A disturbing rumor has been snaking its way through Silicon Valley and the start-up community: Venture capitalists aren't funding start-ups, specifically with investments of more than $1 million, as they have in the past. The rumor even has a name: the Series A Crunch.

The rumor isn't entirely true: VCs haven't dramatically cut back on Series A investments--the first big rounds of VC funding. But lately, competition for Series A deals has been increasingly fierce. More and more entrepreneurs are discovering that raising seed funding doesn't guarantee there will be Series A money down the line. CB Insights, a research firm in New York City, projects that some 1,000 recently funded seed companies will be "orphaned"--or unable to raise follow-on financing.

There are a couple of factors contributing to the crunch that entrepreneurs are feeling. For starters, there was a slight dip in venture capital funding in 2012. Overall, VC firms invested 10 percent less capital in private companies last year than in 2011, and they struck 6 percent fewer deals, according to a report released by the National Venture Capital Association and PwC.

But that's only a small part of the problem. The larger factor is that the number of Series A investments (typically more than $1 million) hasn't kept pace with the recent explosion in the number of angel and seed investments (deals that typically range from $25,000 to several hundred thousand dollars). The number of Series A investments has actually doubled since 2008, but smaller seed-level deals surged some 262 percent, according to PitchBook, an industry research firm. (See the table on the previous page.) "The real issue surrounding the Series A crunch is not that there are fewer Series A investments," says Katherine Barr, general partner at Mohr Davidow Ventures in Menlo Park, California. "It's just that a ton of companies have received seed funding in recent years. It's simply an issue of supply and demand."

Because many investors are making smaller bets--and more of them--an increasing number of start-ups are getting off the ground, only to be left hanging when they need larger investments. But that's the nature of VC funding, says Tyler Newton, a partner at Catalyst Investors in New York City. "Not every company that gets seed funding deserves to get Series A, and not every company that gets Series A deserves to get Series B," says Newton. "I believe there is still more venture money available than good deals to be made."

It appears that certain industries will bear the brunt of the crunch. Companies in markets that are already saturated, such as mobile games and social media, will have a harder time raising Series A funding, says Charles Moldow, a general partner at Foundation Capital, also in Menlo Park.

For now, entrepreneurs like Jeff Martens are left wringing their hands. Martens is co-founder and CEO of CPUsage, a Portland, Oregon-based company with five employees. His company raised a seed round of less than $1 million from Morado Venture Partners and Crosslink Capital in September 2011. Martens plowed that money into the development of a platform that will eventually let customers process and analyze large amounts of data via cloud computing.

Martens, who drove to California and slept on friends' and family members' couches for four months to land seed funding, says investors seem to have a renewed focus on companies that can generate significant revenue--something his business has yet to do.

To get his product to market, Martens figures he needs to raise another $3 million to $5 million in the next six to nine months. It's an increasing source of anxiety. "Everything has taken twice as long and has been twice as expensive," he says. "Our goal now is to last long enough to reach our revenue milestones so we can pull the trigger on that Series A." Until then, Martens is hanging on to his hope that CPUsage will be one of the lucky few.