The looming Series B funding crash

Much is being made lately of a new bubble potentially forming in the tech industry. A smattering of handsomely funded startups are often cited as exhibit A of today’s supposed bubble — evidence that irrational exuberance exists and is rapidly growing.

But at least one Silicon Valley insider says things aren’t quite as frothy as they’re being made out to be. According to John Lee, a director at Silicon Valley Bank’s entrepreneur services group, there may be a lot of seed money out there for early stage companies right now, but even today’s best startups may not be able to get the money they need in a year or two.

The increase in seed and angel investors has been well-documented in Silicon Valley, but sizable venture capital firms have been on a steady decline for years. Some legitimate companies that have received angel and seed funding may find themselves unable to secure more substantial second round capital down the line, Lee told me in an interview on the sidelines of the Structure 2011 conference last month. (A video of our chat is embedded below.)

Overall, he said, all the current talk about a bubble is a bit overblown at the moment — in fact, pretty soon companies may find that there isn’t enough funding to go around. “You’re seeing a lot of seed and small Series A fundings, but you know, in about a year or 18 months [these startups] have got to go out for Series B. And we’ve seen a steady decline in the number of active VCs over the last few years,” Lee said. “I think one question is going to be: What happens when all these companies go out for the next round of funding? Is that going to be there?”

Lee acknowledged, however, that a number of startups have always been weeded out during the transition from Series A to Series B. It’s just that now, some legitimate companies may find themselves unable to find more deep pocketed investors for the next stage of their growth. “There’s always sort of a natural attrition. There is always a much larger number of Series A companies [compared to] Series B. That’s part of the cycle,” Lee said. “But it might be, perhaps, a bit more concentrated this time.”

Here is my interview with Silicon Valley Bank’s John Lee: