this is why 2017 is going to be a hell of a tough year for ... hell of a tough year for seed...

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Thisiswhy2017isgoingtobeahellofatoughyearforseed

startups ByTatjanadeKerros-Budkov/Jan8,2017https://flipboard.com/@flipboard/flip.it%2F7Na0n1-this-is-why-2017-is-going-to-be-a-hell-/f-f39035461b%2Fventurebeat.com

In2006,theaverageearly-stageseedroundforastartupwasjustunder$600,000.Adecadelater,thishaspeakedat$2.2million.Intheeraofmega-


rounds,mega-valuations,over-funding,andmega-burnitisbecomingincreasinglycommonforstartupstoraisenotone,butmultipleseedrounds.Whatisdrivingthistrend?Arestartupsreallybetteroffraisingmultipleseedrounds,andwhatdoesthismeanforseedfundingin2017?Bydefinition,seedroundsexistforinvestorstobethefirstandearliest-stageinvestors(andbydefaulttakethemostrisk)inastartup.However,despiteseedfundinghavingdroppedby4percentyear-over-yearin2016,theticketvalueofaseedroundhasalsoincreasedby3xinthelastdecade.In2006,aseedstartupcouldexpecttoraise$700,000tops.Today,theaverageticket-sizeforaseedroundis$2.2million—or$2.81millionifyou’reluckyenoughtobelocatedintheBayArea.Increasingly,thishasmeantearly-stageVCshavehadtodishoutthecashforstartupsthathaveaSeriesAvaluationbutwithpre-revenuerisk.Tocounteractthisheftybias,Micro-VCfundshavebeengainingtraction,offeringpre-seedcapitalrangingfrom$150,000to$500,000.In2015alone,106ofthesenew‘pre-seeders’poppedupintheUS,givingearly-stagestartupsanevengreaterpoolofcapitaltopickfromandeliminatingthe“awkwardness”thatcomeswithraisingroundsunder$500,000.

Wehearditenoughtimesfromfoundersweknowandtrustthatit’sreallyawkwardinthismarkettoraise$500,000asaseedround.–NicholasChirls,NotationCapitalTHEEVOLUTIONOFSEEDCAPITALBeforeweexamineseedfundingtrends,let’sfirstbreakdownwhytheseed


fundinglandscapehasevolvedsodrastically,andwhystartupsnowfeeltheneedtoraisemultipleseedrounds.1.Theearly-stagefundingcycleshifted.Pre-2005,asastartup,youcouldexpecttobankrollyourideathroughfamilyandfriendsandthentapintotwomajorsourcesofcapital:businessangelsandVCs.Basically,youcouldgetapotentiallygreatideafinancedquiteearlyon,beforeyouevenhadanymarkettractionorproductfit.Seedwasthelead-uptogeneratingtraction,andthenyouwouldscoreaSeriesAtofuelaproduct-marketfit,thengoforaSeriesBorCtofuelyourgrowth.ThesecondInternetbubble,disruptivebusinessmodels,andgrowthofinstitutionalfundschangedallthat.Suddenlystartupsweregrowingfaster,becomingmorecapitalefficient,andexperiencingbetteruniteconomics,andinstitutionalfundswerebecomingbigger.AsRobGofromNextViewexplains,thisconsiderablyalteredthefundingcycle.Seedinvestorswerelookingformoretraction,andSeriesAroundsgotlarger.Asaresult,startupshavetotapintomultiplesourcesoffundingtoevenqualifyforwhatVCslookforinearly-stageseedorSeriesA.

Above:Theevolutionofearly-stagefundingrounds2.Themarketforseedgotsaturated.Circa2005,entrepreneurshipbecamehip.Pureeconomics(affectedbyanumberofmarket,financial,andpolicyconditionsweareallfamiliarwith)increasedthedemandforseedcapitalandstartupsupply.In2005,YCombinatorlaunched,followedcloselybyTechStars.In2008,therewere16startupaccelerators—in2015thispeakedat170—growingbyanaverageof50percentyear-over-year.Thisisn’tevencounting


thenumberofentrepreneurshipprograms,startupgrants,andfundscompetingtofinanceseedstartups.Theresult?Morethan5,000early-stageinvestmentsaccumulatingto$19.5billioninfunding.Withsuchawindowofopportunity,startupshadaccesstoapoolofseedfundingfrommultipletypesofinvestors—eachwithdifferentcriteriaandinvestmentgoals—whichdroveupthevalueoffollow-onfunding.Today,itisnotuncommonforstartupstogothroughnumerouspre-seedandseedfundingroundsfrommultipleinvestorsbeforehittingupaVC;moreoftenthannot,itisexpected.Whichbringsustothenextpoint.

Above:Theevolutionofearly-stageinvestors3.Seedisnolongerseed.You’renolongerfirstraisingseedcapital,you’reraisingpre-seed.Andthat’snoteventhefirstround.You’llprobablyhaveraisedfromfamilyandfriendsfirst,thenperhapshitupabusinessangel,thenenteredanacceleratorprogram—andperhapsasecondone,becausewhynot—thensomeindividualinvestorsorbusinessangels.Atthatpoint,you’llqualifyforaseedround.Thisisn’tevenincludingthemyriadofsyndicatesandcrowdfundingoptions.Bythispoint,youmaystillbepre-revenue,butyournumbersaddup,you’rehittingyourgrowthmilestonesandhavegainedenoughtractiontowhettheappetiteofinvestors.Theproblem?TheeaseofraisingseedcapitalwillmakeitmuchmoredifficulttoraiseSeriesAandBsincetheseroundshavegotteninflated.4.SeriesAandBareinflated.Nostartupdecidestoraiseaseedroundandstopthere.ThegoalisalwaystoraisemorethroughSeriesAandB.ButwithseedroundsnowthesizeoftraditionalSeriesAorB,theyaremuchmoredifficulttoraise—evenifyouhitallthemetrics.Inparallel,themediandollarvalueofaSeriesAorBhasinflatedtosuchapointthatmoststartupsdon’tqualify.Ina


recentpost,TomaszTonguzhighlightsthatSeriesAandBdealsfellby20percentin2016,buttheinvestmentsizeofaSeriesBgrewto$10-15million.Notably,aSeriesAdealsizenowaverages$3-6.6million.Inthiscurrentmarket,itmaybetheSeriesAroundthatisinthemostdanger.THESTATEOFSEEDIN2016Toexaminethistrend,IusedMattermarkdatafromalldisclosedseedroundsthatoccurredintheBayAreain2016.Thisincludedbothfirst-timeandfollow-onseedfunding.Toensurethatdatawasn’tskewed,Isetaminimuminvestmentlimitof$100,000upandamaximumof$3million(themedianforaSeriesA).TheresultsshowthatwhileBayAreastartupsareoutperformingtheirglobalcounterpartsintheticket-sizeoftheirfirstseedround,raisingmultipleseedroundscomesatacost,withdown-roundsbecomingtherulenottheexception.1.Theaveragevalueoftotalseedfundinghashit$2.81million.Thisaccountsforallseedfundingrounds,withthemedianbeing$2.3million.Now,wecanarguethattheBayAreaisabubbleuntoitself,howeverthisclearlyalignstotheglobalaverageof$2.2million.Withthevalueofseedfundinghavingincreasedsodrastically(3xin10years),itisclearwhyseeddealflowhasdroppedin2016,out-valuingmanyearly-stageinvestors.Thisiswhywe’reseeingtheemergenceofsomanyMicro-VCfundstomakeupforthisgap.

2.BayAreastartupsraisedanaverageof1.6xseedroundsin2016.52.5percentofstartupswereraisingtheirfirstroundofseedcapital,while35percentwereraisingtheirsecondround.Althoughstillaminority,justover10percentwereontotheirthirdroundin2016,and2.2percentwereontheirfourth.


3.Startupsfoundedafter2014aremostlikelytohaveraisedmultipleseedrounds.Thisiswhereitstartstogetinteresting.Youwouldthinkthatolderstartupswouldbethemostlikelytoraisefollow-oncapital,right?Itseemsnot.Fiftypercentofstartupsthatwereontheirsecondroundofseedwerefoundedin2014orlater.Thekicker?Fifty-twopercentofearly-stagestartupsontheirthirdseedroundwerealsofoundedin2014orlater.Thismeansthetimeframebetweeneachseedroundisgettingshorterandshorter,andstartupsareeithergrowingfasterorlosingtheircapitalefficiency(I’mleaningtowardsamixofboth).


Startupsfoundedinthelasttwoyearsaren’tonlyraisingmorerounds,they’reraisingmuchlargerdollaramounts.WhenIanalyzedthevalueofthelastdisclosedfunding,Ifoundthatjustunder70percentofstartupsthatraised$2millionormorewerelessthantwoyearsold.

4.Raisingmultipleseedroundscomesatacost.AsBayAreastartupsmultiplytheamountofseedroundstheyraise,theyalsoincreasetheirlikelihoodofraisingadown-round.Whiletheaveragedealsizeforafirstseedroundis$1.89million—andpeaksinthesecondseedroundat$1.93million—bythethirdround,startupsarelosingabout8percentindealsizeonaverage.That’sequivalenttoover$170,000,whichmakesitallthemoredifficulttograduatetoraisingaSeriesA.


ThefundingsituationintheBayAreamaynotreflecttherestofthecountry,butitdoestellusquiteabitabouthowseedandSeriesAaregoingtoevolvein2017.Thistrendofmultiplyingseedroundsisgoingtocontinue,especiallywiththegrowthofMicro-VCfirms,whichinturnwillmakeitmuchmoredifficultforstartupstoraiseSeriesAandBrounds,primarilyduetomuchlowervaluationsandthegrowthinmediandealsize.Asaresult,wewillseeadistinctsegmentationinearly-stageinvestors,withagrowinggapbetweenpre-seedandseedfunding.Putsimply,startupsin2017mayfinditawkwardtoraiseanythingbetween$750,000and$1.5million,findingthattheircapitalrequirementsareeithertoohighortoolowasearly-stageinvestorsagglomerateateachextreme.

this is why 2017 is going to be a hell of a tough year for ... hell of a tough year for seed...

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