Fund Em’? I Barely Know Em’!

Reap what you sow

Betabeat has been writing about the crunch for seed stage startups looking to raise series A since August of this year. The debate over this trend is now in full flower, with VCs divided over whether or not there is a reckoning in the works.

Regardless of what position you take on the series A situation, it’s clear that 2010 saw a surge in seed stage investments. Pulling data from crunch base, Alexia Tsotsis found seed investments grew substantially while A rounds stayed flat.

As Josh Koppelman of First Round Capital writes on his blog today, this is reflected in the amount of time his firm spent evaluating new deals before deciding to invest. Over the last four years, the amount of time it took for a First Round deal to go from “inbox to investment” shrank by a staggering 50 percent.

Mr. Koppelman agrees with Chris Dixon that this is a bad thing, since it means they know less about the companies going in. And this more shotgun approach changes the outcome when it is time to raise a series A.

“Increasingly we are seeing startups who had their seed stage round done by one or more name brand VCs instead of only angels,” said David Pakman of Venrock, chatting with Betabeat by phone. “When they come to us looking to raise a series A the first question we always want to know is, why is that VC not leading this round? When they don’t, which happens for companies without overwhelming traction, that is an obvious red flag.””

The growth of incubators like YC and TechStars, which now offer sizable investment upon entry to the program, means a lot more young companies find their way to seed funding. The same goes for services like Angel List, which aggregate and accelerate early stage funding. But so far there is no finishing school or supplementary service to help companies make the big jump to series A. Fund Em’? I Barely Know Em’!