult for high-quality entrepreneurs to raise money.”

What will be more difficult, he said, is sustaining angel or seed activity throughout multiple years of unwise investments in companies that need seven or eight years to mature — or apps that never mature into companies at all.

“I think we’re already seeing signs of [seed activity fading],” said Vazrani. “I think the number of companies that get seed funding is going to go down in 2013.”

You heard it first here, folks. The Seed Funding Crunch of 2013 is at hand.

And as for those inexperienced investors, Vazirani’s words were not ones of comfort: “You’re going to see a lot of mortality. That’s the plainest way I could put it: The mortality rate is going to be high.”

“Writing the check is the easy part,” Ackerman concluded. “When we have a massive influx of angel capital, a couple years down the road, there’s a massive reset. … There’s a reckoning that’s coming.”

Image courtesy of Neale Cousland, Shutterstock

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

It’s is harvesting season and seed rounds are sprouting like crazy. Today, fledging startups are getting showered in venture capital to make their products grow. Already this morning, 5 early-stage companies peeked up above ground to make funding announcements. Here is what they have revealed.

For more funding news as it happens, subscribe to our Deals Channel feed. You can also follow VentureBeat on Twitter, @venturebeat, to view funding news as it’s published.

Spindle harvests social graph, reaps $2.3 million in VC funding

In 2010, a group of ex-Microsoft employees banded together to form a startup. Two years later, they have released Spindle to “redefine the future of search.” The application provides a news feed for your surroundings. It is built on geo-positioning technology that takes information about location, time of day, nearby establishments, social networks, and real-time updates to give users a glimpse into what is happening around them. Features include user profiles and sharing; theme filters (shopping, restaurants); feeds from ‘favorited’ and ‘liked’ spots; and the ability to search for specific places.

Polaris Ventures, Greylock Partners, Lerer Ventures, SV Angel, Atlas Ventures, Broad Beach Ventures, Project 11, Ray Ozzie and Raman Narayanan threw in for this round. Spindle is currently available in Boston and San Francisco, and other major cities are soon to follow.

MAZ Digital helps brands publish mobile content without a developer hand

Digital publishing platform MAZ Digital closed $1 million in seed funding led by Expansion Venture Capital. Expansion focuses its investments on mobile infrastructure, and MAZ’s cloud-based platform helps publishers easily deliver high-quality content to tablets and mobile devices, without needing their own developer team. Over 100 publications currently use the platform, including Inc. Magazine, General Electric, and Hubert Burda Media. MAZ bootstrapped for two years before taking this initial capital and will use the money to scale. In addition to Expansion, there were 13 other participants in this round.

Zoomdata raises $1.1 million to make data look like Matisse

Data is not typically something I think of as “beautiful,” particularly not with my background in art history. However, these two worlds are colliding with a startup called Zoomdata, which processes data and turns it into “three-dimensional tactile data art.” The system allows users to integrate multiple data source into a single stream to create a “data quilt” and view it in “beautiful visualizations.” The reports include past, present, and future views, zoom capabilities, and collaboration tools. The funding came from a group of angel and institutional investors and will be used to add to the engineering team. Zoomdata is based in Reston, VA.

SubtleData links cash registers to smart phones

While the mobile payments space is heating up, a majority of bars, restaurants, hotels, nightclubs, resorts, convenience stores, and retail shops still conduct business using Point-of-Sale systems. SubtleData connects mobile applications to these systems by providing a single platform that developers can use for integration, so they do not need to do it on a case-by-case basis. This makes it easier for build apps for retail businesses. SubtleData raised this initial $500K fund through on AngelList. The company is based in Austin, Texas with customers around the world.

The Winklevoss twins invest in e-commerce solution Hukkster

Winklevoss Capital recently led a $1 million investment in Hukkster. Hukkster is a button that lives in a user’s browser. Whilst shopping, you collect products you would like to buy, but which may be slightly out of your price range or soon to go on sale. When the price is reduced, Hukkster sends an alert to your inbox and takes a small referral fee for each sale.

Hukkster was founded by Katie Finnegan and Erica Bell who used to work at J.Crew as merchandisers. Since launching, it has acquired more than 10,000 users and works with major brands such as J. Crew, Bloomingdale’s, and ShopBop. Hukkster is based in New York City.

SocialWire launches with $2 million to make Facebook ads effective, social, and less annoying

Facebook and advertisers have had some rocky moments over the years, as have startups trying to make these ads effective. SocialWire is valiantly entering the ring today with $2 million in seed capital from First Round Capital, Dave McClure, Joi Ito, Ariel Poler and Brian Sugar with what is allegedly “a new kind of advertising company.”

SocialWire is a platform that lets marketers take a shoppers’ activity on their site and turn it into a Facebook moment. For example “Rachel Greenwood loved a product on SocialShop.” will show up on the news feed, and members of her social network can click directly on the catalog item. The sharing is more organic drives traffic back to the retailers.

Survey startup makes it OK to give your friends a wedgie

Wedgies are mean and rarely lucrative. However,  this company which creates simple, shareable polls with realtime results has taken $500K in seed funding. Users simply create a question and two answers on Wedgies, and then receive as many votes as they tally up. Zappos and the NCAA have both used the platform to survey audiences during live events. The round was led by Tony Hsieh’s VegasTechFund, Mike Ciklin of SPB Partners, and angel investors Steve Slovick and John Eaves. Wedgies is based in Las Vegas.

Captive Media turns peeing into an opportunity for gaming and advertising

Maybe it is a girl thing, but I prefer not to be advertised to while I am in the bathroom. It seems not all men, or at least investors, do not share this sentiment because Captive Media has raised $700K in seed funding for its ‘pee-controlled washroom media system.” These interactive systems are installed in public urinals and feature games that are controlled by aiming left and right in the bowl. Brands and venues have the opportunity to market to consumers while they are, well, captive.

Captive Media launched in 2011 in the UK. SInce then, it has expanded to eight European countries and will soon be entering the US. The investment came from a group of six angels, including Cambridge-based technology fund Martlet, and serial tech investor Mike Ullmann, chair of Prodigy Finance.

For the funding news that broke this morning, check out: Funding Daily: A pitcher’s worth of investment news

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

U.S. and European venture capital firm Index Ventures announced a €350 million fund for primarily early-stage European investments late Sunday. The firm said it’s impressed by the innovation it’s seeing in Europe despite economics issues that have plagued the area for several years. Some of the fund will go towards U.S.-based startups as well.

This sixth-generation fund for the firm will focus on consumer technology, with some enterprise investments. The firm has done well investing in marketplaces, payments, gaming, mobile, and social startups, Index Ventures partner Mike Volpi told VentureBeat in an interview. Index Ventures’ past investments in these areas include Flipboard, Etsy, Path, and Moo.

“There are more companies started by more people in Europe. Right now, there are more people disillusioned by their big company jobs,” said Volpi.

Venture capital firms do well in Europe, according to Volpi. Large companies are hesitant to invest, so VC firms have an advantage. They also act as a support system, because European startups often don’t have access to lawyers and financial advisors that specialize in startups. Because the entrepreneurs have less experience, VCs take on a mentorship role.

Index’s sixth fund will primarily go towards startups in Berlin, London, Stockholm, and Tel Aviv, with some investments made in the U.S. in New York City and San Francisco. The early-stage fund has dedicated $20 million to seed financing.