Silicon Valley Asks: What Cash Crunch?

A Wall Street Journal report has riled those used to the easy financing for startups

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The tech bubble is on its way out. "Amid a glut of Web start-ups, some strains are starting to show," writes The Wall Street Journal's Pui Wing Tam, opening a piece on the "cash crunch" happening in Silicon Valley. His thesis: Too many startups, not enough money. "But as the number of tiny Web companies riding the frenzy has mushroomed, some in recent weeks have found it tough to procure new funding," reports Tam. But some in Silicon Valley are offended by the notion that the spigot of investor cash is closing off.

"I definitely don't agree with the article. Valuations are still high and I haven't seen evidence of cash crunch," tweeted venture capitalist Chris Sacca, who has invested in Twitter, Uber, Instagram, and "Plenty of stellar startups raising seed financing between 4mm & 6mm pre-money," Bay Area entrepreneur Josh Felser added in a tweet.

It's not like Tam didn't do his homework. "The average valuations of young companies have dropped recently to $3 million to $5 million, from $6 million to $8 million earlier this year," Naval Ravikant, a Silicon Valley entrepreneur and investor who runs AngelList, a website where young companies can apply to seek "angel" or "seed" money told Tam. As valuations drop, more start-ups pop up and the money pool shrinks. He pulls numbers from VentureScore to support this trend, citing rising start-up numbers with falling investments.

But Silicon Valley won't have it. V.C. firms can explain what's really going on. Fred Wilson insists everything is just fine.

So, is there a "cash crunch" for web startups? Not that we are seeing. Our portfolio companies have all been able to finance themselves when they have wanted to. And we have made more investments this year than any year we've been in business (maybe 10-20% more, not 2x more).

Well, sort of. "But I do believe we are in for a bit of a reality check. We've had quite a run here and all big runs are followed by pullbacks," he continues. Money everywhere is running out, so, like, it's not that bad, Wilson writes. "The public markets for stocks and bonds has been relatively weak all year and that has to have some impact. It is likely that we will see more startups having trouble going from the seed round to the A round, or from the A round to the B round." That sounds kind of like an impending cash crunch, no?

But even if there is some pullback, others say it's really a good sign. Venture capitalist Bryce Roberts seconds that sentiment. He sees the same trend as Tam, but he explains, "This steep increase in number of companies angel/seed funded, paired with fewer and fewer active investors up stream is creating a scenario akin to a pig passing through a python." He adds, "As the time, attention and capital becomes more scarce upstream the number of companies who will attract follow on capital will continue to decrease. But he says it "isn't necessarily a bad thing," even though he ends with this foreboding metaphor: "My purpose in pointing this out is not to play chicken little or create artificial fear, it’s simply to highlight the phase of the cycle we’re in. The pig is passing through the python- the pig is growing by the day and the python is shrinking. Follow on capital will become less and less available over the coming quarters so validate, derisk and plan accordingly."

What happens when the pig gets too big for the python, does it burst or simply go to sleep?

This article is from the archive of our partner The Wire.