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The number of seed rounds in 2014 fell compared to 2013 (techcrunch.com)
87 points by dmor on Jan 17, 2015 | hide | past | web | favorite | 69 comments

Except: "Bear in mind that the total dollar amount of money flowing into seed deals barely declined".

That is a questionable definition of "popping" a bubble.

The article does go on to admit that it's just selectively illustrating the number of deals, not the amount invested in seed deals, which is actually still the same in aggregate, and then wishy-washily says it's up to you to interpret this yourself etc. But since most people don't read too far past the dramatic chart and the headline, I think it would be fair to say this smacks of click-baity sensationalism.

And it's equally possible to interpret this data positively. Perhaps VCs are becoming more selective and concentrating their money on better teams/ideas instead of casting as wide of a net as possible(I am not saying this is actually the case). I don't understand why so many journalists try to find catastrophe in the absence of contrary evidence.

That's negative for shitty teams/ideas, but yeah, probably positive for the health of the ecosystem.

I would apply the "San Francisco Rent Test". Are SF rents still high? Then Seed Bubble: not popped.

Rags need to produce articles. Exhibit 1.

That should actually be a red flag about the data. When you see a rapid, precipitous decline in deals but amounts don't change, you have to look at the data.

How do you get a rapid, precipitous decline in deals without an expected decrease in dollars? Use a data source that a) is liable to miss deals[1] and b) will classify multi-million dollar rounds involving institutional/venture investors as "seed"[2][3].

[1] Per my other comment I work with a startup that raised a public seed round in Q4 that is not listed in Crunchbase.

[2] https://www.crunchbase.com/organization/skydio

[3] https://www.crunchbase.com/organization/north-technologies

Could an article based on the same data not also be titled "Seed rounds increasingly replaced by Series A"? Because while Seed rounds are in decline, Series A is up.

Series A also are higher amounts than Seed, so volume in investments is actually going up.

Also, it doesn't matter if something is called Series A or Seed. In the end it is about the amount of dollars available to entrepreneurs.

First of all. The word click-bait needs to die. It implies wrongdoing by the author, but all you are really saying is the headline grabbed your attention and you didn't like the content.

Second, the aggregate chart shows the total amount invested went from 9 years of growth to it's first decline. Look at Q3 2014 vs Q3 2013 more than a 50% decline in seed deals! With numbers like that it's hard not to interpret it as foreshadowing continued declined.

Nope. It shows the total number of deals, not amount invested. You fell victim to precisely the problem I mentioned.

Here's a big hairy recap of 2014 venture capital:


Nothing on here is alarming at all - look at fundraising, look at how much money was invested in venture companies, look at valuations, look at capital exited; all really healthy.

Sure, maybe the "spray and pray" style of seed investment has stopped as VCs are pickier about early stage companies or prefer to focus on later stage companies with their portfolios, but that's not necessarily a terrifying sign of some big bubble popping. It might be harder for a business plan and a website to get a few hundred thousand dollars circa 1998, but a lot of promising companies are still getting the money they need to grow.

This plays right into YCs hands: seed money is harder to get, but YC is still open for business. And with the number of deals they fund the remainder of the seed world is left with what they (incorrectly) perceive as 'second choice', now that the path to YC is well known.

This is true. I think what we saw was an accelerator bandwagon. It was truly a revolutionary mechanism in the VC world and everybody under the sun wanted in on the action... but there were too many and hardly any of them could replicate the same results as YC and TS. We knew some of them were going to die off and now they have.

I fail to see how anybody but the "me too" accelerators lose with this trend (and they were losing already, obviously). Startup founders shouldn't have been taking money from them anyway, so the fact that they're dying off just saves naive founders from making at least this one mistake.

That's something worth remembering about reading graphs. When you're looking at the aggregate of a trend, it's worth asking what changes in that aggregate represent. Sometimes, growth means taking on dead weight. Sometimes recession means shedding it.

That first graph doesn't really show the bursting of a bubble. Yes, the number of rounds have gone down, but I think an important metric is the amount raised, which has only slightly decreased. This make it seems like there have been stricter requirements by seed investors before jumping in.

Which to me sounds like not a bad thing. Ideally we'll get less Yo apps this way.

The problem I see is that if fewer companies are being funded early-stage today, then there will be fewer companies around to get later-stage funding tomorrow. One of the reasons we have so many companies getting later stage funding right now is that there was so much seed funding a few years back. If early-stage funding is starting to dry up, that may be a sign of other things to follow...

If this just affected the Yo apps it would be great news but that does not seem to be the case.

Interesting graph. The "bubble" goes parabolic right in 2009, as the financial system is awash in QE money, searching for yield. Almost textbook.

A very good observation, and one that I've been making to my friends and family. Where else to put the money sloshing around in the system except technology and automation? It almost doesn't matter what the idea is, only that it "could be big." Many other industries are either already commoditized (manufacturing) or require too much money to enter (healthcare, anything regulated heavily by the government). Why not throw some money at a few guys who want to "change the world?"

QE has nothing to do with VC

>QE has nothing to do with VC

Sure it does. Easy money is easy money. That goes for you and your mortgage at historically low rates, or VCs raising capital. When stimulus is occurring, it's interesting to see where it ends up.

I'm not implying anything nefarious. In fact, I'd say it's working as intended (or at least expected).

To make sure we're talking about the same thing; the pink line in the second graph on the techcrunch article is what you're talking about when "the bubble goes parabolic".

That pink line represents the number of seed deals completed, not the amount of money in the system.

Unfortunately, I cannot download the original dataset that Mattermark is using, but using a dataset from Pricewaterhouse Coopers[1], and data from FRED[2], I have run some statistical analysis using R.

My results are here: http://imgur.com/a/eFzs1

In short, the only statistical correlation I can find between QE and Seed capital is a negative one, which would contradict your original hypothesis.




>My results are here

Why would you compare quarterly values of seed money to a cumulative total (QE) and expect a correlation? They are completely different series. Try doing a running total for the seed money and the graph will look different. The first and third graphs don't make sense for this reason.

The second graph is better, and you can see there is some correlation. Did you test for lags, or do you assume that QE money would flow instantly into the coffers of institutional investors?

I applaud your effort, but there is more to this analysis than overlaying two graphs. You need to understand the data.

When demand increases for Apples, the price of Apples increases. When the price of Apples increases, the demand for Oranges increases.

Fed demand for Investment Bonds increases the price of Investment Bonds. When the price of Investment Bonds increases, the demand for other investments increases.

Textbook Econ 101, as the parent comment noted.

I would say you're comparing apples to oranges by conflating Investment Bonds (which I'm assuming you mean Treasury Bonds), but you've already set yourself up for the apples and oranges with your example.

If you'll check the source article[0] that the Techcrunch graph was pulled from, you'll see that there is a negative correlation between the Treasury bond yield and the amount of money flowing into seed deals.

According to your Textbook Econ 101, there should be a positive correlation between these two. But the data shows there is not.


Yeah, cheap money never goes searching for yield.

Most professional investors are sheep. The number and scale of opportunities in technology is growing incredibly and they're not all doubling down.

It's been almost 10 years and no one has launched a credible competitor to YC. That's proof of how incredibly weak the industry is.

Where investors are afraid, consumers aren't the least bit deterred. They don't talk of bubbles. They want cool new stuff that makes their live better and they're paying for it. The internet has reached critical mass, everyone is online and has a credit card. Which is why, in the near future, new technology will mostly come from companies that were funded by crowdfunding, not professional investors.

crowdfunding? really?

Both crowdfunding and VCs fund a tiny portion of the total small businesses started.

Did you see those charts? The scale is in hundreds.

In the US alone there are millions of small businesses started each year. Sure, most of those aren't trying to change the world (haven't seen statistics on that)... but even if it's 0.5% and you exclude all the solo founders, it would still far out number crowdfunding and VCs by a large margin.

There are more Italian restaurants funded every year than there are technology startups as a whole. But if you take "startup" to mean "technology startup" you're talking about the same thing I am.

And almost all of these startups were funded by VCs early on. Crowdfunding will replace VCs as it becomes possible for people to get equity in exchange for funding. Your average person is more than clever enough to invest $500 in Dropbox the day it launches as a video on Digg. Only a broken system stops them from being able to profit the way already rich investors do today.

In the same way that Uber didn't replace taxis, crowdfunding will not replace VCs, it will surpass them. The crowd has far more money and are themselves the ultimate judge of what's good.



How are the millions funded?

Loans, savings, investments from friends and relatives, etc.

> And of course there is another possibly — maybe hundreds of startups collectively decided to stop announcing their funding rounds?

There is also a much simpler explanation... there is a lag in when seed rounds happen and when they are announced. The fact that the most recent data point stands out as a massive outlier is a strong indication of this possibility. Simple to check as well, we can look at this same plot in 6 months with the back filled data and see if the conclusion is the same.

Jumping to conclusions for the sake of a headline is fine, that is Techcrunch's job after all. But for those of you that do data analysis for your own companies, be careful when jumping to conclusions. If you see a massive outlier on your graph like this, more often than not it is a data collection/sampling issue than a giant change in the world. And of course if you do think it is a giant change in the world, extraordinary claims require extraordinary evidence. So there shouldn't be a caveat, which if true, completely disprove the whole conclusion.

You also need to consider the source of the data. From what I understand, much of Mattermark's data comes from Crunchbase, and the categories in the Mattermark chart[1] mirror categories on Crunchbase.

Crunchbase is by no means a comprehensive source of all deals. As an example, I work with a company that raised a seed round in Q4 2014. Crunchbase does not have this funding despite the fact that it's public.

For the deals that Crunchbase does have, the categorization can be very spotty. For instance, you can find $2+ million party rounds with institutional investors categorized as "Seed" while there are sub $1 million rounds categorized as "Venture" or even "Series A." There are also oddball categories like "Debt Financing" and "Convertible Note" which in some cases appear to be the same thing.

In my mind this is almost certainly a case of garbage in, garbage out.

[1] https://tctechcrunch2011.files.wordpress.com/2015/01/screen-...

We definitely found this out the hard way. We tried to raise $750K for a seed round and were repeatedly told that our tech/team were great but that we didn't have enough traction.

It's kinda hard watching people go on about the "bubble" when you're just out there trying to scrap it out and find something that works.

YC offers 20k+ for a few percent. Startup Chile is 40k with a co-investment of around 10k. That money is supposed to support the founders for a few months while they get the prototype out the door and build traction.

In comparison, 750k is a metric ton of cash, and should be enough to support a founding team for several years. Not judging, but if you're positioning it as a seed round instead of Series A that may be part of the problem.

> In comparison, 750k is a metric ton of cash, and should be enough to support a founding team for several years.

Until you start hiring. Then you can burn through that kind of money surprisingly fast. Talent is (rightly!) expensive. So unless your co-founders and you have all the skills you need to see your product out the door you could very well need multiple 100 Ks to get going. If you're doing anything hardware related or that needs certification or a hundred other things that you could spend your money on then you might find this is not as much as it seemed at first.

Not all start-ups are making simple web apps or mobile apps.

Doing a seed round for $300K is not much easier than $750K and will give you only half the return on your time invested.

At least at 750K you'll still be looking at a relatively abbreviated process rather than a full blown DD (which would burn up too large a chunk of the investment to make sense).

BTW, YC now invests $120k in most of their companies: http://blog.ycombinator.com/the-new-deal

Wow. I didn't know they'd dropped the convertible round. The new arrangement is a great deal -- more than a $1.7 million valuation for each company accepted.

Given that we'd sunk about $300K of our own cash into the company, I don't think $750K was out of line for what we were doing, or for the VC firms we were talking to which tend to do much bigger deals.

The bigger problem was we were doing something really technical that required a lot deeper pockets, and people were nervous to invest without seeing more traction. Which is reasonable; capital isn't flowing like champagne like a lot of people seem to believe.

I'm not trying to be critical. I've been following YC since it started and my impression is that it became popular largely because PG was the first guy willing to give developers rent money and a decent valuation on the basis of basically nothing. In contrast, what you are talking about isn't a seed round in the way that most people conceive of it.

> capital isn't flowing like champagne like a lot of people seem to believe.

Absolutely, and I don't think it really has since 2000 to be honest. There was a minor boom around 2004 for "user-generated content" and "social/video" sites, and then another for mobile apps after the app store launched. But the general trend has been towards low-value "seed" rounds for demonstrating traction, and then lots of financing for late-stage companies that would previously have already IPO'd.

I hope you guys get the funding you need. I'm just not sure that your experience is relevant to a discussion on the availability of seed funding, that's all. What this conversation really highlights is the way no-one here even seems to even have the language to talk about what is reasonable in terms of expectations/traction for mid-stage startups that are more capital intensive.

I'll probably be looking for seed later this year, so this makes me sad and despondent. I can probably bootstrap to traction, but it's really hard.

Don't feel sad - this is just a set of numbers. While the big picture trend doesn't look very good, that graph still shows that hundreds of companies just like yours are closing deals. Keep the faith and keep working hard - fortunes are made during downturns...

So bootstrappers are on the rise now?

Yes and it's going mainstream. Starting a company is so cheap and fast now that it doesn't even take a team of 2 or 3 anymore. A single person can do it.

There are so many benefits to solo-founding, it's not even funny. Without co-founders, there's no delay in getting started. There's no drama. The development cycle is fast and the code can be remarkably clean. Personally, I make changes to my production code all the time because the whole thing is in my head and I know what effect my changes will have. (And if I screw something up, I know how to fix it in minutes, not hours.) With a team, that's simply not possible.

Investors are going to wake up to this reality soon and accelerators will trip over each other to claim to be the "accelerator of solo founders".

Corollary to this, MBAs and other non-tech types are screwed in the years to come. Engineers won't need them anymore. 1. Make a product. 2. Get some baseline traction. 3. Join an accelerator or raise a seed round, if you need it. 4. Hire the founding team. 5. Profit.

One small problem: co-founders make you stronger. You are your own single point of failure. For many customers that makes you a no-go zone.

"Co-founders make you stronger" is a questionable generalization. Cofounders add a lot of things, both positive and negative, and as long as you and (each of) your cofounder(s) have vital skills/resources that are unique in the group, you now have multiple "single points of failure."

Yes, cofounders can contribute bandwidth, skills, connections, and all sorts of other positive things. They can also contribute friction, disagreement, and various other negative things. It's not a cut and dry benefit.

Reminds me of remote working. Some people claim it's bad, some people claim it's the greatest thing since sliced bread. There's pros and cons to each. People build successful companies with both methodologies.

As a solo-founder, I've never run into a customer that cared how many people were involved in my company. Once you get to the point that things look professional, most just assume you aren't running the company out of your apartment. Maybe this matters more for sales-intensive B2B startups though.

If you are selling anything mission critical like infrastructure, being a one-man shop with nobody to provide support when you get a bad bout of diarrhea is a no go.

But honestly... is it?

In my experience, if you have a good brand image and a track record, people just assume you have contingency plans, lots of funding and/or a second programmer on staff.

Cofounders with good relationship > sole founder >> cofounders with poor relationship or other issues.

Yes, absolutely.

In retrospect the second comparison is more like >>>>>>!!!!!!!

Founder conflicts are death.

Not always, been there, done that. But they can definitely rob you of momentum when you need it most.

Co-founders make you stronger, co-founders make you weaker. There are plenty of examples of both. There are examples for every narrative. There are no absolutes in startup success.

Along these lines, are there any accelerators/funds willing to fund a solo founder? If not, this seems like a good opportunity for a company which can quantify the risk of solo founders.

They never stopped. The number of bootstrappers dwarfs the number of funded companies, they tend to score lower but they score more frequently. They also don't get press unless they're acquired by some company.

Lots of money changing hands (investment, blow-up, acquisition) is what gets you press.

This talk by DHH explains why I prefer to bootstrap a company: https://www.youtube.com/watch?feature=player_embedded&v=0CDX...

The main point being, that if you start off by selling a product (rather than getting people to sign up for a free product and then monetizing later) and can get a fraction of the people to sign up then you are in profit. Further, if you own 100% of the company, you are profitable much faster so you don't need to grow as large.

Ex: $30/month * 500 users = $15,000 a month. If that was a bootstrapped business with just a solo founder...$$$

> Further, if you own 100% of the company, you are profitable much faster so you don't need to grow as large.

Can you explain how 100% ownership translates into earlier profitability?

Fewer founders means fewer people with expenses that the business needs to support (even if those expenses are the bare minimum: food, shelter, etc).

Of course, I think what that assumes is that one person could launch a product as quickly as a team. It's easy to imagine a product being complex enough that a team could launch it before a solo founder would.

But ignoring that.. it's clearly faster/easier to build a business to support a single person than multiple people.

But you could sell shares to non-founders. That way you have the same path to profitability but none of the extra costs.

I guess not earlier profitability but earlier "riches" because there is only one person taking from the pie.

Of course the reason people add confounders/employees and take VC funding is because it makes the total pie easier to grow in many cases.

Suppose you got $40-100k from one of the dozens of accelerators and the cost of running an online business shrinks every year. Is your next raise still counted as seed or series A? Are successful kickstarter campaigns counted as seed deals? Should they? Maybe it's not that seed bubble is popping, but there so many new ways to run a startup that old metrics are no longer relevant.

There's a significant time delay between when seed rounds are closed and when they're announced, so data for the most recent quarters are almost certainly incomplete. This leads to the spurious conclusion that the number of seed rounds declined in 2014.

Seed deals decline while total $ spent stays still? Good news IMO. Means VCs are putting more of their weight into co's they do fund. #win

I totally misread the graphs. Sorry Danielle!

Did I see the same chart you did? I went back and looked, all I saw was "Q1" and "Q3" labels while the data showed all four quarters, but only half were labelled. It /was/ missing a Q4 though at the end.

Creator of the graphs and author of the original post (here: https://medium.com/mattermark-daily/why-is-the-number-of-see...)

All the quarters from Q1 2005 through Q4 2014 were plotted. The axis labels do not show all of them due to space constraints. Apologies that this was confusing, I will make sure to add all the tick marks and labels in the future.

I don't think you need all, I mean, there were space constraints. This is why a bar graph can be clearer than a line graph for discrete data though. They may be boring, but they are often effective at communication. :-) Oh and it's helpful to label both ends of the graph, from Q1 2005 to Q4 2014, then fill in what labels you can in the middle. If you'd picked random Qs or even just every year, perhaps to shade the backgrounds of each year, that might have made for a more understandable graph. Our fault for misunderstanding it in the first place, of course... This is also why some places link to tables of data used in the graph. You could click to view the table if you had any questions about what you're seeing in the graph. Stephen Few's an accessible read on this subject.

Cool, this is great feedback. I'll check out Stephen Few's work too -- thanks for reading and caring!

"The Seed Bubble Has Popped" has popped.

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