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Editor’s note: This is part 1 of a two-part series on the state of seed startup investing in early 2024. Check out part 2 tomorrow.
Despite a significant setback in global startup investment over the past two years, investors say the US seed funding environment has been the most vibrant compared to other fundraising stages during the recession. .
In fact, US seed funding in 2022 increased by nearly 10% in investment dollars, in contrast to declines in all other funding stages. According to Crunchbase data analysis, U.S. seed funding fell by 31% in 2023, a significant percentage but still a year-over-year decline compared to other funding stages. (It is also worth noting that these other stages were already seeing year-over-year declines in 2022.)
In today’s startup funding market, “we’re seeing more great talent who are excited to get things started,” says co-founder Renegade Partners, a Bay Area-based investment firm focused on Series A companies. says Renata Quintini. Close to a seed ecosystem.
Other investors share that enthusiasm. “Valuations are coming down and there’s more talent in the market,” said Michael Cardamone of New York-based seed investor Forum Ventures. “A lot of the seed companies and Series A companies are probably going to be in the next bull market.”
10 years of seed trends
Seed as an asset class has, unsurprisingly, grown in the US over the past decade. Less than $5 billion was invested in seed in 2014. At the market peak in 2022, seed investment exceeded $16 billion, but by 2023 it had fallen to $11.5 billion.
Despite the economic downturn, seed funding in the US in 2023 was still $2 billion to $3 billion higher than in pre-pandemic 2019 and 2020.
The hurdles are high, the rounds are expensive, and the value is high.
But as the market tightens, seed investors are becoming more selective about which companies they fund.
“We understand how difficult it is for these companies to get beyond Series A, and we’re making it even more He is disciplined and patient.” “The bar for our beliefs is higher than it was in the heyday, when everything was funded.”
Amid the slowdown in the funding environment, the company is investing in the later stages of the seed stage, saying, “We feel that it reduces risk more, so we invest in ‘seed plus’ or ‘minus’ — take your pick of the words. Please…I’m drawn to it.” We can now see more data,” she said.
Freestyle aims to acquire approximately 12% to 15% ownership of the companies it backs. “The reason is our model,” Lefcourt said. “We are low-volume investors and high-conviction investors.”
And because we invest in pre-Series A companies, our reality is that this market is actually valuing us at a higher valuation than we actually would. It’s not something that was created.
“But the data we’re seeing shows we’re not alone in that situation,” she said.
Series A matures
“Companies run for longer periods of time before reaching a Series A. They’re more risk averse,” Quintini said, adding that more mature companies are leaning toward raising Series A funding in this market. I see that there are.
Over the past decade, the typical time it takes for U.S. startups to go from seed funding to Series A has increased, according to data from Crunchbase. For Series A closed in 2014, the median time since the startup received its first seed of over $1 million was 14 months. In 2020, that increased to 24 months.
From the peak market in 2021 to 2022, the median value for each year has shortened slightly again to 22 months.
But in 2023, the median time from seeding $1 million or more to advancing to Series A has jumped to 28 months.
However, Mr. Quintini says, “The venture industry is an industry with many outliers, and the actual truth cannot be known from the median or average value.”
We compared the median time to raise to the top quartile of Series A raises from a $1 million first seed round. The top quartile achieved this in less than 12 months, excluding the Series A round in 2023.
In the first half of this decade, fewer companies reached that milestone, but they were able to raise Series A funding more quickly.
In 2021, the top quartile was shortened by up to eight months.
In 2023, the top quartile of companies took 12 months to reach Series A from an initial $1 million seed.
“we, [Series] A: Because people don’t want to be left behind by outliers,” Quintini said. In this market, with the exception of AI, there is less pre-emption where investors invest in nine months of a seed company’s life, she said.
That sentiment was reflected in cardamom. “There were a lot of companies that easily reached an A rating within nine to 12 months. And I think that’s going to continue to change.”
As companies take longer to reach Series A and the funding hurdles become higher, “the mortality rate will be higher and the proportion of companies that reach Series A will be much lower.” [Series] A, which means it’s a more difficult job for seed investors, even though they have more information to take on,” Cardamone said.
methodology
Seed funding in the US includes angel, pre-seed, and seed, as well as equity crowdfunding and convertible debt under $3 million. This analysis excluded seed funding of $100 million or more.
Illustration: Dom Guzman
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