There’s a silent but intense winnowing happening right now in venture capital. As the WSJ reported here, many start-ups are having a hard time raising follow-on financing:
Just under half of the 165 companies in the consumer information services sector that raised first rounds in 2010 have raised a subsequent equity round and fewer than one-quarter of those who raised a first round last year have done so.
Specifically, the funding of Internet Consumer and mobile companies is down 42%. That’s because, while seed rounds are happening, the dollars going to follow-on financing rounds are way down. This is a topic about which I co-hosted a panel at the recent MassTLC unConference: seed rounds are easy, but how do you get sustainable financing from the VC community?
“Sector rotation” happens often among start-ups. A sector becomes “hot,” but it eventually cools down. We’re seeing that right now in the Internet Consumer space.
IMO, I think the winners will be the companies able to find a space with few substitutes. In other words, a unique value proposition. Whether cycles ebb and flow, success always comes down to the same thing: you create real value for a customer.