It's Time to Tackle the Series A Funding Gap

03/19/2015 10:02 am ET | Updated May 17, 2015


For entrepreneurs, there are few tasks more important than raising the capital they need to keep the doors open as they continue their long march toward a profitable venture.

A recent article from Josh Kopelman at First Round Review provides a treasure trove of tips and information on raising this kind of capital, especially in Silicon Valley.

What really stood out to me about Kopelman's article was his sharp assessment of the statistical barbelling currently dominating the world of venture capital and the resulting "Series A gap," which is creating a whole new set of challenges for entrepreneurs and entrepreneurial ecosystems across the U.S.

The Gap Explained

According to First Round Review, the number of seed-funded companies has quadrupled nationwide over the last four years. Of course those national statistics are skewed heavily by Silicon Valley, which still dwarfs the rest of the country in terms of total deals and total dollars. Still, we've seen a similar statistical trend here in Northeast Ohio, where both the number of seed-stage companies receiving investment and the total number of seed-stage deals has increased significantly over the last decade.

A real downside to the growth of seed stage funding is that we have not seen a corresponding rise in early-stage (Series A) funding options. In fact, it's been the opposite. Many investors who once focused on early-stage deals are either moving down-market into the seed stage or up-market to the growth stage. Meanwhile, the middle market for VC monies is shrinking.

Plotted out on a graph, this creates a kind of statistical barbell. There are lots of seed stage options at one end, and on the other end lots of opportunity for big wins at the growth stage - but in between there is a growing gap.

What This Means For Entrepreneurs

First, the good news - it's easier than ever for an entrepreneur to get started. Costs of entry have fallen while seed-stage funding options have multiplied. Once, not long ago, there were less than a dozen major business accelerators in the U.S. Today there are hundreds, not to mention new crowdfunding and Micro-VC options.

These seed-stage opportunities are unquestionably a good thing for entrepreneurs. However, they have also created even more competition during Series A fundraising rounds, where the dollar amounts rise and the opportunities have not increased to match the demand. Naturally, these conditions make it harder for young ventures to successfully raise early-stage Series A dollars.

"If you have 4x the number of companies with seed funding, that's 4x the players competing for the same money," explains Kopelman in his article. "(This makes) it 4x harder to raise an A round than it was five years ago."

And if it's hard to raise an A round in San Francisco, you can imagine how difficult it can be in other regions, where there are far fewer sources of all capital, including Series A.

What This Means For Job Creators

Away from the coasts, entrepreneurs often face more difficulty raising capital. That's why economic development organizations have spent so much time and effort over the last decade working to build ecosystems that give startup ventures a fighting chance to get off the ground.

In Ohio, we have benefited greatly from one of the most forward-thinking private-public partnerships on the planet, the Ohio Third Frontier (OTF). Together with ecosystem partners from all across the state, the OTF has focused on providing critical seed-stage capital and crucial technical assistance to startups in their infancy.

By most accounts, these efforts have been a resounding success. In Northeast Ohio, our ecosystem is stronger than it has been in a very long time. Homegrown Ohio ventures are routinely making national news for their exciting deals and venture capitalists are now making comparisons between our state today and Silicon Valley in 1975.

However, we also know that it takes time for young seed-stage startups to morph into the kinds of revenue-positive "Series A" companies that grow and hire aggressively. Unfortunately, the lack of Series A capital is a direct threat to these companies, who are facing funding difficulties at the precise moment they are poised to deliver on their promise of job-creation and increased economic impact.

What a shame it would be to have dedicated so much time and so many resources to build up our entrepreneurial ecosystems, only to falter because we failed to adjust our strategies as those ecosystems evolve.

This is precisely what we must work to avoid.

The Future of Economic Development

Any veteran of this work will tell you that "success" is not measured across months, years or even a decade - success is measured over generations. When you're running that kind of economic development marathon, staying on course requires a lot of course correction and creativity. Incubators, accelerators, venture development organizations - all have been crucial to rebuilding and developing entrepreneurial ecosystems in Ohio and across the U.S. - but new problems and challenges have a way of emerging just as the original problems are "solved."

Today, our entrepreneurial ecosystems in Ohio are dramatically more developed than they were ten years ago - and we celebrate this fact, but that does not mean all of our challenges are solved. The next major challenge for startups, tech entrepreneurs and economic development professionals is to find new and innovative ways to address this Series A gap.

At JumpStart, we have many ideas and we are lucky to have such strong partners in this work, including the Ohio Third Frontier. Only by working together and leveraging all of our collective knowledge and resources will communities be able to successfully meet this challenge.