"A-Round Crunch" isn't a funky new ice cream flavor. But it is giving plenty of entrepreneurs an upset stomach, and experts warn it could stymie innovation in Silicon Valley's long-booming startup community.



"A huge number of startups are going to run out of money" in 2013, said Peter Relan, who runs a Burlingame incubator for mobile and gaming startups called YouWeb.

CB Insights, a New York firm that analyzes investment trends in private companies, just released a report predicting that 1,000 startups will be orphaned in the next 18 months -- the bulk of them in California.

Anand Sanwal, the firm's CEO, calls his prediction "simple math," noting that while the number of startups landing "seed" deals of $1.5 million or less spiked to 4,000 in the past three years, the number that have gone on to raise Series A rounds of $3 million to $5 million has remained a fraction of that.


Venture capitalist Duncan Davidson, who's been warning of the A-round crunch for several years, said that while the fallout isn't likely to throw huge numbers of people out of work in Silicon Valley, given how thinly most startups are staffed, innovation will suffer if burned investors stop funding new companies.

"You don't know what ideas that could become big companies could just fall through the cracks," Davidson said.

Another tech investor, Paul Santinelli of North Bridge Venture Partners, said the cratering number of startups also will tamp down wages in the valley's tech community, creating a ripple effect on local retailers and restaurateurs.


"Companies that assume the next round after seed is a $5 million 'A round' are poorly positioned," Ravikant said. But because it costs less to grow a tech company than in years past, thanks in part to the ability to "lease" rather than build key infrastructure like data centers, Ravikant said the traditional boundaries of seed and A rounds are shrinking.


But Davidson and Santinelli both say the problem is worse than people realize -- and that what's looming isn't a crunch, but a cliff.



"If you do the math, there's only something like 97 venture funds that have invested more than $1 million in each of the last four quarters," Davidson said. "Yet people think there still hundreds of funds that are actively investing."









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