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December 20, 2012

Tech startups are about to start dropping like flies

By Will Oremus Slate.com

One thousand startups will be orphaned; many will die. One billion dollars will have gone for naught. Bright young minds across the country will be out of work.

This isn't a Mayan prophecy. It's the conclusion of a new report on what's being called the "Series A crunch," an impending Darwinian shakeout that is expected to reshape the technology industry in 2013.

The report, from the venture-capital tracking firm CB Insights, corroborates what industry insiders and pundits have been predicting and fearing for months. A recent boom in seed funding for tech startups, particularly those in the Internet and mobile apps sectors, is going to result in disappointment for a lot of would-be world-changers.

The crux of the crunch is that the flood of seed funding — the money that angel investors give to entrepreneurs to help them get an idea off the ground — has not translated to an increase in "Series A" investment rounds from venture-capital firms, which can help turn a promising startup into a real company.

Those that get seed funding but do not find Series A money are said to have been orphaned. The hardiest will find a way to survive on their own. The rest will perish, taking a total of more than $1 billion in seed financing down with them, by CB Insights' estimate.

But here's the kicker: That might be a good thing. After all, the people of the world only need so many options for sharing photos, managing their personal budgets, or splitting a check after a dinner out with friends.

Of the startups that will fail, many provide services that are nifty but not essential. Some aren't even that nifty. Meanwhile, bona fide, fast-growing tech companies around the country are starving for engineering, coding and design talent. They'll quickly snap up the best founders and employees from the ventures that turn belly-up.

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