A lot has been written in recent weeks about the Series A crunch in venture capital. For the uninitiated, the Series A crunch is the widening gap between the number of angel/seed financings (growing) and the number of Series A financings, the second round of fundraising start-ups typically raise (not growing). According to Pitchbook, in 2008, the ratio of seed financings to Series A financings was 1.9:1. In 2012, that ratio stood at 3.3:1.
There are a host of reasons postulated for the widening gap, including a denominator effect: larger VC fund sizes make Series A less appealing, as firms need to put bigger checks to work (not necessarily a decline in Series A funding, just not keeping up with growth of Seed financings); numerator effect: there has been a swell in “angels” over the past few years with the popular success of incubators and demo days; and the cyclical explanation: angels/seed financiers made poor investment decisions, now the reigns are tightening as companies cannot prove their business models.
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