Guess What? Startups Die, Regardless of a Series A Crunch - 1

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Guess What? Startups Die, Regardless of a Series A Crunch - 1
Last week, I turned a seemingly innocent column that I wrote for the N&O about a college kid making good with a startup into a piece published here at ExitEvent where I believe I may have poked a hole in the copycat startup bubble.

In that same evil-twin fashion, my N&O column yesterday was a well-received, almost feelgood piece about how the Series A Crunch won't impact the Triangle Startup Scene.

But here you'll get the darker side of the story. That article was really about the fact that startups die. It's all part of the circle of entrepreneurial life, whether there's a Crunch or not.

ExitEvent has been tracking all kinds of startups for a little over two years, and what makes us special (beyond the good looks and amazing vertical leap), is that we've been tracking these startups all the way from the idea stage to exit (thus, our fancy name). Yes, it's mostly in the Triangle, probably about 50%, but what better hotbed of the middle-of-the-road than here.

And you know what? About 1-2% of our tracked startups quietly disappear every month. Every month. I know this because I'm usually the one checking that sad little "inactive" checkbox on the profiles, and I only know to do this because we generate data that periodically tells us who's up and who's down, not because the founders ring me up. The unannounced demise of these startups comes about for various reasons, but mostly because they weren't in fact viable to begin with -- not because they couldn't raise Series A.

Of course, it goes without saying that you don't get Series A without being viable. So is there a Viability Crunch? Absolutely. But there's always been that, and no one ever writes about it.

The fear isn't that the Series A Crunch will cause whole lot of startups to fail, it's that it will cause a whole lot of startups to never get started.

To get from here to there, let's first take a look at the Crunch (and one of the reasons it's gotten so much play, I believe, is that it's so much fun to say "the Crunch" -- it's like talking about the Perfect Storm, no one really has to know what it is, but it makes you sound smarter than you actually are).

I guess the Crunch has been debated in the tech/startup press and blogosphere for about the last two months. I swear to God, no one knew the term six months ago, but people like me were already talking about the potential for there being too many startups at the idea/incubation stage with a) not enough runway and b) no real product from which to derive sweet, sustaining revenue.

The phenomenon was still a "bubble" when I wrote about the American Underground expansion back in November. One of the first questions I asked Adam Klein was along the lines of "Dude -- 100 more startups in downtown Durham? Is there support for that?" For the record, Klein is confident in that assumption being true, and he talked about overall startup growth here being influenced by expanding the "top of the funnel" -- so think of the Crunch as a kink further down that funnel.

My take on the Crunch, as outlined in the N&O, is that it has a sort of silver lining for the Triangle in that it has always been a nightmare trying to raise money here. We've got all of the right ingredients to produce prolific startups that can succeed at the Series A and Series B level, but when we have to raise money, we invariably end up getting most, if not all, from outside the state. And what's more is we've been doing this for 20 years, through the early Internet and the dot-com era.

So we're somewhat insulated from the Crunch by the fact that our expectations are already pretty low.

It's very Generation X, which is where most of our entrepreneurs are still firmly generationally entrenched anyway (another difference between us and the millennial boom in the established startup meccas). We've been shat on for so long that we expect it, and we already know how to deal with it. We've already made movies about dealing with it. They weren't blockbusters but they do OK on DVD.

Nationally, it's a different story. In Raleigh and Durham, there's a solid history of underserved startups. Everywhere else, you have two types of startup ecosystems:

1) Always-had-it places like Silicon Valley and New York where they've seen a grunge-era Seattle migration over the last two years.

2) Never-had-it places like Bozeman, Montana, where there are now just enough startups to start debating the concept of a startup community.

In these types of places, the Crunch is a hell of a lot scarier.

In Silicon Valey, they're not quite ready to admit they have a problem. Venture Capital tracking firm CB Insights claims it's just a supply and demand issue. Well-known serial entrepreneur Jason Calacanis called the whole thing a myth. And PandoDaily's Sarah Lacy, who spoke at Internet Summit in Raleigh in November, went from on-the-fence to convinced in December.

But in SV and places like it where carnage can be expected, the Crunch might be almost welcomed, if just to thin out the herd before the dollars get any crazier. Startups fail, that's part of the high-risk/high-return process. The problem comes about when startups fail and drag massive investments at crazy valuations down with them. Silicon Valley and New York don't fear a Series A Crunch so much as a long-term bear run in the public markets. Then you get high-risk/no-return.

In the other places, those sections of the country where a coffee shop is still the entrepreneurial community center, well, they don't have much to fear in the short term. A startup community, by definition, should look completely different from place to place. What works in SV doesn't even matter in Bozeman. Frankly, long story short, there's no Series A to dry up.

But what that leads to is the migration of talent out of those cities and into the meccas. Startups will try to make a go of it in Bozeman as long as there's the possibility that they may be able to take their business to the next level without leaving Montana. If the door slams shut on that option, then the talented entrepreneurs are all but forced to move to where the money is. You get a brain drain, and the dream eventually dies for that town.

This is what we were debating in Raleigh/Durham five years ago, before the sense of sustainability really sunk in.

And that's the true fear about the Series A Crunch. Startups die all the time, and it's not only natural, it's necessary. A persistent Series A Crunch would result in startups never getting started in places where the money and the talent isn't already entrenched. That could lead to a herd mentality piling into a smaller number of Silicon Valley startups, which leads to a bubble.

Then we're right back where we were ten years ago.