With the Series A Crunch, Product Market Fit Is the New Black

With the Series A Crunch, Product Market Fit Is the New Black

Marc Michel spoke at one of our recent investor breakfasts. Marc is founder and Managing Director of Runway Ventures.

In this case, runway has nothing to do with fashion.

Au contraire, Runway invests in post product-market fit SaaS and software-enabled businesses, and refer to themselves as late-stage seed investors, aka mini-A, or that ‘runway’ between the seed and A rounds.

A Bit of History

In 2008, Michel founded Metamorphic Ventures – one of the early, and at that point, one of the few seed funds in NYC. With 140+ angel groups around today, “you can’t walk down Fifth Avenue without finding seed funding,” said the investor.

This is not an advert for Runway Ventures. This is a wake-up call to startups that haven’t yet noticed that the sands have shifted and the bar has been raised between seed and A investments, and it has become more difficult to get to that A round.

So, What Happened?

“The reason for that is Series A funds, which were, say, $150M-$300M had this bull run and great outcomes. What happens when funds have great outcomes? LPs shovel money into the funds. So funds that were $150M-$300M are now $750M-$1B. They don’t write more checks because they’re bigger. They just write bigger checks.”

We’ve known this for a while now, and good to know that there are investors who are addressing the problem, and hopefully others besides Runway are looking at the issue, as Michel seemed to have been ahead of the curve with Metamorphic. Without this ‘bridge’ infusion, according to Michel, we’re “going to have a bunch of failed deals that shouldn’t have failed.”

What’s missing now – which is Runway’s focus – are funds that provide that ‘runway’ when the company is at that point where the product has to fit into the marketplace properly in order to get to the point where they now need that growth, or Series A, round.

What’s a Founder to Do?

Outside investment isn’t always the answer, nor is it as readily available for follow on. So what’s a founder to do? Building a sales channel and/or white labeling parts of your technology, of course. Vanessa Kruze offered some suggestions as to What are some hacks for reducing your burn rate if you are a startup? “Every startup spends >80% of their money on 3 things: Payroll, Rent and Contractors,” she wrote.

Here are some suggestions: as to the rent, with real estate prices for both office space and housing becoming prohibitively expensive in the tech hubs, including NY, SF and LA, Contrary to media hype, tech firms and young workers aren’t flocking to “superstar” cities. Which means that people are being trained in those tech outlier and you might want to consider insourcing rather than outsourcing consulting talent. Outsourcing may seem cheaper, but can sometimes prove to be much more expensive in the long run. Times and tech talent locations have changed. Time to take a hard look at the budget, not just the payroll, and how far that money will actually get you in the production cycle.

It’s difficult enough when it seems that everyone and his or her first cousin once removed has a startup idea, but the bar was just raised. But that’s tech. Product market fit is the new black. Think of it as the new sustainability. Much better mindset, if you plan on building a business. And since it seems that someone is always moving the cheese, time to think outside of the mousetrap.Onward and forward.

 

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