Investments

Silicon Valley's Seed Funding Slowdown

Seed funding has been on the decline lately — for the last two years, the number of firms able to secure starting out funds has dropped 40 percent since hitting a peak in 2015.  The amount per investment is also down, though less dramatically than funding itself, with a 24 percent decrease during the same two-year time period.

And this, according to experts, is something of a worrying trend, since seed funding is "the lifeblood of a technology ecosystem built on risk-taking," according to Reuters.  Without it, the next Uber or WhatsApp may never be able to make the initial run at building to scale a startup needs to become — well, not a startup anymore.

"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.

The drop can be seen by the numbers — angel investors completed about 900 deals in the second quarter, a notable drop-off from the 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. By the dollars, seed investors provided $1.65 billion in funds during Q2 — down from $1.75 billion for the same time period in 2016 and down significantly from 2015, which saw $2.19 billion invested into fledgling startups.

So why the slow down?

Well, exits have been tepid of late — when LendingClub, GoPro and Fitbit went public and quickly lost their groove, they did a lot of work to chill the enthusiasm of investors looking to hit on the next big thing.

Initialized Capital managing partner Garry Tan notes that mega players in tech are having a chilling effect on investments.

"Incumbents just get so much more power, so there are fewer super early-stage opportunities that are very valuable," Tan said. "I can imagine a 20 to 25 percent reduction in valuable investment opportunities."

And some early stage investors have noted that they are rethinking their approach and looking to make fewer larger deals in favor of making lots of smaller deals and hoping to hit.

The median seed deal is now $1.6 million, according to Pitchbook, up from about $500,000 five years ago.

And there are fewer seed funds these days as lackluster performances make it hard to raise new funds.

"A lot of these funds didn't perform," said Samir Kaji, senior managing director at First Republic Bank. "They are still around, but they aren't writing new checks."

In the last year or so, at least nine seed firms have gone out of business, according to PitchBook. Veteran Chris Douvos, managing director with Venture Investment Associates, estimates that the hundreds of small seed funds that exist currently will dwindle to 40 to 80 in the next year or two.

"All of venture capital's train wrecks happen in slow motion," Douvos said. "The mass of these funds is on the bubble, and what will determine who lives and who dies is to some degree luck."

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