July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

This is a guest post by startup lawyer Mick Bain. 

As a lawyer who advises startups, I’m increasingly asked by clients how to make the company more appealing to venture capitalists.

This doesn’t surprise me, given the industry’s navel gazing over the so-called “Series A Crunch.” And it’s true that the growth in the number of new startups has outpaced growth in venture capital outlays, creating a more competitive funding environment.

So what do I tell startup founders who ask this question? I often respond by asking, how killer is your idea? That’s still what matters most to VCs.

But the conception of what constitutes a good idea has evolved in the last several business cycles. Like most of us in today’s economy, VCs are under pressure to do more with less. Venture asset classes have lost value in recent years, so limited partners are favoring startups that aren’t capital intensive, and that can demonstrate a strong likelihood of generating real revenues in the first few years.

The upshot is that VCs are favoring ideas that solve big but practical problems. Often these ideas respond to large-scale needs of businesses, rather than consumers. The ideas also don’t require the imagination of a futurist to understand their potential market value. They are a product or service that is clearly needed now and is likely to be adopted with relative alacrity and limited risk.

If a VC is sold on an idea, he or she will then consider other factors that influence a startup’s success, such as talent, experience and technical resources. Unfortunately for first-time entrepreneurs, those who have already started a successful company will have an advantage in this area.

VCs also prefer companies that don’t require big capital expenditures for expensive assets like manufacturing equipment or telecommunications infrastructure. Doing more with less is a watchword that continues to carry weight in Silicon Valley, Boston and New York.

It’s also important to demonstrate a keen understanding of the micro and macroeconomic trends and dynamics that affect the broader economy and your market niche. Show that you know your sector well enough to adapt to changing circumstances. It can take months, or years, in some cases, to bring a new product to market. During that time conditions can change — are you prepared to make the quick decisions needed to remain a viable force for growth?

The last thing I often tell startup founders anxious about first round funding is to remember that many companies have been successful without it. Today’s technology is relatively affordable and accessible, often allowing entrepreneurs to create valuable companies with very little overhead. Part of being an entrepreneur is finding a path to realize a vision regardless of the barriers. In the end, vision and commitment of this kind are the most important assets of any emerging company.

Mick Bain is the partner in charge of WilmerHale’s Waltham, Massachusetts office and co-chair of the firm’s Emerging Company and Venture Capital practices.

Top image of a consulting lawyer via Shutterstock

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Cendana Capital has raised an additional $28 million to invest in startup seed funds, bringing its total pool to $88 million.

Cendana Capital is a “next generation funds-of-funds” founded by Michael Kim. Before starting Cendana, Kim was an original partner at Rustic Canyon Partners and currently serves as a member of the limited pattern advisory boards for a slew of well-known firms, including Accerlator Ventures, Forerunner Ventures, Founder Collective, Freestyle Capital, K9 Ventures, Lerer Ventures, and SoftTech VC. Kim, clearly, is an active figure within the venture capital community.

With Cendana, he exclusively invests in seed-stage or ‘micro-cap VC’ funds, which then put their money into young startups. Seed-stage investing is a hot button issue right now. The entrepreneurial community is all flutter with discussions of the legendary ‘Series A’ crunch. The cost of launching and operating an Internet startup is fairly low and as a result, the ecosystem is saturated with early-stage companies looking for capital. However, the number of seed-financed startups greatly outnumbers the amount of venture capital firms willing to invest in an institutional round, which means that unless these companies can quickly establish a revenue stream or get acquired (or raise an A round), they go under.

The main cause of this ‘crunch’ is the sheer number of seed-stage startups, which Cendana is helping to fuel. That said, a robust support system for early stage startups is a key driver of innovation and it is important to create an environment that promotes entrepreneurship. A current trend in the tech world right now is venture capital firms investing more in seed stage companies. Earlier this week, Maveron announced an initiative to fund and foster seed startups, and Sequoia recently confined existence of its Scout Seed Fund.

Cendana is a part of this movement. The initial $60 million was filed in June 2012 and today the fund closed at $88 million, as first reported by Pando Daily. Read the SEC filing. 

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

The Series A crunch has left the realm of Bigfoot and Nessie and is entering the realm of truth, at least according to Fenwick & West.

The law firm released the results of its 2012 Seed Financing Survey today, which found that the number of startups obtaining Series A financing after a seed round declined significantly in 2012.

“Of the companies funded in 2011, 27 percent had raised a Series A financing by the end of the following year [2012], while 45 percent of the companies funded in 2010 had raised a Series A financing by the end of the following year [2011],” the report said.

The Series A crunch is a Silicon Valley urban legend of sorts. Some say it is fact, and others dismiss it as myth. The basic idea is that the number of seed-financed startups far outnumbers the amount of venture capital firms willing to invest in an institutional round. The cost of launching and operating an Internet startup is fairly low, and a strong angel investment community supports young companies as they get off the ground. However, companies that are unable to quickly establish a revenue stream or get acquired need venture capital to keep going, which is where the “crunch” comes into play. Without additional financing, they go under and turn into “zombie startups.”

A significant driver of this phenomenon is a changing scene for seed financing. There has been rapid growth in seed financing over the past few years. As opposed to 472 deals in 2009, Fenwick & West found that there were 1,749 seed deals in 2012, while the number of Series A rounds only rose from 418 to 692.

A few key trends are behind this bottleneck. First, venture capitalists are becoming increasingly involved in seed-stage deals. The percentage of seed deals that venture capitalists led increased from 27 percent in 2011 to 34 percent in 2012. Furthermore, accelerator programs are multiplying like rabbits, which adds to the number of promising startups getting attention from investors. The JOBS Act and the emergence of crowdfunding provide more flexible alternatives to traditional seed financing, and platforms like Angelist help establish a cohesive network between early companies and investors.

Basically, it is easier than ever before for a startup to nab seed funding. The challenge is creating a product strong enough to attract venture dollars (or sustain itself on its own).

“These results show a continued strong and diverse seed stage financing environment in the internet/digital media and software industries,” said Steve Levine, a partner in the Fenwick & West Startups and Venture Capital Group.  “However, the decreased percentage of seed funded companies that had received Series A investment by the end of the following year emphasizes the importance of companies demonstrating traction with the seed investment they receive, in order to obtain Series A funding.”

The survey also found that seed stage deals are beginning to look more like traditional, institutional deals. The number of deals structured around “preferred stock structures,” as opposed to convertible notes, increased, and valuation caps increased in deals based on convertible notes.

Fenwick & West drew these results from an analysis of 61 transactions in 2012 with a high concentration on Silicon Valley. It is a small sample pool that does not necessarily reflect “the larger, geographically dispersed, seed financing environment,” but like sightings of Bigfoot, the thrill is in the mystery.

Photo Credit: Ben Cumming/Flickr

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

When New York-based entrepreneur Matthew Hogan quit his steady job in finance to work on a startup idea, he told his two closest friends during a road trip to Atlantic City. A few months later, they each wrote Hogan a $25,000 check.

Many tech entrepreneurs take investment from friends and family to test the viability of an idea. They raise just enough to fund a developer’s salary, office space, monthly rent, and a steady supply of ramen noodle soup.

It’s a time-honored startup strategy, but it’s a risky one. Hogan could make his friends rich, if his startup takes off. But if it craters, that lost $50,000 could haunt their friendship.

For Hogan, the investment buys him enough time to test the market opportunity for his startup, “DataCoup.” If all goes according to plan, it will earn him a place at a competitive tech accelerator program like TechStars, which he can parlay into additional investment.

Andrew Frank, Matthew Hogan and Brian Kauffman

“I’m solely investing in this idea because of Matt,” said Andrew Frank, an investment banking managing director. ”Anyone I didn’t know with the same idea, I wouldn’t have even looked at the slide deck,” he admitted.

Hedge fund manager Brian Kauffman knows what he’s getting himself into: he has made six  ”alternative investments” over the years. Five of them were in friends’ startup companies. “If it [DataCoup] goes bad, I’d consider it to be a bad investment decision on my part,” said Kauffman in a Skype interview. “I wouldn’t blame Matt.”

With friends like these, it’s difficult to see a downside in taking their money. Typically, it’s a darn sight easier than landing a seasoned angel investor. An added benefit for Hogan was using his friends’ networks from the finance world. Frank, who has known Hogan since they were 10 years old, brought in a few investment banker friends to invest in DataCoup’s seed round.

Then there’s always the chance that the whole group will get rich and sail off to the Mediterranean in a fleet of matching yachts.

Hogan’s case aside, others advise caution in taking money from friends.

“I wouldn’t take family and friends money if I had any other choice,” said AngelList founder Naval Ravikant in a recent interview. Unlike a professional angel investor like Mike Maples or Dave McClure, your wealthy Uncle Jim can’t be called on for honest, critical feedback about your startup’s business model.

Related: Read our analysis of the “Series A crunch” and the risks of taking investment from friends and family.

Entrepreneurs should ask themselves, “Do you really want to lose your business, friends and family at the same time?” according to Ravikant. Blow your best friend’s $25,000 investment on some half-baked idea for a dating app, and you may destroy that relationship for good.

Here are some hard and fast rules to consider before taking “friend and family” money:

• Consider those #firstroundproblems: The explosion of seed-stage startups has given way to a hotly competitive environment in Silicon Valley. Meanwhile, the supply of series A funding has remained steady. The media call it a “Series A Crunch.” In the struggle to rise above the noise and make it to the next round, it helps to have a highly respected ally. A professional angel investor can make the requisite connections to Sand Hill Road’s most prestigious venture firms.
• Exhaust all other options: Generally speaking, it’s better for an entrepreneur to land one professional angel investor than to raise money from a dozen rich uncles. A seasoned angel is typically well connected, cognizant of the risks, and can draw on years of experience to guide an inexperienced founder.
• Be upfront about the risks: Hogan and his friends realize that most startups fail. “This needs to be money that if you don’t see again, you can’t be mad at me,” Hogan explained, and described the process as a “big exercise in expectation management.” But many entrepreneurs can’t help but sell a grand vision. A friend under the impression that an idea is the next big thing might be tempted to invest money they can’t afford to lose. Most startups fail: Do you want do have to close up shop and inform your best friend that you’ve blown their kids’ college tuition?
• Favor well-connected friends and family: If that wealthy uncle hobnobs with lawyers and attorneys at the local country club, ask for an introduction. Likewise, if a friend has invested in early-stage startups before, that’s typically a good sign.
• Keep inexperienced investors at a distance: If a friend wants to be informed about every minute detail — and worse still, if they expect to interject an opinion about the product — you’re in trouble. Unless they lack deep domain expertise, offer family and friends a brief update every few months. “Otherwise you can get socially pressured into doing something you don’t want to do,” warned Ravikant.
• It’s a gift, not an investment: Harvard Business School associate professor Noam Wasserman wrote a chapter on this tricky issue in his book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. He references a serial entrepreneur who views money from family and friends as a gift, meaning that there is no expectation of being paid back.

One of Kauffman’s six investments, another friend’s startup, recently went bust. He has subsequently hung out with the founder “many times” and even said he would consider investing in his next gig.

Frankly, investing in a seed-stage startup is like donating to a nonprofit: The chances of seeing that money again are slim to none. Still, it’s a bonding experience for Hogan and his bros.

“We could go into public equities and safe bond investments,” said Frank. “Or we could take some high risks with an astronomical upside.”

“Friends throwing cash” image: Yuri Arcurs via Shutterstock

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Facing unstable global markets and an upcoming presidential election, venture capitalists took a more disciplined approach to their investments in 2012 than in previous years.

Results from a MoneyTree report in partnership with the National Venture Capital Association (NVCA) found that investments totaled $26.5 billion in 2012, with VCs closing 3,698 deals. This is a 10 percent decrease in dollars and a 6 percent decline in deals over the prior year.

Related: Check out the top investment deals from the fourth quarter.

Tracy Lefteroff, global managing partner of Pricewaterhouse Cooper’s venture capital and private equity arm attributed the decrease to unstable markets and “taxes, government policy, the general environment in the stock and equity markets, troubles in life sciences, [and] the regulatory market” in a call with press and analysts.

However, investors and financial analysts agree that there is cause for optimism in 2013. For the fourth quarter, venture investment of $6.4 billion into 968 companies fell 3 percent in dollars but rose 5 percent in deal volume over Q3 2012. With the re-election of President Obama and burgeoning excitement about the JOBS Act, deals kicked into high gear.

Mark Heesen, president of the NVCA, said there would be a decline in “me too” investments in 2013, meaning that VCs won’t just follow the herd. With the industry facing constriction, “more seasoned entrepreneurs” will get funding over 20-something Internet wunderkinds.

In addition, the experts anticipate a steady pipeline of high-profile IPOs in 2013, particularly in the business-to-business (B2B) software sector. Research firm CB Insights predicts that 80 percent of the companies in a position to go public target their products at businesses rather than consumers.

Related: We predicted that SurveyMonkey, Dropbox, and Square would be among the companies to go public in 2013.

Indeed, software is the only sector to see a steady increase in venture capital dollars, while biotech and life sciences, clean-tech and consumer products and services, failed to capture VC attention in the final quarter of 2012. Investment dollars rose 10 percent over 2011 to $8.3 billion, which funded 1,266 software deals.

This represents the highest level of investment in the software sector in over a decade.

It seems the reports of a “series A crunch” have been exaggerated. For the fourth quarter, early stage investments increased 5 percent in dollars and 9 percent in deals over the previous quarter.

Investors on the call, including John Backus of New Atlantic Ventures, said there were a healthy number of companies receiving first-round financing. Seed deals are notoriously difficult to track as family and friends often privately invest. “I don’t believe we had a series A crunch,” said Backus, who said he witnessed an “angel feeding frenzy.”

With entrepreneur-friendly government regulation and high-quality late stage companies on the cusp of going public, VCs expect to see solid returns in the coming year. “It’s a terrific time to be investor,” said Jim Healy of Sofinnova Ventures. ”We expect to be highly active in 2013.”

The quarterly Moneytree report is issued by PricewaterhouseCoopers and the NVCA, with data collected by Thomson Reuters. The full report is available online at NVCA.org.

Image: igor.stevanovic |Shutterstock 

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

This is a guest post by investor Jon Soberg

It’s almost 2013, and many seed-funded companies are hoping the New Year will yield a big, fat Series A check. As we all know, and as the recent report from CBInsights reminded us, there is a “seed cliff” that is showing no signs of letting up.

As a seed-stage and first-round investor at Blumberg Capital, I sit right in the middle of this purported “crunch.” We mostly do seed funding, but about a quarter of our investments start with Series A. We see consistent deal flow coming in for both, and we have a number of companies that are looking for follow-on funding. I am spending much of my time these days helping our seed-funded companies with their fundraising strategy. In light of recent media reports, here’s what I’m telling my startups: Plenty of companies are getting Series A funding, and if you play your cards right, so will you.

I have reiterated to our CEO’s that if they build a solid company, they will be able to raise funding. The numbers show that Series A financings have remained fairly stable, but more companies were able to gain seed funding in the past few years. This means the balance of power at Series A rests with the investors who are patiently waiting for the best companies to walk in the door before they write checks. The ramification for founders is that there’s far more competition — you better bring your “A” game, no pun intended.

With the balance of power shifting to the VC, here are my rules to stay afloat:

Rule #1: Make sure you have enough runway.

I’m sure you are all thinking, “Duh, tell me something I don’t already know.” I’m not talking about raising a large seed round, and there have been many articles written about that, including a recent one from VentureBeat. When I say make sure you have enough runway, I’m not talking about simply looking at a product roadmap or business plan, and recognizing that you will likely run out of money and need to raise in “X” months. I’m talking about proactively managing that runway, and in some cases making the tough calls early. Take it from someone who has personal experience shutting down a company after the investors didn’t continue to fund it — it’s painful! So, let me give you two examples from recent experience.

Rule #2: Make drastic decisions; take cuts if necessary

This time last year, in a startup’s board meeting, we took a careful look at our plans for 2012. We had runway until May, and the base plan was to raise money in February or March. We had a lot of customers in the pipeline, but revenue was low, and customer on-boarding was taking longer than anticipated. We had a couple of meetings with investors, and it was clear we weren’t ready. We decided immediately to cut the burn pretty substantially to give ourselves another six months of runway, without expecting much in the way of revenues. We all agreed that we needed the time because we didn’t have full control of the onboarding or the fundraising. The plan was to take the company profitable on a low burn, and then expand with revenue (or opportunistically, financing). It wasn’t easy — the founders took cuts, and we needed to adjust equity compensation.

In about July, the ramp really started to accelerate, and today, the company is making about $100,000 per month in revenue with high margins. We are expanding, and will likely raise capital in 2013 to fund further growth, but we wouldn’t be here talking about it had we not made the course correction early. Today, we control our destiny because we don’t particularly need to raise capital.

Rule #3: Consider a gradual approach to fundraising

Another company, where I’m on the board, has taken a careful and gradual approach to fundraising. They were also faced with a short runway and minimal revenues. They made sure their operational costs were lean, but didn’t make any drastic changes. Rather, they went out and put together a small round, adding about $500,000 and extending their runway by at least six months. They subsequently added another $800,000 at a slightly higher valuation because the metrics continued to improve. If you had asked them two years ago about fundraising plans, I can assure you they didn’t look like this, and there is far more dilution than anticipated. However, it’s better to own less of a real company than to own a whole lot of nothing.

Rule #4: Time is your ultimate weapon. Use it wisely! 

In both of these cases, the entrepreneurs pro-actively looked very objectively at their businesses, and made adjustments in the face of harsh realities. They are both continuing to thrive. As you re-assess your priorities heading into 2013, here are a few tips. These are things that will help you build your business, and rise above the fray in fundraising.

• Time is your most precious asset. The more runway you have, the more opportunity to succeed and attract funds. It is much easier to raise when you don’t need to.
• If you can take control of your destiny, do it. You know what makes a business attractive? Profitability, and the potential to scale. Build the base from which you can scale.
• De-risk your business. Series A investors are not looking for businesses with a lot of questions that remain to be answered. They are looking to scale businesses based on solid proof points. Take the time to prove your unit economics! If you’re focused on the enterprise, show some solid clients and understand your sales cycles; if you’re consumer, know your acquisition channel and costs.
• Hire: Get your key team members in place.
• Do your homework on potential investors. This goes without saying, but I continue to see companies that spray and pray. With more seed companies seeking Series A financing, the companies that do their homework will differentiate, and more likely find compatible investors. This is especially true if you are a consumer business — the market has moved and many investors currently prefer business-to-business and enterprise investments, so find people who will invest in your space.

That said, on the whole I am very upbeat about the prospects for 2013, and wish you all a wonderful holiday season and a prosperous New Year!

Jon Soberg is a Managing Director at Blumberg Capital, where he invests in early stage companies, specializing in FinTech, SaaS, and eCommerce. Prior to joining Blumberg, Jon has been a serial entrepreneur and senior executive in multiple companies including Ditech, Broadband Digital Group and Adforce, which had a highly successful IPO.  

A CFA Charterholder and adjunct faculty in the Wharton Marketing Department, Jon earned a B.S in Engineering from Harvey Mudd College, an M.S. in Engineering from Northwestern University, and an MBA in Entrepreneurial Management and Marketing from the Wharton School, where he is a Palmer Scholar.

Compass image via Shutterstock

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Jeff Bussgang is a general partner at Flybridge Capital, and a senior lecturer at Harvard Business School. This post originally appeared on his blog.

A question I often get asked by entrepreneurs is what is Flybridge’s investment philosophy – do we make our investment decisions based on people or on themes?  The glib answer is both, but as I’ve thought more about this question I wanted to expand the answer a bit to help entrepreneurs understand how investors approach this issue in more detail.

I think this question has become more acute as the much-discussed shortage of Series A capital (the so-called “Series A Crunch”) means that, going forward, too many entrepreneurs are going to be chasing too little capital.

People-based investing is an age-old investment strategy.  Bet on the jockey, not the horse, as the saying goes.  Exceptional entrepreneurs will always find a way to make money, so the job of the investor is to spot the exceptional entrepreneur and convince them to take your money as opposed to worrying about strategic trends and dynamics.

People-based investors focus their due diligence process on spending both structured and unstructured time with the entrepreneur, as opposed to analyzing the product, business model or interviewing customers.  People-based investors can be quite analytical, although often times it is more instinctual.  When they are analytical, people-based investors conduct deep management team due diligence, psychological profiles and a broad set of team interviews.  When they are not, they simply listen to their intuition as to whether the entrepreneur is a “money maker” and trustworthy.

Personally, I think this is a flawed investment strategy.  Building a successful startup requires more than exceptional people, because even exceptional people can find themselves the victims of market forces, competitive pressures and faulty business models.  I have seen many exceptional people execute beautifully, hire well, achieve operational excellence, but still fail to build a massive business.  These entrepreneurs are like the well-trained surfers who sit, frustrated, on their surfboards on a calm day because they can’t catch the right wave to propel them to shore.

A theme-based investment strategy requires the investor to have market knowledge and a strategic point of view.  Theme-based investors go deep in a particular sector, develop a hypothesis, and then meet entrepreneurs to test this hypothesis.  They build market maps, attend conferences, hire EIRs (entrepreneurs in residence) and cluster their investments and networking around a particular sector.  By building expertise in a sector, theme-based investors develop insights about where the markets are moving and where the opportunities are for disruption.  They like to “see everything” in a space before investing in something so that they are assured that they have picked the absolute best way to play the theme they have identified.

And here’s where the magic happens – referring back to my glib answer regarding Flybridge’s “both” investment strategy – when a theme-based investor collides with an exceptional entrepreneur who shares the investor’s vision for a particular disruptive opportunity.  I have heard many entrepreneurs gush when describing these meetings.  “It was like he was giving my pitch for me!” effused one entrepreneur after a VC she was pitching took over the meeting with their own passionate observations about the market opportunity.

We experienced just such an opportunity as part of a new deal we are leading in New York City that my partner, David Aronoff, recently alluded to.  We have a thematic focus on cloud computing and the consumerization of the enterprise.  It is an extension of our developer-driven investment theme, that led to portfolio companies such as 10gen and Crashlytics.  When we intersected with an entrepreneur who had a similar theme and had developed an emerging leader in a space we liked, we jumped at the chance to lead the Series A, following on with some great angel investors.

As an entrepreneur, those are the situations you want to find.  Seek out “Investor-Entrepreneur” Fit.  Find that investor who believes in you as well as the market opportunity and has already been thinking proactively about it.  Watch what they blog about, what their investment history looks like, and what conferences they are attending.  If you can find this intersection of compelling themes and people, you won’t sweat the coming Series A crunch.

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Over the holidays, friends and family with a bit of extra cash might choose to invest their money in risky, albiet exciting, startups.

Given the meteoric success of Instagram, why not give in and fund that crazy brother-in-law with an idea for an iPhone app that just might work. All he’s asking for is $25,000 from a handful of investors to outsource the cost of a developer in India or Russia to build a prototype.

The barriers to entry when starting a tech company these days are low. It’s easier and cheaper than ever to get an idea off the ground, and you need little or no programming expertise. As a result, the number of startup ideas that receive seed funding from angel investors has exploded.

It’s all rosy until the entrepreneur decides it’s time to raise a first round in institutional funding, say $1.5 million or above. With increasing competition for a steady amount of available dollars, we’re hearing plenty of resounding “no’s” from Sand Hill Road. The press have labelled it a “Series A Crunch,” which sounds looming and suggests it’s only going to get worse.

To shed light on the reality of this trend, investment firm CBInsights produced a report analyzing 4,056 seed investments. The research indicates that 1,000 recently-funded seed companies will be orphaned, meaning they are unable to raise follow-on financing. The author refers to this as the “process of natural selection.” They also make the case that the eventual death of these startups is a good thing for the tech ecosystem — it will mean there is more available talent for startups that have raised venture capital rounds.

The explosion in seed funding will result in over $1 billion of investment into these companies being incinerated. However, this is to be expected, as seed investments are the riskiest bets an investor can make.

“With at least twice as many companies getting seed funding this year, it’s not surprising to me that there’s a crunch,” said Rob Coneybeer of Shasta Ventures, a Silicon Valley-based venture firm that views Series A as its sweet spot. In a phone interview, Coneybeer said he’s not taking more meetings than usual and inferred that many of these companies funded with dumb money aren’t solving particularly unique and challenging technology problems. “It hasn’t changed things for us because there are four times as many photo-sharing companies,” he said.

In a recent story about the big, dumb angel bubble, VentureBeat’s Jolie O’Dell argued that institutional investors are not to blame, and it’s not an indication that entrepreneurs are producing less deserving or less fundable startups. The problem is that easy “dumb” money from inexperienced investors, like friends, family, or former colleagues, often does more harm than good.

“Finding the right investor at the seed stage is critical,” said Jenn Wei of Blumberg Capital, a firm that specializes in early-stage startups. Untrained investors often lack connections and influence and haven’t done their homework. “We have seen an increase in the number of angel investors who do not do proper diligence, and oftentimes, those companies are under-funded,” said Wei.

Wei explained that most seed-funded startups receive about $200,000 or $500,000 from angels, which is not sufficient to carry the company to a complete functional product and obtain customers, the “milestones” that she typically looks for.

To avoid hitting a wall, entrepreneurs need to get smarter about fundraising. Entrepreneur Sameh Elamawy is currently in the process of fundraising for his Series A. He advises raising a larger seed round than expected. To get to a stage where you’re ready for a Series A investment, you may need to fund your developers and ramen-habit for well over a year. He also advises raising tiny consecutive seed rounds — $25,000 here and $50,000 there — rather than betting on a huge chunk of first-round financing.

As the power shifts to investors, CBInsights’ analysts predict that it will take longer for entrepreneurs to raise follow-on financing. Currently, it’s about 13 months, according to the report.

Above all, avoid taking “dumb” money; ideally, your angel investor is a prominent figure in Silicon Valley and is connected to a venture capital firm. “You want your seed investors working for you to make the next round happen,” said Elamawy. The report also found that seed deals in which VCs participate have a historically higher rate of getting follow-on financing compared to seed deals in which VCs are not participating.

The Series A Crunch is very real, but there’s nothing and no one to blame but simple economics. “The category is doing well, and this is the natural course of capitalism,” said Coneybeer.