Thinning out seedling companies

The size of the rise in the burgeoning Startup Seeding and Incubation industry (lets not call it a bubble) is well explained in the above waterfall chart (courtest CBInsight, as seen on TechCrunch) of the US funding market. The evolution of the problem is that, since 2009 when startup companies getting seed funding in the US, and companies getting the next stage, Series A funding were both at about 100 per quarter.

(Seed funding is in the tens to a few hundreds of thousand dollars range, Series A typically in the low millions of dollars range)

Roll forward to mid 2012 and it was about 500 startups seeded per quarter, compared to only c 200 Series A rounds, a 5-fold rise in seedings vs a 2 - fold rise in Series A funding. By Q4 2012 it had droppped to c 350 Seedings to c130 series A - if not the sound of a bubble deflating rapidly, certainly one of animal spirits evaporating.

The downside will be the culling of a 1000+ only recently seeded startups - the red bar in the waterfall above (thinning out seedlings, I believe gardeners call it). Some believe this adds up to a writeoff of up to $1bn but that seems to be a high estimate, I'd suspect its more like about half that (a quick calculation will tell you that 1000 startups funded at way less than $1m each will not reach $1bn of losses). Now, seed funders may do some form of additional funding rescues, but that is by and large not in their business models (and not always in their piggy banks either) so one suspects it will be unlikely. Now this is US specific, but you can bet that a similar story will soon start to play in Europe, though I'm not sure that the startup bubble was quite as frothy here (in dollar terms,that is - in hype terms its cup ranneth over).

The ubiquitous Startup industry drinkups will thus probably shift from living it up to drowning sorrows in 2013.

As usual, at the peak of a bub....sorry, exuberant financing phase, there is always some method that gets invented to allow more and more people to put in smaller and smaller amounts of money, hence the move by AngelList and SecondMarket to open a service for investments of as low as $1000. (Actually, I think more being able to trade shares in startups will be a useful thing, but the timing is unfortunate)

The good news, also as always, is for those who get funded just before the gates snapped shut, as they know that they won't have to look over their shoulders for other startups on their tail for some time, and people ahead of them with less cash left probably won't get more either - and last man standing is always a good place to be. Now they probably will raise a glass or two of bubbly next year....

Update - thoughts from Broadsight's Andy Wise:

- Surprising statistic that “startup companies getting seed funding in the US, and companies getting the next stage, Series A funding were both at about 100 per quarter”. Suggests that the natural process of thinning out was happening before the seed funding stage. No other similar process has a 1 to 1 ratio – it’s far more usual to back 10 horses for every winner. (My comment - I think that's the seeding bubble effect)

- It would also be interesting to know what happens to those that don’t go on to Series A funding – what percentage fold with a zero return to the investors and what percentage stumble on with organic growth or get bought out or in some other way eventually return something to the investors. (My comment - in my day the rule was for every 1 hit, there were 3 trade sales, 3 "zombies" and 3 deadpools. I suspect the deadpool ratio has rocketed, looking at these numbers)