It’s getting harder to raise seed funding for anything meaningful
As VC funding and Series D rounds reach record highs, new statistics from PitchBook show that it’s getting harder to raise seed funding. Although this is a US-based view, it echoes what I’ve been hearing in the market around Europe.
👻Why is it that Casper can ‘disrupt sleep’ with the worlds most ridiculous IPO, while just about every health-tech business out there struggles for funding?
Issue 1: Seed is no longer seed
The very concept behind seed is to help founders to get an idea off the ground, to prove a hypotheses, to test a market. It’s risky, but the bite-size should be low enough to be attractive. Yet VC’s appear to be demanding more and more from a seed round:
As of September 30, 2019, the median company age of angel & seed companies is 3.0 years. This is in stark contrast to the median age of 1.9 years in 2014, just five years earlier. — PitchBook 2020 Venture Capital Outlook
How exactly is a 3 year old company considered seed?! Seed deal quantities are also falling, and the new ‘pre-seed’ category meant to fill the gap are also reducing:
A view I’ve heard repeated in the industry endlessly now seems to be policy:
“It’s so cheap and easy to get a startup off the ground with AWS and no-code solutions that we just need to see more before we’ll fund”
👏It’s a view covered in-depth by Mark Suster in this brilliant analysis: https://bothsidesofthetable.com/why-has-seed-investing-declined-and-what-does-this-mean-for-the-future-6a9572357130)
This works when you want to weed out a vaporous social startup but is absolutely not the case with IOT, health tech, finance, bioengineering — or to be blunt, most of the emerging new sectors where innovation has huge revenue and societal change potential. These highly regulated industries have significant upfront costs in validating hypotheses and building prototypes. The very things that a seed fund was supposed to pay for.
Issue 2: A false assumption that accelerators will pick up the slack
The face of the seed founder is certainly changing, and for the better. It used to be that anyone with a working knowledge of PHP and/or a type-A dreamer who thinks he’s gods gift to humanity could get funding. These days however, the biggest future bets lie with engineers, analysts, scientists of all kinds. Those with deep, practice-based knowledge of their industries. Or a ninja-like ability to navigate through a regulatory landscape.
I really do feel like investors now expect these founders to get seed through different sources. I have heard repetitively over the last 5 years a perception that accelerators, grants, and academia should be the ‘new seed’. Science-based startups should be born in academia, ideas that benefit institutions and communities should get grants, and accelerators can separate the wheat from the chaff.
Two problems with this:
- Accelerators end up becoming a useless and frustrating distraction for almost every single founder I have ever known. There, I said it. 💥
Of over 200 accelerators in North America, only 3 or 4 have shown successful exits, and most show little in the way of results, such as raising capital, and providing real value — https://www.gva.vc/en/about/blog/1592/
🤷♂ If you have a different perspective, I’d love to hear it.
- Grants are exceptionally difficult to navigate
Grant applications are a lengthy and complex process, often requiring MVP’s, already-existing academic links, or collaborations in place. All things that need funding and time to get sorted.
🇬🇧Here’s a surprisingly honest account from the UK: https://www.sensemedia-events.com/our-unsuccessful-application-to-innovate-uk/
😠Here’s innovateUK’s glassdoor: https://www.glassdoor.co.uk/Reviews/Employee-Review-Innovate-UK-RVW20826655.htm.
Those with deep sector expertise aren’t Californian 20-something dropouts, those that actually succeed are 45 years old on average and arming more of these people with the tools to take risk and apply their expertise is an opportunity the market seems to be increasingly forgoing. A $10k accelerator with AWS credits and a desk at WeWork is not the solution.
Could Corporate Venture Capital come to the rescue?
It may well be that the seed industry is in an interstitial lull — trapped between low costs of launching web/app/content-based businesses, and the rails of our future industries still taking form. Regardless, innovation will suffer unless seed revives, or new and more relevant models of incentivising founders to take risk are found.
The saviour may come from Corporate Venture Capital, which has seen an explosive growth in recent years. It seems legacy industries are realising how desperately poor they are at innovating, and buying up disruptors in their own industries.
VC deal activity with CVC participation set a new record in 2018 with 1,725 deals worth a combined $70.0 billion. — PitchBook
CVC could help spur investors to adjust their expectation from explosive blitzscale plays to earlier exit potentials from investors that place a far higher value on IP, skills, and engineering in a specific area.
❓Think i’m wide on the mark? Would love to hear if anyone echo’s this or has any other views.
