Getting to "yes" in a world of "no"…

“Series A, R.I.P.”…?

Doubtless VCs will find some way to disagree (please leave your comments below, I really don’t mind), but I believe that fast growth startupsyou know, the kind VCs are so desperate to get a slice of – should now avoid Series A completely. The Big Things that are So Very Wrong with Series A…

  1. VCs get preference shares, i.e. where everyone who was in before takes a big hit and comes second in any future liquidity event
  2. The process takes so long and costs so much (legals, due diligence, etc) that it has to be for an obscene amount to be worthwhile.
  3. VC funding is hugely expensive, with service charges and top-table directors’ fees to add to your monthly cash outgoings

…have long been believed to be balanced by the sheer weight of the money pile. If your only exposure to business was TechCrunch, you’d be certain that a Series A round sounds like the company has hit a key growth / credibility milestone. But… I think the world has changed so much over recent years that Series A is (almost by definition) redundant. I’ll show you what Wikipedia says about Series A and I think you’ll see why:-

“A typical Series A round is in the range of $2 million to $10 million and is intended to capitalize a company for 6 months to 2 years as it develops its products, performs initial marketing and branding, hires its initial employees, and otherwise undertakes early stage business operations.”

Hence even at the slow end of this model, such startups are looking for (say) $4m to last them 24 months of early stage operations, i.e. burning $167K per month. Circa 2010, the problem with this is that in all but a few cases, product development & customer development are just not that expensive any more.

So on the one hand, thanks to trailblazers such as Steve Blank and Eric Ries, lots of dev people are busy building and bouncing stuff off their customers, pivoting fast to try to fail fast, and persisting down their long-term road to product/market fit nirvana. After all, everyone makes mistakes, but there’s a technical name for people who keep on learning from their mistakes: winners.

While on the other hand, you have an entire VC industry (regardless of whether or not you happen to think it’s moribund etc) dangling big valuations and multi-zero cheques in front of startup execs’ eyes to convince them to build big, go big, stay big: their model of winning is to use money to build a market fortress at speed and get to #1 (or maybe #2 behind Microsoft, if it’s a big enough market and MS is in an acquisitive mood).

So… how can ‘win through learning’ and ‘win through sheer size’ ever be properly reconciled with each other? Personally, I don’t think they can.

I suspect that the new growth path will come from startups building a financial firewall around their IP (specifically their patents) and securitizing it about 18-24 months after their seed round – basically, leveraging a non-VC debt round against market-proven IP. OK, it’s completely true that hardly any Euro bank securitizes intellectual property at the moment: but then again, hardly anybody does IPOs any more either – and both of these are probably just fashions that will change before very long.

Here in Europe, the other big funding angle to watch is what the European Investment Bank is doing, because it is one of those institutions with an awfully big pot of money and a long strategic reach that will probably never scale down to seed level… but mezzanine-level support from it may well be possible.

Finally: here in the UK, unless Vince Cable can quickly devise a way of bribing encouraging more angels to write more (and larger) cheques, there currently seems to be too few active angels to support any substantial UK startup scene (whether seed or early-stage), even with EIS relief (for both downside and upside), and even with Wired going ra-ra-ra about the sector in the current issue. Oh well!


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