Startups just in their infancy are getting attention from seed investors — but unlike the dotcom days when every idea got some form of funding, investors are being choosier, resulting in fewer deals but with the ones getting funding enjoying surging valuations.
According to a report in the Wall Street Journal citing data from PitchBook, the median size of seed investments so far this year stood at $2 million in the U.S. That is close to four times more than the $550,000 median back in 2013. The median valuation for seed companies increased to $7 million from $4.7 million in the same period.
Startups that are operating in red-hot sectors and companies run by seasoned entrepreneurs are raising between $30 million and $40 million before they even start operating, noted the report. The Wall Street Journal pointed to Kodiak Robotics and Ike Robotics as two examples. Citing people familiar with the discussions, it reported Kodiak Robotics already raised $40 million in its first round, while Ike Robotics is in talks with VCs about landing an investment of more than $40 million. Meanwhile, Figure Technologies, which was founded by the former head of Social Finance Michael Cagney, raised $50 million in its first round. At the same time that some seed companies are having successes raising funding, the percentage of startups getting an initial round of funding has dipped 40 percent in the first nine months of 2018 compared to the first nine months of 2015. Investors, noted the report, said there is a lack of viable ideas to invest in.
The valuations of startups are being helped by the entrance of small VC firms, with at least 223 in the U.S. launching their first venture fund since 2012. They have brought in more than $15 billion in new money to the marketplace. The funds are also focused on niche areas, whether it’s cannabis, AI or real estate focused. Athletes — including Kevin Durant, the retired baseball star, Derek Jeter, one of baseball's greats and Joe Montana, the football legend — are among the well-known people investing in startups. At the same time, some ventures that would normally invest in later-stage companies are setting their sights at the seed level so as not to compete with SoftBank's Vision Fund, which has been making a lot of tech investments. There are also growth funds that are raising record amounts to back companies that are gearing up to go public, forcing other VCs to look to earlier stage companies. “These megafunds have an impact that trickles down to the earlier stages,” says Joe Horowitz, managing general partner at Icon Ventures, in the report. “Some markets can only grow at a certain pace no matter how much money you throw at them.”