For once I disagree with User-9918985937555143421

Or maybe I don't, and I am saying the same thing in a different way. I think the startup sector is being temporarily shielded from macroeconomic conditions like interest rates due to the dominance of much stronger internal forces that are reshaping it.

The distended entrepreneurship capital market is seeing true bubbles in the front-end, a true recession in the middle, and a true mini-boom at the growth end, with the return of IPOs.

Or to put it another way: the entrepreneurship sector is being disrupted, in ways that nearly exactly parallel the disruption of old-time Big Studio Hollywood.

Prognosis:

There will be a bubble burst involving small companies with less than $1 million invested to date. I track this on my trail about the bubble:

http://trailmeme.com/trails/The_...

Latest estimates are that only about 30% of companies exiting their seed stage and looking for Series A will make the cut. That's 70% infant mortality, and the rate will not/does not reflect quality of ideas, but a messed up infrastructure.

Companies already in middle stages of growth, requiring a Series A level of investment ($2 - $4 million say), and not yet at product-market-fit, will be seriously starved of growth capital. They will die at the same 2/3 rate. Their ranks will swell with the 2/3 failure-to-get-Series A crop from the Y-Combinator type bubble pipeline.

Think of it as the middle class suffering and getting killed, the rich getting richer, and the impoverished class initially reproducing like rabbits before being slaughtered by an epidemic.

This huge glut in the middle will cause the following effects:

1. The super-angel game at the entry level will stall, waiting for the mid-level pipeline to unclog. Backpressure effects basically.
2. The pipeline will crack and burst in the middle, breaking the old capital market model entirely. Once they run out of cash, most of the talent from starved-to-death mid-capital-needs companies will flood to the tail end of the pipeline, fueling the growth of a few companies with big war chests
3. The minority of the talent from the pipe burst will cycle back to the front end of the funnel, but instead of looking for angel/super-angel funding, they'll simply start things that are cash-flow positive on Day 1, following the lead of companies like 37Signals. This means entrepreneurs will retreat to the self-funded corner of the economy, while waiting for the "capital needed" part to reorganize itself
4. The Super Angels will go into a period of introspection, and return with a full infrastructure solution. They will most likely settle on extending the Y-combinator model to mid-range capital needs companies via a studio "production company" model.
5. In this model, borrowed partly from Hollywood and the gaming industry, graduates of the YCs will move to a second-stage studio, where the costs of failure are lower than independent existence. Basically collective insurance plus shared infrastructure (including shared talent). I anticipate that the mid-range studio, running 3-4 "projects" will replace mid-stage companies altogether. They will lower burn rate through shared infrastructure, and basically run 2 startups for the cost of 1.
6. The studios will be managed by the super angels, but funded from two sources: first, by VCs at Series B level, with new ownership instruments to manage exits from the studio stage, and second, by big companies seeking to shut down their R&D facilities entirely and moving the money to the studios. Studios will spring up servicing specific open innovation intake pipelines. These studios will be a blend of incubator, traditional industrial R&D lab and university lab. But they'll also contain some sort of secret sauce. After all, the modern Hollywood production company is more than a mix of a theater troupe, big studio and theater school.
7. The high-capital tail-end of the pipeline will remain the preserve of traditional VC model of investment in individual companies and seeking IPOs or non-IPO exits.
8. While this is all sorting itself out, LPs will move money over to Private Equity and other non-startup areas. The total VC pie will shrink, and many firms will shut down through failure to raise another fund. We'll be distracted from this by the fact that the survivors will be doing lots of high-end dealmaking north of 50-100 million. We'll be watching the Benz/Lexus drama while the Kias and Toyotas are getting slaughtered.

The companies that are past product-market-fit and need growth money will find it.

Basically, old school investors are seeing their models crumble and are retreating (as in any disruption event) to the high end of the market, betting on sure things.

The new kids on the block, super-angels etc., are about to get their first harsh lesson in investment, but they'll survive, learn and eventually thrive. The biggest lesson they have to learn is that they simply can't pull together enough money to launch real companies on their own. So they'll switch to contributing the ACTUAL value they are good at providing: expertise with a little money on the side.

The mid-range will pay the cost of the switch.