Seed Fundraising Is No Longer A Local Game
It used to be that investing at the seed stage was purely a local sport. Conventional wisdom has been that, especially at the rawest of company formation stage, having a startup’s investors in close proximity was optimal because it could benefit greatly from the hands-on help with early company building.
On the ground, however, my partners and I at NextView have recently noticed a surge away from this bias. Increasingly, it appears that seed rounds are comprised of, and moreover, being led by seed firms from outside the startup’s HQ town. We’re now recognizing the same peer funds investing together with us in syndicates across the country, regardless of geography. And it isn’t just a phenomenon of VCs outside the Bay Area being drawn to the largest pool of startup in/near San Francisco. Rather, some of the best Silicon Valley seed investors have been vocal about looking beyond the Bay Area, like Semil Shah at Haystack “intentionally investing outside the Bay Area”, Hunter Walk at Homebrew saying “we don’t see a reason now to artificially constrain ourselves,” and Josh Felser at Freestyle promoting that “half of the… companies in our young Fund IV portfolio are based outside the bay area.”
Seed fundraising trends
In a recent blog post, my partner Rob Go recently looked at the seed stage landscape, and concluded while there has been a proliferation of new dedicated seed firms, the actual number which have the appetite & conviction to lead rounds is far fewer. And so together, Rob and I decided to run a second deeper set of analysis, of the top firms identified in his original post which had operating history of 4+ years, to see if there are noticeable recent trends across geography distribution of these firms’ investments. Sorting through over a thousand seed rounds from two dozen firms over past few years reveals some surprising (to me) insights about seed VC firms’ investments’ geographic dispersion.
Two things struck me in running this above analysis. First, it’s notable that even as of a few years ago, already nearly half of best seed VCs’ investments were made outside their headquarters’ geography. Second, that this share of geographic reaching for firms is incrementally broadening even further. In short, seed VCs are seeking entrepreneurs regardless of where they’re located. And entrepreneurs are incrementally choosing to add geographic diversity of their VCs to their seed stage syndicates.
However, when we cut the figures to look at rounds for cases when the lead investor was from outside their home geography, the recent trend is much more pronounced:
The best entrepreneurs are now looking for the best investors to not just join their rounds, but lead them, regardless of geography.
Entrepreneurs are confirming these actions with their voices – in a recent First Round Capital survey, only 2% of founders cited geographic proximity as one of their three most important criteria in picking a lead investor. Why is all of this happening? There is a confluence of factors pushing this underlying trend. We now have hyper- transparency about VC investors’ thesis, style, and approach from blogs, Twitter, and other social media, communication tools like Zoom for first meetings is leveling the playfield for both sides in the seed fundraising marketplace, and systematic “Platform” efforts offered by seed firms which have emerged over the past few years have built robust portfolio support services which aren’t tied to geography.
However, I believe that there is an additional recent, more acute, and direct cause of this trend. According to Pitchbook data, the number of seed deals is down precipitously since 2015.
With the number of deals dropping and the number of players & size of funds increasing, the seed venture market is maturing and institutionalizing. Competition is heating up further for both the best investors and the best entrepreneurs… rising above geography as a constraint.
Actually, perhaps more accurately put, is that entrepreneurs’ are finding not just the best investors, but the ones which are the best fit for them. The “best” investor for a startup is not a one-size-fits-all, but rather founder-investor fit is paramount. Different VC investors can add a thematic perspective, complementary skillset, functional expertise, network in a specific domain, or tangible operational help to a venture. As these defining characteristics increase in importance, proximity as a priority diminishes.
Which leads us to the takeaway for entrepreneurs with this trend: understanding that the first step in fundraising for a seed round is to identify the set of firms which could be a good fit for the lead, and increasingly think beyond merely “home” geography. Fill-in capital for a syndicate can come later, but it’s opportune to look beyond home geography to find the right firm that catalyze a round to come together and become a true force-multiplier in their business after the money is in the bank. When lead VCs bring to the table more than just proximity, seed fundraising is no longer a local game.
This article originally appeared in Forbes.