At the beginning of August, Betabeat began talking about a coming crunch for seed stage companies in New York. We believe that the bubble in early stage financing had peaked, and that in the coming months, many young startups would find it hard to raise follow-on cash.
At the time, local investors like Chris Dixon and Shai Goldman argued that this wasn’t some dire turn of events, but simply the natural cycle of venture capital funding playing out. But the drumbeat of seed stage slaughter now seems to have made its way to the mainstream press.
The Wall Street Journal ran a story yesterday, “Web Startups Hit Cash Crunch,” which claimed that valuations for these early stage companies had fallen by as much as half in recent months and the venture capital funding was at an all time low. AngelList’s Naval Ravikant said that startup financing is getting weaker by the week and that the survival rate for young companies is dropping fast.
But new data from CB Insights, a venture capital database here in New York, disputes that outlook. Their quarterly report shows a record number of seed stage deals over the last quarter and a steady growth in overall venture deal flow and funding since 2009.
As Fred Wilson says: ”So, is there a ‘cash crunch’ for web startups? Not that we are seeing. Our portfolio companies have all been able to finance themselves when they have wanted to. And we have made more investments this year than any year we’ve been in business (maybe 10-20% more, not 2x more).”
The Journal seems to be trying a little too hard to make their case. At one point the story declares, “Between Jan. 1, 2009, and late last month, U.S. venture-capital firms raised $39.2 billion, down 76% from the $162.5 billion that was raised between Jan. 1, 1998, and Dec. 21, 2000, according to VentureSource.”
The fact that venture funding is at much saner levels now than it was during the dot-com boom is a good thing. Nobody in the industry wants to see a repeat of the crash that followed those heady times. Saying we’re in a cash crunch now because the number don’t stack up to the 90s is like bemoaning the absence of Bernie Madoffs among today’s money managers.
What is happening now is the inevitable outcome of the early stage funding boom of the last few years. A lot of young companies are experiencing flat-to-down rounds, which is why valuations seem to be returning to a sane level. And the Cambrian explosion of mobile, local and social startups is being culled a bit. A number of older VC funds are struggling, meaning the amount of new funding being raised may drop off.
But the amount of money being invested, the number of deals being done and the flood of young entrepreneurs eager to get into the game has not slowed at all. And that’s a very good thing.
P.S.–Be sure to check out CB Insights’ data, which notes that New York is now far and away the no. 2 spot for tech venture after the Valley, pulling farther ahead of Boston in several categories.