INSUBCONTINENT EXCLUSIVE:
We’ve decided to step back from the breaking news for a minute to conduct a review of seed and early-stage funding trends over the last
decade for U.S.-based companies.I’m fairly certain we can all agree that the environment for startups has changed dramatically in the past
10 years, specifically in two major ways:The development of seed funding as its own class and;The expansion of growth stage investing.What
we’ve also seen are recent concerns raised about the decline in seed stage funding by Mark Suster, a partner at UpFront Ventures, as
there has not been commensurate growth in early stage funding (Series A and B), to meet this growth in seed-financed companies
This is often expressed as the Series A crunch.So with venture funding at an all-time high, along with increased growth in supergiant
rounds, now seems like an appropriate time to conduct this kind of review.Setting the stageFirst, let’s set the stage for our analysis and
explain where our data comes from with a few quick facts:Rounds below $1 million can be the most difficult to capture adequately as many
angel and pre-seed deals are not reported.Luckily, Crunchbase has an “active founder community” that adds early stage financings.By
“active founder community” we are referring to many founders who are active on Crunchbase adding their company, themselves as founders,
and their fundings.Around 47 percent of fundings below $5 million in the U.S
are added by contributors, as distinct from our analyst teams who process the news, track Twitter, and work directly with our venture
partners.For this study, we bucket U.S
funding rounds by size to indicate stage.Given the high percentage of self-reported seed financing, data added after the end of a quarter
needs to be factored in.For this reason we use projected data for many of the Crunchbase quarterly reports in order to more accurately
reflect recent funding trends
For the charts below we are using actual data, with some provisions for the data lag when discussing the trends.Now, let’s take a look at
the trends.Rounds below $1 million are slumpingSince 2014 we have seen mostly double-digit declines in less than $1 million rounds each year
– a strong pivot from 2008-2014 when we saw double-digit growth.In 2018 seed funding counts and amounts below $1 million were down from
2015 at 41 and 35 percent respectively
Given that data at this stage can be added long after the round took place, we assess there could be a 20 percentage-point relative increase
in 2018 compared to 2017.If we factor this in, 2018 seed funding counts and amounts below $1 million are down from 2015 at 30 and 23 percent
In other words, seed below $1 million are closer to 2012 and 2017 levels.$1 million to $5 million rounds are flatteningRound from $1 million
to $5 million also experienced growth from 2008 through 2015, more than threefold for counts and close to threefold for amounts
Upward growth stalled from 2015
However, we do not see a substantial downward trend in the last three years
Dollars invested are stable at $7.5 billion from 2015 through 2017
Counts and amounts are down in 2018 from the 2015 height by 12 percent for deal count and 6 percent for amounts.At Crunchbase we are always
cautious about reporting downward trends for the most recent year or quarter, as data does flow in after the close of the most recent time
If the trend is over a greater time period, that is a stronger signal for change in the market
Based on data continuing to be added after the end of a year for the previous year, we assess around 10 percentage point increase relative
This would make 2018 roughly equivalent to 2017 on rounds and slightly up on amounts.Seed funds take bigger stakesWhy is seed flattening
Seed investors report putting more dollars into fewer deals
Or as they raise more substantial subsequent funds, they are putting more dollars into the same number of transactions
Seed funds need to get enough equity for a meaningful stake, should a startup survive to raise subsequent rounds
Seed funds are investing in fewer startups for more equity.Larger venture funds taking a less active role in seedUpFront Ventures’ Suster
(referenced earlier) also talks about larger venture firms becoming less active in seed, as investing at the seed stage can limit their
ability down the road to invest in competitive startups who emerge as growing contenders in a specific sector
The growth of more substantial funds in venture allows firms to see deals mature before investing, perhaps paying more to get the equity
they want, and allowing startups not growing as quickly to fail or get acquired.As Fred Wilson from Union Square Ventures notes, “In
the first five years of this decade, we saw the seed portion of the market explode
In the last five years of this decade we saw the growth portion of the market explode
But over those last ten years, the middle part, the traditional venture capital market, has not changed much.”The middle is growingFor the
middle, Series A and B rounds (which used to be the first institutional money in), the market for $5 million to $10 million rounds has
almost doubled, but it has taken from 2008 to 2018
In that same period, growth has been slower than round below $5 million
Growth has continued past 2015
Since 2015, rounds are down slightly for one year, and then continue to grow in 2017 and 2018
Counts are up from 2015 by 17 percent and dollars by 18 percent.$10 to $25 million rounds are growingRounds of $10 million to $25 million
have grown over 11 years by 73 percentage points for counts, and 78 percentage points for amounts
This is a slower pace than $5 million to $10 million rounds, but continuing to edge up year over year.Seed is maturingSeed is its own class
Indeed pre-seed, seed and seed extension all seem to have specific dynamics
Of the 600-plus active seed funds who have raised a fund below $100 million, close to half have raised more than one fund
In the last three years in the U.S
we have not seen a slowing of seed funds raised for $100 million and below.ConclusionWhen we take into account the data lag, dollars for
below $5 million is projected to be $8.5 billion, close to the height in 2015 of $8.6 billion
Deal counts are down from the height by a fifth, which does mean less seed-funded startups in the U.S
Provided that capital allocation is greater than $5 million continues to grow, less seed funded startups will die before raising a Series A
More companies have a chance to succeed, which is good for seed funds, and ultimately for the whole ecosystem.
