
Seed funding has declined - lnguyen
https://techcrunch.com/2017/11/30/theres-an-implosion-of-early-stage-vc-funding-and-no-ones-talking-about-it/
======
sulam
Given that they define ‘early’ as before A, they simply mean seed fundings
have dropped off a lot. There’s a lot of reasons this could be true, but a
couple that resonate for me (an investor in three pre-A and two post-A
companies) is that 1) the series A cliff is real and is backpropogating to
seed rounds and 2) seed is full of dabblers (me included) who have hopefully
realized the economics aren’t great unless they have quality deal flow and can
afford to invest at least $1M+ being an angel (which means they should have
overall portfolios in excess of $10M minimally).

Bonus theory: the bloom is off the crowd-funding rose. Crowd funding was
producing a lot of low quality startups that tanked fairly rapidly and
probably never had a chance.

~~~
api
Bonus theory #2: few IPOs means few newly minted angels.

Bonus #3: huge companies still sucking up VC like Uber are crowding out
smaller investments.

~~~
danblick
I like to imagine that maybe Uber and money-losing ventures like it will help
bring some balance to the universe by taking away the billions accumulated by
super-rich investors and redistributing that money to working-class drivers
through subsidies.

Like, I don't know: does all that red ink have a positive effect on the Gini
coefficient?

(This pipe dream might not be supported by actual facts.)

~~~
lozenge
I would argue the subsidies are going to the customers. The drivers, who often
take out leases only to be surprised by Uber pricing changes, are often just
treading water.

Karhoo is a more flagrant example - they allowed multiple referral codes per
account, and people quickly circulated lists of codes that together came to
over $100 in free rides.

~~~
ghaff
In many cases, I expect customers are getting subsidized by both VCs and by
drivers who don't have a good handle on their costs.

~~~
jmknoll
Regarding drivers who don't have a good handle on their costs, almost
definitely. Mr Money Mustache just did a piece on this recently.

[https://www.mrmoneymustache.com/2017/11/22/mr-money-
mustache...](https://www.mrmoneymustache.com/2017/11/22/mr-money-mustache-
uber-driver/)

------
immad
Other strong factors that are not mentioned:

1\. Seed funding has long delays to liquidity. The glut of seed investors,
money and excitement in 2012-2015 got a lot of investors interested but none
of them have got returns yet so they got tapped out.

2\. Accelerators like YC have built up a strong brand so seed funding is more
concentrated as well.

3\. You need less and less money at seed stage so expectations are higher and
one would expect less funding activity.

Overall a gentle decline in seed funding from its slightly bubbly levels is a
healthy sign for the ecosystem.

~~~
lm555
What about ICOs didn't they some kind of seed funding?

~~~
paulie_a
Were there any legit icos?

~~~
daSn0wie
there are some. checkout [https://coinlist.co/](https://coinlist.co/)

------
danielblazevski
My main takeaway is that there seems to be little incentive to invest in new
companies, just invest FB, Google, Lyft, Spotify, etc.

That can't be good long term for the tech sector.

~~~
matte_black
If you are looking for a steady ROI this has always been true.

You don’t invest in startups unless you’re hoping to make huge returns.
Investing in FB or Google at this point will never get you 100x returns.

~~~
danielblazevski
I see it as a difference in investing $100K in 50 startups and one gives 100X
increase vs $1million in 5 companies all giving like 50% increase. The
risk/reward for more medium-large companies is far too appealing these days to
avoid

------
pascalxus
Well, VCs don't just stop funding stuff for no reason. I'm sure this is an
effect and not the cause. I suppose, VC must be getting less returns on Seed
rounds and everyone's starting to see that most of the new opportunities are
gone. It's now all about established businesses that already have a user base.
We've already seen this play out with the gaming bubble when it peeked in
2012.

~~~
skgoa
There is also far less apetite for "tech unicorn" startups and IPOs on Wall
Street now than a few years ago. The gold rush is over and now people are
waking up to the fact that most of those super hyped companies will never turn
into the next Facebook. The Fed having turned of the money faucet (i.e.
quantitative easing) probably has something to do with that, too. Plus we have
seen a sector rotation from tech to financial stocks recently.

Without a greater fool to sell the VC's stake to after a few years at most,
the whole VC business case wouldn't work. That means VCs have to be far more
discerning.

~~~
cyberpunk0
Not surprising when half the shit people fund was dog shit to begin with. Half
of the time I read about start ups with the most trivial ideas ever and wonder
how dumb and blind people are to throw millions at them

~~~
JoeAltmaier
Most big internet wins started as little ideas. Its about the market and
timing? More than how shiny the idea is. If there's a customer for it, then it
can make money.

~~~
CalChris
They started out as fundamental ideas, not little ideas.

------
clay_to_n
What do they mean "no one's talking about it"? That's just clickbait, it's
been talked about widely that seed funding has been declining, but Series A
and later rounds are staying about the same.

Just a google search for "decline in seed funding 2017" shows how many big
outlets have had stories this year on it.

------
TuringNYC
Perhaps the ~10yr life-cycle of many funds started in 2007 have ended in
disappointment for many LPs. I wish there were comprehensive statistics on GP
performance.

~~~
leggomylibro
It would probably be very educational to see the same sort of post-mortems
from those funds that we've seen from their investments.

~~~
matte_black
What more could they say really? They already expect most of their investments
to fail expect for a few big outliers.

~~~
leggomylibro
"We expected X, Y happened, and we learned Z" would work for me.

~~~
IMTDb
Failed VC fund : "We expected 90% of our investments to fail. 100% of them
failed. We learned that choosing the right company to invest in is harder than
we thought."

Successful VC fund : "We expected 90% of our investments to fail. 80% of them
failed. We learned that we are awesome at choosing good companies"

Realty : They both gambled. One of them won, the other not so much.

------
empath75
There also seems to be a contraction in digital publishing. I think the money
well is starting to run dry and we might be seeing the beginnings of a flight
to quality.

[http://talkingpointsmemo.com/edblog/theres-a-digital-
media-c...](http://talkingpointsmemo.com/edblog/theres-a-digital-media-crash-
but-no-one-will-say-it)

~~~
mustacheemperor
The reasons for the contraction are well explained by the author in that
article, though, including why venture capital investing has slowed in the
sector - the business model for most of these companies doesn't seem to have
the same explosive potential previous investors predicted and it's clear the
expected returns won't happen either. Not an attractive market at the present
moment.

~~~
awakeasleep
The gold rush is over and the profits go to the big five.

This is unfortunate because a lot of the 'innovation' in the big 5 comes from
acquisitions, and without the VC money startups won't exist to be acquired

~~~
lenley
Following your model, then 'innovation' at the big five will slow down and
there will be greater incentive for people to create new start-ups... and the
cycle will continue.

~~~
goialoq
"It's different this time", but, it's different this time. As the Information
Age advances, entrenched players can use their information advantage to
outcompete. For example, Facebook has analytics on every small startup that
gains traction, and can due much better due diligence than the startup's own
investors, and so can buy the most promising ones out for cheap.

~~~
lenley
The companies still have to be willing to sell, and there's greater and
greater liquidity in the market. While the ICO fad will fade, there will be
new financial innovations to take the place of ICOs.

------
muzani
Y Combinator partners have been saying for a while now that accelerators were
a bubble. I see what they mean now.

~~~
hkmurakami
Speaking of which, I wonder what this artcile means when they say "early
stage".

Do $200k "angel rounds" count the same as $5M Seed rounds involving actual
tier 1 or 2 VCs?

~~~
muzani
I feel like a lot of it includes angels who instead chose to buy Bitcoin.

------
njpatel
Fwiw, there seems to be a push from VCs to bring you in talking about a
'normal' seed round (a smallish figure, debt-financing or simple equity-
financing), but then try and talk up doing a large Series A immediately (with
all the complexity that brings).

The idea being that you then have enough money to go and do whatever you want,
at any cost, and work your way to a Series B. In the mean time, the VC(s) get
their share and have some/all board control.

~~~
CalChris
Do you really mean Series A or do you mean priced? I did see a presentation
from a seed fund that insisted on a priced round recently.

------
ramzyo
Can anybody explain this sentence?

>> More worryingly, it comes at a time of unprecedented stock market
valuations worldwide.

So people are putting their money into stocks because interest rates are low
and there’s nowhere else to put it? It’s worrying to startup investment
because...there aren’t many good opportunities to invest instead of the stock
market? Not sure I’m understanding this correctly..

~~~
Alex3917
When interest rates are low and/or stocks are overvalued, interest in
alternative asset classes like venture is supposed to increase. Think of it
like a BATNA in negotiations.

~~~
ramzyo
Right, so what are possible explanations for interest in alternative asset
classes not increasing, and why is that worrisome?

~~~
clay_to_n
I think it's worrisome because it means people are keeping their money in
stocks - they aren't acting as if the market as overvalued, even when
everyone's talking about it (which could contribute to a bubble pop).

------
jamiesonbecker
Congress' and the SEC's diligent efforts to regulate markets and prevent
another 2000 have also prevented another 1999.

Now companies don't IPO... they suck up all the funding that would otherwise
be aimed at actual startups (as opposed to companies that should probably be
listed in the Fortune 500).

------
gozur88
The stock market is white hot right now. Why take a huge risk on a startup
when your index fund is up 20% in just one year?

~~~
matte_black
The point of investing in startups is not to get better returns, it’s to get
different returns. If you already have a ton of money invested in stocks,
diversifying a bit by throwing some capital into startups is not a bad idea in
case the market tanks.

~~~
vadimberman
Where do you think the venture money comes from? Mostly from investment banks
and faceless funds, not a bunch of rich guys.

These funds have diversified portfolio. They are paid to produce good returns,
so a small part goes into "alternative investments" and such, which is
potentially high-risk, high-yield.

The article does a good analysis but they forget to mention another factor:
cryptocurrencies. It's clearly the biggest bubble right now, which means it'll
draw the money used to gamble.

~~~
nostrademons
Cryptocurrencies are also used to directly invest in startups via ICOs. The
ICO market is reportedly bigger than the venture capital market as of a couple
months ago; the numbers in this article are completely consistent with a shift
in early-stage fundraising from seed funds to ICOs.

[https://www.cnbc.com/2017/08/09/initial-coin-offerings-
surpa...](https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass-
early-stage-venture-capital-funding.html)

~~~
api
Is the quality of seed stage ventures as bad as the quality of nearly all
these ICOs? If so wowza.

~~~
nostrademons
If you take as your universe the set of all ventures that _pitch_ to seed
stage, probably yeah. Most of them are weeded out by investors. I suspect a
good many ICOs are weeded out by "investors" as well, but if you pitch to
enough people, there's always someone willing to suspend disbelief. (This goes
for seed stage ventures as well...some truly idiotic business models have
gotten funded.)

------
speedplane
If you want to invest in early technology that is vague on substance and has
only speculative potential to add true value, then why would you invest in
startups when bitcoin has far higher returns?

~~~
ohyes
Because startups create value in the real world?

~~~
lwansbrough
I’m not a fan of Bitcoin but it creates a lot more value in the real world
than many Silicon Valley startups; such as the ones building webcams for
animals, or delivery for X.

~~~
goialoq
Yes, the best of one category is better than the worst of another category.

~~~
lwansbrough
Well regardless of what we think of those startups, massive amounts of money
are being poured into them. How much value are they really creating though?

------
PaulHoule
I have known about it for two years or so and I can't say that I'm terribly
well connected.

------
pjzedalis
It is all going to Bitcoin.

~~~
api
... and into the air as CO2. Last I heard mining consumes as much power as the
entire nation of Ireland.

~~~
moreless
Yes, but did you hear how much power nation of Ireland is consuming? Last I
heard as much as whole Bitcoin blockchain! </s>

------
DrNuke
It seems to me that seed funding was treated too much as a disconnected
financial bet instead of a connected reasoned instrument? I mean, the seed as
a small lump sum of money plus closed-circle services buys time but nothing
organic. More consideration seems being given to industry-tailored, vertical
seeds aka the big players playing with startups as prospective, cheap,
external, disposable, temporary r&d departments.

------
sneak
It’s much easier and faster to raise seed round amounts of money via an ICO
than it is to deal with the huge time sink that is courting angels.

~~~
djrogers
Let’s be realistic - something that’s happened a (relative) handful of times
over the past 12 months does not explain a dramatic 3+ year trend...

~~~
richardknop
It has happened hundreds of times actually. There have been tons of ICOs. I
would not underestimate it.

------
hkmurakami
>The data shows by far the sharpest fall in activity has been in early- and
seed-stage rounds. In fact, later rounds have remained fairly flat the last
three years, and A and B rounds have fallen, but not nearly by as much.

A/B rounds I guess is being called "mid stage" in their graph. For both early
and mid stages, we're back to lower than 2011 numbers. Mid stage rounds may
not have grown as much in frequency than early stage, but they're back to
levels just as low as early stage, comparatively. Given that, the author's
observations look very biased and reeks of trying to interpret the data to fit
the narrative.

------
nl
It would be interesting to see what is defined as "VC Funding" \-
specifically, I suspect it may exclude accelerator programs (or measure the
whole accelerator program as a single funding activity for a VC fund).

The drop in VC fundings seems to align reasonably well with the increase in
accelerator programs[1]. That makes sense - as tech companies are getting
cheaper and cheaper to start.

[1]
[https://www.entrepreneur.com/article/271000](https://www.entrepreneur.com/article/271000)

~~~
goialoq
That can explain the trend in #fundings, which is a silly metric anyway. But
$$$ has also plateaued and started to drop.

~~~
nl
Maybe?

Depends how and when it is measured. If the 2017 figures cut off at the start
of September (which isn't crazy if it gathered quarterly) then it is on track
to be the most ever. If it cuts off at the end of November, then it's a real
drop.

------
vadimberman
Reporting from Singapore. Yes, seed funding has dried up here as well.

On the other hand, the TechCrunch chart shows that the amount is still higher
than, say, 5 years ago.

------
j_s
How much of the early investment done in startups is motivated by QSBS
(pre-$50M)? Maybe the virtuous cycle has stalled as participants haven't
reproduced.

[https://news.ycombinator.com/item?id=15594177](https://news.ycombinator.com/item?id=15594177)

I doubt it has a major impact, but it may be a small part.

~~~
CalChris
I think the effect of QSBS is quite small. It has only really come into force
with Obama's initiatives in 2009+2013 and it seems that few people know of it
and understand it.

Unlike 83b, not many people are even aware of QSBS. For example, it isn't
mentioned at all in the 3rd edition of _Venture Deals_. I've been in a few
Silicon Valley workshops (Morrison Foerster and also Berkeley Law) and neither
mentioned QSBS. YC doesn't seem to provide any guidance. I see very little on
it from SV law firms. I've asked and I get a recital of the basic mechanics.
First Round Search doesn't mention it.

[https://search.firstround.com/search?query=qsbs](https://search.firstround.com/search?query=qsbs)

Anyways, I've been looking into QSBS myself. I don't know why QSBS isn't a
bigger thing, especially since the maximum capital gains rate increased to
20%.

[https://g.foolcdn.com/editorial/images/433057/maximum-
capita...](https://g.foolcdn.com/editorial/images/433057/maximum-capital-
gains-tax-rates_large.PNG)

I don't think startups are handling this well for either their early employees
(which includes founders themselves) or for any individual angel investors who
could qualify. Empirically this lack of interest in QSBS is the case. But I
don’t know why it is the case.

------
jgh
i figured the opposite might start happening with Softbank's gigantic fund
coming online. But I guess if they're going to go after late-stage "winners"
and that's how everyone else is going, then maybe tech startups will have to
start thinking about starting business the traditional way.

~~~
stevenj
I believe at least 50% of SoftBank's $100 billion Vision Fund is dependent
upon Saudi Arabia, which recently arrested several prominent businessmen and
investors that were integral to securing the deal.

As far as I know, the status of Saudi Arabia's $50 billion investment into the
Vision Fund is uncertain right now due to the arrests.

------
s73ver_
I don't see this as being too terrible. Hopefully it causes companies to focus
more on selling things to customers, instead of just "growth hacking" to get
more users that don't actually contribute to the bottom line.

------
zerostar07
it's official, we are running out of ideas

~~~
pascalxus
more accurately, running out of solvable problems

It's time for another innovation unlocking to occur. Someone needs to build a
platform that does what the internet did for software, but apply that platform
to the world of hardware and the real world.

I still need a robot to clean up my kitchen and put the kid to sleep.

~~~
nrhk
You mean something like a web of value vs the web of information we have
currently?

Where we can meld physical properties with digital and interact in both worlds
seamlessly through AR.

In order to do that we would some sort of immutable database where many
parties can come to a consensus on its values...

~~~
pascalxus
Well, i was think more along the lines of reducing barries to the point where
anyone can create a real product. For instance, anybody with basic coding
skills can create a website or social network. Imagine if anyone with some
basic programming skills could build a house, a new car, a form of
transportation, a cheaper form of medical insurance, a new robot, etc. We'd
see an explosion of new innovation, that really would benefit society. As it
stands right now, all the above requires enormous amounts of legal knowledge
because even if you had the hardware/AI skills to do it, it's illegal and
politically insurmountable.

------
king07828
I realize this won't be popular with this crowd.

One big reason is the campaign against patents in general, and against
software and e-commerce patents in specific.

Why would an investor put down money for an idea for a new website where FB
Google Amazon Apple MS will simply copy the idea and use their economy of
scale to remove even the hint of success?

~~~
dmritard96
I'm not buying that. The reality is early stage companies dont bother with
patents as mich because of money and time constraints. Really well funded
compa oes sure, but the reality is patents are a tool for the big guys, if you
have to do battle with google, your startup is probably screwed either way.

~~~
socialentp
Yes, but this ignores the fact that those patents are transferred to an
acquirer upon the sale of your startup. Yes, the patent is largely useless to
your startup. However, if you've proven the market, a patent could be an
attractive perk to acquire your startup (rather than just copying and crushing
it) since they can use that patent to keep other big players out.

------
mef
Anyone know why the title was changed away from the actual title of the
article?

~~~
nostrademons
[https://news.ycombinator.com/item?id=15822097](https://news.ycombinator.com/item?id=15822097)

------
rblion
Hopefully seedy people along with it.

