Series B is for Suckers

2011 saw a modest recovery, as venture capital firms raised $18.2 billion from their limited partners – up from $13.8 billion the year before.  However, most of the money was raised by established funds with very few new entrants and a number of VC’s morphing into the Walking Dead. While these are clear signs of the long-anticipated industry consolidation, the impact for emerging companies seeking capital is more complicated.

The emergence of Super Angels and Seed stage funds (which we have often addressed in these newsletters) has increased the competition for very early deals – but also lowered the amount invested (due to technological and other efficiencies, investment stages earlier in a company’s lifecycle, and increased demand of entrepreneurial companies).  At the other end of the spectrum are a few established firms with ever-larger funds, who are lowering risk and moving to more growth-stage deals. The result, as this post makes clear, is a funnel on each side that narrows at the Series B round.

Seed investor (and former traditional VC) Rob Go even calls a Series B the Sucker Round.  As he puts it:

“In the seed and series A, you are selling promise and some execution.  In growth rounds, you are selling something that already “works”.  You are selling a marketing machine, and the ability to “put in 1 dollar and get out 2″.  In between, you are selling a hybrid of both, and that isn’t easy.”

Execution – particularly at the early stages — is boring. Concept is sexy; scaling is a thrill.  The tension between abstract opportunity and tangible execution depends a lot on where one’s attention is primarily focused.  Boring maybe, but impossible to live without.