Over the past few years, a lot of people have started companies. Between 2007 and 2011, more than 200 digital startups were created in New York alone.
The companies have been able to survive because they've been able to scrounge together some cash, often from wealthy individuals (angel investors) or early stage venture capital firms.
But it's much easier to raise a few hundred thousand dollars—what's known as a "seed round"—than the $10 million or more required to launch a startup into the big leagues.
Now, many of the startups that were able to raise seed rounds or their first venture-capital financing—a Series A—have run out of cash. The number of expansion-stage deals—generally Series B or later—collapsed from 305 a quarter to 207 earlier this year, according to a National Venture Capital Association study.
Unable to convince investors to give them millions more, startup founders are being forced to throw in the towel. Some are softly landing at larger companies for an offer of employment and options but next to no cash; others are closing up shop completely.
LA-based BetterWorks, for example, shut down its service over the summer just one year after raising a $10 million Series A. Earlier this fall, Bravo reality star Dwight Crow put his startup up for sale and landed at Facebook; he has a real bed now, but he's still couch-surfing. San Francisco's Dailybooth and New York's Fondu both found homes at Airbnb; Brooklyn's Loosecubes—which raised more than $7 million a few months ago—shut down today.
The fiscal cliff for startups funded in the recent explosion of seed-stage deals has arrived: Many are failing or have run out of money. This has been a long time coming. And it's actually a good thing for everyone.
For a while, the smartest, most talented people were joining or creating their own startups. But many of the ideas they were working on weren't that big. They were gimmicky mobile apps, not world-changing companies.
No shame on them for trying: Everyone has the right to launch a startup. Most won't ever succeed.
Now that the companies are starting to fail, the talent is being gobbled up by bigger, more established companies that need smart people to continue changing the world.
It may be unfortunate for entrepreneurs who put an outsized importance on the founder title. But for the industry and the world at large, it's a net win.
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