Early-stage funding is the lifeblood of a technology ecosystem built on risk-taking, Reuters reports.
Denied seed funding early on, companies can’t hope to grow fast enough to become the next Airbnb or Uber.
Seed-stage financing has been on the downswing for the last two years. The number of transactions fell by about 40 percent since the peak in mid-2015, data show. Dollar investments in young companies also declined, falling by more than 24 percent over the same period.
For about two years now, the VC industry has been in a pattern of decline as the hyper activity of 2014 and 2015 gradually deflated back to normal. Now for two quarters in a row, overall VC activity within the U.S. has been on the upswing. Deal count at both the early and late stage has seen increases, undoubtedly helped out by the robust fundraising that has taken place in recent years.
The declines in seed funding could have been partly the result of seed investors shifting to fewer, larger deals instead of putting small amounts of money into lots of startups in the hopes that a few will work out.
The bloom is off seed funding, the business of providing money to brand-new startups, as investors take a more measured approach to financing emerging U.S. technology companies.
The slowdown comes despite an explosion of interest by wealthy individuals and foreign investors looking to park money in the next big thing.
And it has potentially big implications for Silicon Valley.
Source: CB Insights/PwC/Reuters
“The reason why startups are disrupting companies in the 21st Century is not because they are smarter. It’s because they have capital to do so,” said Steve Blank, a serial entrepreneur, startup mentor and adjunct professor at Stanford University.
Early-stage investors, known in Silicon Valley vernacular as seed and angel investors, often act as farm teams do in sports. They provide the first significant money and mentoring to help entrepreneurs prove their technology and hit milestones needed to attract even bigger investments from venture capitalists later on.
But 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, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data.
The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That’s just shy of the $1.75 billion for the same time period of 2016 and down significantly from 2015, which saw $2.19 billion invested into fledgling startups.
Veteran seed investors and industry analysts offer a number of reasons for the decline.
They cite concerns over inflated valuations as well as a tepid market for initial public offerings, which provide seed funders a way to recoup their investments. After some much-hyped IPOs such as GoPro Inc, LendingClub Corp and Fitbit Inc lost their sizzle, Wall Street has curbed its appetite for shares in unproven private companies with billion-dollar-plus valuations.
Others blame the rise of technology leviathans for the decline in seed funding deals.
The median seed deal is now $1.6 million, according to Pitchbook, up from about $500,000 five years ago. That’s more in line with what big venture firms used to invest.
And while data show that about 70 percent of seed-funded companies never make it to the next level, there is no shortage of interest from investors.
About 450 seed funds have emerged in the past few years, according to fund managers, financed by investors as diverse as wealthy individuals, universities, sovereign wealth funds and Chinese family offices and corporations.
