“There’s an implosion of early-stage VC funding, and nobody’s speaking about it,” was the headline of a viral article posted on this web site in late 2017. Enterprise capitalists are deploying extra capital than ever, the writer defined, but the variety of offers for early-stage startups has taken a nosedive.
Roughly one yr later, little has modified. Seed exercise for U.S. startups has declined for the fourth straight yr, in accordance with enterprise knowledge supplier CB Insights, as median deal sizes elevated at each stage of enterprise capital. In 2018, seed exercise as a proportion of all offers shrank from 31 p.c to 25 p.c — a decade low — whereas the share and dimension of late-stage offers swelled to report highs. Whole annual international VC funding, for its half, shot up 21 p.c to $207 billion as deal exercise solely elevated by 10 p.c to 14,247 transactions.
The median U.S. seed deal was the best on report within the fourth quarter of 2018, rising to $2.1 million after kicking off the yr at a median of $1.7 million. Early-stage financings — i.e. Sequence A and Sequence B fundings — skilled the identical pattern, increasing to a median of $eight million in This fall, a major improve from the $5.5 million median recorded within the first quarter of 2017.
The decline in seed offers and the simultaneous improve in deal dimension started in 2012, and is much from an anomaly at this level. What’s induced the tip of seed investing as we all know it? A report quantity of dry powder within the enterprise ecosystem has pushed VCs downstream, the place they will deploy massive sums of capital in additional mature firms. Even corporations specializing in seed investments are muscling their manner into Sequence A offers. Many seed corporations have grown up and change into extra strategic of their bets, typically opting to put money into startups which have discovered product/market match somewhat than these nonetheless on the concept stage, even supposing traditionally, idea-stage firms have been the goal of seed financings. Happily, pre-seed, a more recent stage of investing consisting of investments of round $500,000, has emerged to help these initiatives.
Not solely are offers fewer and fatter, however firms incomes seed investments are older, too. In 2016, for instance, firms elevating seed offers have been older than the median age of an organization elevating a Sequence A deal 10 years in the past, and Sequence A firms have been older than the median age of Sequence B firms a decade prior, too.
Fundraising exercise suggests deal sizes will solely proceed to inflate, somewhat than regulate. Firms within the $100 million to $500 million vary are at present essentially the most energetic fundraisers, and in the event you pay any consideration to the tech press, you realize there’s no scarcity of recent billion-dollar funds. Buyers at these funds aren’t capable of deploy small bits of capital into early-stage startups — not solely as a result of the return on the funding isn’t significant, however they don’t have the time to dedicate to these initiatives, which usually require extra help and oversight than their late-stage counterparts.
One factor may ship deal sizes again to their regular ranges, nonetheless, and that’s the market downturn many VCs expect in 2019. Median deal sizes shrank in the course of the Nice Recession in 2008, and traders have a tendency to show away from riskier bets when market situations develop chilly. Which means, in a bear market, extra consideration will likely be paid to steady, later-stage companies whereas early-stage firms are left to their very own units.