27 Oct Why CAV Angels Invests in the “Valley of Death” Funding Gap
Education for both entrepreneurs and investors is one of our many activities at CAV Angels, and as such, multiple first-time and potential entrepreneurs from UVA have asked me “do entrepreneurs and investors really use all of this crazy jargon or is someone just playing a joke on me?!” While I don’t know if jokes are being played, reality is that the world of early stage investing really does use colorful wording to describe different situations. A few common examples are-
- A company’s “burn rate” is how much cash a company spends in excess of the cash it brings in each month
- An investor can get “crammed down” if the company doesn’t perform well
- A “unicorn” is a company worth over $1 billion
Many more examples of such language exist, but the terms “Series A Crunch” and “Valley of Death” refer to a phenomenon that many entrepreneurs become acutely aware of and know is not a joke. This phrasing will certainly catch your eye and for good reason: all too often, the Series A Crunch can prove to be the young company’s undoing.
Although specific definitions and opinions can vary, the Series A Crunch essentially refers to the difficulty entrepreneurs face when trying to raise the second major round of investment in their company. Usually, the first major round is called the “Seed” round; the second is usually called the “Series A”; the third is usually called the “Series B”; etc.
Each situation is unique, but to speak broadly, difficulty arises because entrepreneurs can often raise a relatively-small Seed round among investors or groups in their local area, but they need to survive long enough to attract Venture Capitalists, who prefer to invest relatively-large amounts in Series B rounds.
However, the medium-sized Series A round can prove to be difficult because many Venture Capitalists see the round as too small (and the company too young) to get involved, but it can also be tough for local and regional investors to raise the entire amount; thus, a funding gap exists for such medium-sized rounds. Again, there are many exceptions to the above, but generally speaking, this phenomenon is known as the Series A Crunch.
At CAV Angels, we believe this funding gap presents a great need for budding, early stage companies and also a great opportunity for our investors to step in and add value to UVA led companies. Thus, we typically target companies that have already raised some investment (i.e. a Seed round) and can show some market traction (i.e. converting that Seed round investment into results). We also have a strong network of other investment groups with whom we can “syndicate” (i.e. invite to co-invest in), giving entrepreneurs a warm introduction to other potential sources of investment.
This is not to say, however, that we only talk to companies fitting this profile; quite the opposite in fact. We have many conversations with entrepreneurs whose companies are just getting started and are often going through their first capital raise. Rather than simply tell them to come back later, we spend time talking with them about their pitch strategy and messaging, what capital sources they plan to pitch, other potential sources of funds, and many other topics. Value can be added for young companies in far more ways than simply dollars invested, and we try to provide some value for all entrepreneurs with which we speak.
Angel investing education is an important part of our mission because we want to empower less experienced and first-time angels to confidently step into early stage investing and start making a difference. So if you have any feedback or ideas about topics we can discuss, absolutely let us know by sending an email to firstname.lastname@example.org
We look forward to boosting UVA’s entrepreneurial ecosystem with you!