

How long will the seed-stage bubble last? - elsewhen
http://andrewchen.co/2012/08/20/how-long-will-the-seed-stage-bubble-last/

======
asanwal
There really is no Seed Stage bubble because there is no market mechanism that
will force a "correction".

First, if you add up all the seed investments happening in tech and assume
that 100% fail, the money lost would be the equivalent to a few medium to
large'ish VC funds failing. It's not a huge deal in terms of $.

But 100% failing is not going to happen. So there will be stories of some
angel or seed investor making a killer return on a deal and that brings more
people into the market trying to emulate that. So even though some angels/seed
investors will get totally washed out and stop making investments, there will
be a new supply coming in. The "corrections" will be mini-corrections, i.e.
people stopping angel or seed investing cuz they didn't make money.

But there will always be someone new who fancies themselves as a "smarter
picker" of companies and who will continue to make these investments.

The only thing IMO that could trigger a correction would be if all the
prominent seed & angel investors came out and said they're stopping making
investments. That would change the supply/demand characteristics as well as
the overall sentiment towards these deals, but that is not going to happen
because each thinks they are smarter than the other, has better proprietary
dealflow, is more disciplined, etc.

We're seeing (my company sells data to investors) lots of people try to set up
Seed VC funds these days ($25 to $100M) so this appears to just be getting
started to be honest.

~~~
TheEzEzz
Can you elaborate on how this reasoning doesn't apply to the first dotcom
bubble? Is it that more companies were publicly traded during the first dotcom
bubble? How do companies like Zynga and Facebook factor in to your analysis?

(I was just a kid during the dotcom bubble, so I appreciate any insight you
can shed.)

~~~
jfarmer
The first bubble was characterized by massive speculation in public tech
stocks completely detached from fundamentals.

Facebook, Groupon, and Zynga getting kicked in the nuts on the public market
is the opposite of that.

------
pg
"Given that this whole ecosystem is supported by the team acquisitions..."

If that's what he's starting from, you can't trust any of the conclusions
here. We make next to nothing from HR acquisitions.

~~~
j_baker
They're probably better deals than if the companies went under. I think his
point is that the possibility of an acquihire removes a good deal of risk.

~~~
pg
HR acquisitions have such an insignificant effect on returns that they're
indistinguishable from failures.

------
rdudekul
"we’re currently in a golden age for early stage startups, and the early stage
market will stay hot for at least the next 3-5 years"

"VCs are seeding deals without any price sensitivity, and a lot of angels
seeing exits even when the teams fail"

"Angels are willing to invest because they have downside protection due to
acquihires"

"downside protection is driven by acquihires from companies paying $1M-3M per
engineer"

Fascinating observations. For me this is not a bubble. It is a fail safe
investment opportunity. If you are an accredited investor just sign up for
AngelList and start investing in seed rounds for startups that you understand.
There is too much upside and too little downside. No wonder the funding
environment for seed stage startups is red hot.

------
cageface
_The downside protection is driven by acquihires from companies like Twitter,
Facebook, Groupon, and others which are paying $1M-$3M per engineer._

All these companies seem to be headed for a dose of some very strong medicine
though. Without the acquihire safety net I think the seed stage investment
game looks a lot less certain.

Of course, all the traditional investment vehicles look even less appealing
lately.

~~~
alttab
I notice many players these days that their entire strategy is based on aqui-
hire. Essentially building a "feature company" and trying to grab a user base
to piss off the company that "should have the feature anyway". If you ask me,
thats a rather narrow game plan and it leaves a lot of risk in case something
changes. If the "target company" implements the feature themselves, well, then
you either need to pivot or continue in the delusion that the company can
stand on its own (hint: It wont because it wasn't ever part of the plan).

------
justincormack
I think the seed-stage boom is because companies generally need much less
money than they used to. There are no significant costs except salaries for
software businesses. So why take more money? It is more a reflection that the
larger VCs have less opportunities, so seed stage will continue to grow.

------
dm8
Andrew, why do you call there is a bubble? From what I know, it's still very
hard to raise seed money. Last week, founder of Launchbit posted her seed
round on her blog (and it made it to HN front page), it didn't seem easy at
all.

You are the man in the investor's arena, so I'm curious to know what has
become easier (in obtaining seed funding) compared to say 5 years back.

------
j_baker
I nominate the title for the loaded question of the month club. When will the
author stop beating his wife?

