A new discussion around what’s going on in early-stage fundraising in the United States is kicking around Silicon Valley. Let’s unpack the discussion and figure out what the data can tell us.
The global startup funding market is doing fine. At the end of the last quarterly cycle, Crunchbase News reported that the projected venture “deal and dollar volume” was set to reach what we called “post-Dot Com highs.”
Since then, mega-rounds keep getting done, the public markets have shot to new, record-highs, deal-making is afoot, and while cryptos continue to do odd things, even IPOs have picked up a notch. The environment, generally, looks good for startups looking to raise money to grow and even find liquidity.
So you might think that here, in the United States, the earliest stages of startup funding would be on fire.
But that doesn’t appear to be the case.
In fact, there’s been quite a lot of recent conversation surrounding early-stage investing activity and just how healthy it is domestically. To understand what’s going on, and if the early-stage market is as bad as you’ve read, let’s examine what’s been said and what it could potentially mean for investors later on down the pipeline.
The Early-Stage Implosion
We start with a recent TechCrunch article that carried a headline sure to draw attention: “There’s an implosion of early-stage VC funding, and no one’s talking about it.”
Intrigue! The piece contains a few key arguments that we need to deal with, most importantly that “there has been a quiet, barely noticed implosion in early-stage VC activity worldwide,” and that “[t]he data shows by far the sharpest fall in activity has been in early- and seed-stage rounds.” The piece goes on to separate the funding market so that series A and B rounds are distinct from the aforementioned category.
So we’re effectively looking at the various flavors of the U.S. seed market.
The TechCrunch piece includes data showing a precipitous decline in the volume of the earliest-stage rounds. Peaking in 2014, volume has since fallen sharply, with 2017 shaping up to be another instance of year-over-year declines.
That article, and its data, led to Union Square Ventures’ Fred Wilson responding on his blog. His piece, which is worth reading in its entirety, contains a different cut of data, this time from the NVCA and Pitchbook which Wilson summarized in a manner that I quite like:
The data is pretty clear. The seed and early stage investing market has cooled substantially in the past few years.
On a dollar basis, the cooling off has been mild.
On a deals basis, the cooling off has been dramatic and looks to be getting worse.
This is, as they say, very much our shit. So let us get into what we understand about the domestic seed and angel markets.
Top Line Notes
We have two broad tranches of data to dive into today: Our Q3 look at the U.S. seed-stage market, and what we’ve recently learned from our explorations of the pre-seed market. Pre-seed, for the uninitiated, is what seed was once—before seed grew into the dollar range of traditional series A round.
So we begin with a rewind to our own Joanna Glasner’s Q3 report, which included the following notes regarding the domestic seed market in the third quarter:
U.S. startups are projected to raise $892 million in seed and angel investments Q3 2017. That’s down from the $995 million they were projected to collect in Q2 2017 and the $1 billion raised in Q3 2016.
Projected seed-stage round counts are down as well, with just under 1,200 companies expected to raise funding in Q3 2017, down from just over 1,200 in Q2 2017 and well below Q3 2016, which had just over 1,500 seed and angel fundings.
So that data sorts well into what we would expect it to show, given what we have read so far today.
Indeed, the round count was at least a five quarter low, and the dollar amount was in second-to-last place compared to the preceding year. The graph looked like this:
We have since updated our charting template.
Extending the range of that data slightly, the Q2 2017 result (included above) was a disappointment compared to its year-ago period (Q2 2016, not included above). It’s a result that we reported in the following way when the second quarter ended:
The trends diverged a bit when looking at each stage. Late-stage round counts were up year-over-year, while seed and early-stage declined. Projected seed round counts are down 16 percent from year-ago levels.
Heading back a ways, Crunchbase’s projected seed and angel deal trends match up to what we are seeing from our preceding articles. It seems that seed and angel are tightening at the moment, and have been for some time, as the data shared by the TechCrunch piece, Wilson, and our own work shows.
But if the trend has been underway for some time, why should discussion of it crop up now? Had it finally gone on long enough to become sufficiently noticeable in the market as to draw media attention? Or did people just notice?
I fully doubt that there is a single reason for the discussion kicking off now, but I have a hunch as to a contributory factor. With that, let’s bring in everyone’s favorite, growing institutional funding category: pre-seed.
Pre-Seed Nitty Gritty
We’ve published two looks at the pre-seed market recently on Crunchbase News. To my surprise, they were quite popular. Normally, I would have wagered longer looks at nascent-and-very-specific funding slices of a single market wouldn’t be fodder for a traffic bonanza. So when the two kicked up dust, I noticed it as indicative of something in the market that I had not fully grokked.
Our first piece dealt largely with what pre-seed is and what it might be good for. (Answer: Rounds under $1 million, and for funding companies that are not ready for a large seed round.) The second, however, gave us a better understanding of why institutional pre-seed is likely popular. As pre-seed kicks off as a professional category, rounds that could be dubbed “pre-seed” are on the decline.
That odd combination makes pre-seed firms in demand. This is perhaps why the market was more curious than we anticipated regarding reporting on the firms.
That in hand, a caveat on data. Crunchbase News reports quarterly on Crunchbase’s venture projections. Reported venture data on a per-quarter basis will always be light, as some rounds are simply not reported until after they occur. Still, what we found was surprising.
As our own Mary Ann Azevedo reported in her second pre-seed piece, activity is slipping quite dramatically:
Pre-seed’s funding peak in 2015 was comprised of 3,176 deals under $1 million—totaling $1.03 billion in funding. That compared to 2,138 deals totaling $694.5 million in 2012, marking a 33 percent increase in dollars raised and number of deals.
But deal and dollar amounts started to go south in 2016. The number of deals during this period fell to 2,401 while dollar volume declined to $803.4 million. So far in 2017, we’ve seen just 1,152 rounds in which $381.6 million was raised. However, it is likely that pre-seed deal counts and dollar amounts will go up as more deals are reported.
As before, here’s the chart:
As you can imagine, there is no undercount large enough to bend that chart positive. So even as the pre-seed market formalizes as a professional asset class (of sorts), the trends that others have pointed out hold up. It does indeed seem that here, in the United States, at least, small rounds for startups are slipping.
Definitions And Differences
The title of this piece says “Early Stage,” which may or may not include seed rounds or series Bs. What counts as early stage is a question of taste, to some extent. Series D rounds are never early stage, of course; however, old definitions are breaking down. A $50 million series A can’t be early stage can it? But what about an $8 million series B? There is, perhaps, no perfect definition.
But no matter where you want to put up the fences, it seems fair to say that a variety of data sources and reporting (from reporters and investors alike) indicate that, at the front of the market, activity is slowing down.
And that matters for later-stage investors, as it could limit their future investment opportunities (as we’ve written before). But if we are already seeing American entrepreneurship slip, perhaps it was only a matter of time until tech rotated into the rest of the economy’s patterns.