Increasing Series A financing risk for software/Web startups

 
There is an angel bubble. There isn't an angel bubble. It doesn't so much matter to startups per se. What matters is the effect of the changing angel dynamics on startups. 

More startups are forming and more are getting initial funding, which increases their average life-span. Both of these factors increase the amount of startups out there at any given time.

At the same time, the VC industry is probably shrinking and also probably starting to invest less in software/Web. Even if those things were not true, the # of deals in software/Web are not increasing at nearly the same rate as the increase in startups mentioned above.

This means that while startups can get angel rounds done easier, they're going to find it harder and harder to close their first bigger round. It's simply a numbers game. 

Therefore, at the moment I see an increasing Series A financing risk for software/Web startups getting started today. It could go away if somehow VCs start doing a lot more of these financings, but I don't see any signs of that yet from anywhere or anyone.

So where does that leave you, new startup? I think you have essentially two choices.

Choice #1: go big or go home. Raise a big angel round, prove all your assumptions, find a traction vertical (customer acquisition channel) that you can pour money into, and then make it a no-brainier to get a big round of financing from a VC. 

It's a high-flying strategy. If you fail, you're done.

Choice #2: focus on profitability from the get-go. Raise an angel round required to get you to break even with a plan to do so. Move slower, but methodically. The money should stretch, but at the end of it you've beaten the financing risk because you don't strictly need another round.

Of course, you may end up at the same point as the first strategy, where you found a channel to pour money into, and you end up raising VC to do so. You won't be forced to though.

On the face of it, these choices seem like they could be one in the same. In both cases, you're of course looking for traction. The difference is two-fold.

First, different types of startup ideas will generally fall into the different buckets. The go big strategy is all about building $100M+ companies that are by definition interesting to VCs. You (generally) need to raise big angel rounds to prove those assumptions. These are often empire plays.

The other strategy is more like $20-50M ideas that may not ever be that interesting to VCs. You may end up with a nice bank loan though to fuel growth. You could always come out with other product lines, etc., but on the face of it, we're talking about smaller opportunities. Note, however, that smaller opportunities does not necessarily translate into smaller pay-days.

Second, you're going to spend money differently. In the go big strategy, you're hiring right away, you're spending on building platforms and other big stuff like that. Profitability is not in your vocabulary. In the other strategy you're generally tinkering with processes and business models from the get-go to get you to profitability.

As an angel investor, I'm all about the latter strategy, unlike most of my peers (exception: hacker angels). I'm looking for investments where the financing risk is inherently diminished because of the type of startup and its strategy.

 

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I'm the Founder & CEO of DuckDuckGo, the search engine that doesn't track you. I'm also the co-author of Traction, the book that helps you get customer growth. More about me.