As reported a month ago, the U.S. seed funding market is crashing. Deal volume is down 40 percent from 2015 highs. And the massive influx of cash has propelled leading funds to seek much larger financing rounds—which effectively excludes true seed-level deals.
At the NY Venture Summit we attended in July, VC panelists were emphatic that seed valuations have contracted. One early-stage NY VC partner said “it’s all back to 2012 [valuation] levels now.” Another recommended that seed-stage companies should be raising 18 months of capital, to have enough runway.
As Reuters reported:
…the zeal that prevailed just two years ago has faded. Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015…
“Seed-stage” has lost its meaning
On the ground what this means is that what VCs term a “seed” round is really a “pre-A” round.
What we’ve seen is that the hurdle for seed-stage funding is not truly seed-stage any more. It’s become pre-A, meaning software companies are judged primarily on established growth rates (AI and deep tech companies still avoid that filter, for the most part). If a company is growing fast, it’s not seed-stage, by any meaningful definition. We’ve actually heard VCs use nonsensical terms like “pre-seed”—and that shows how contorted the market has become by massive inflows of cash.
Put simply, “seed” VCs want deals that are safely on their way to being Series A rounds.
Why is this happening?
All markets run their course. VC has had up and down cycles since it began as an asset class in the Seventies. But this time a few reasons are clear:
First, unicorns are overlaued in many cases. They are avoiding IPOs for that reason. And nobody will buy them out (bailout), so the paper values cannot get liquid. The capital doesn’t re-circulate.
Second, some seed investors are anxious at the speed at which their investees are liable to competitive assault:
San Francisco seed fund Initialized Capital, for example, has slowed its investment pace to about 20 companies a year, down from 50 to 60 just a few years ago, even though its fund size more than tripled to $125 million, according to managing partner Garry Tan.
Among his concerns: dominant players such as Facebook Inc. have amassed so much wealth they can quickly challenge a hot startup, diminishing its value.
Having watched these market cycles before, we’re skeptical things will turn around. In a future post, we’ll explain why.
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