Analysis: Too many start-ups chase too little cash

Sun Oct 30, 2011 8:12am EDT
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By Sarah McBride

SAN FRANCISCO (Reuters) - Venture capitalist Bill Gurley has noticed something new this autumn: a big jump in the number of what he calls "legitimate introductions" that he receives each day to entrepreneurs who hope he might invest in their start-up companies.

The money-seekers are companies that have benefited from a tidal wave of early-stage investing in start-ups and who now need funding from mainline VC firm's such as Gurley's Benchmark Capital to take them to the next level. But many companies, even some that have done fairly well in their initial phase, are finding it increasingly difficult to raise the next round of cash.

So far this year, some 859 companies have raised an initial round totaling $3.9 billion, according to data from the National Venture Capital Association and ThomsonReuters. That compares with 777 companies raising $3.5 billion this time last year and 523 companies raising $2.3 billion in the first nine months of 2009.

The plethora of early stage companies is a result of the comparatively low cost of bringing new technology products in the age of dirt-cheap software and data storage and massive social-marketing engines such as Facebook. A growing legion of wealthy "angel investors," many of whom made their money in the last boom, has contributed to the start-up boom too.

But it can still cost a lot of money to get a company from proof-of-concept to maturity and that's exactly where start-ups are running into trouble.

Every year sees some start-ups that don't make it to that next round. But this year, the situation is particularly bad, entrepreneurs and their potential backers say, simply because there are so many more young companies. And next year they expect it to get worse.

Of course, the hottest companies are having no trouble winning new rounds of funding. Cloud-based storage company Dropbox raised $250 million earlier this month in its third round of capital from companies including Benchmark.

Instead, the crunch is hitting the hundreds of fledgling companies that most people have never heard of.   Continued...