What’s Happening to Seed Stage
Venture Capital? 1 Image Credit: Pexels Mark Suster @msuster Chang Xu @_changxu

The Seed sector of the
Venture Capital industry started booming in 2006. This wasn’t a result of VC’s suddenly wanting smaller funds, it was a result of massive technology shifts making it significantly cheaper to launch a startup. 2 1999 2005 2010+ $5m $500k $50k 90% 90% Costs to Launch a Startup

The first major wave was
cause by open-sourced computing and horizontal computing. 3 1999 2005 $5m $500k 90% Costs to Launch a Startup • Open source (LAMP Stack) meant no licenses for UNIX, web servers & Oracle databases • Horizontal computing meant no need to buy expensive Sun servers & EMC storage. Instead one bought cheap arrays of PCs and when one failed you just removed it and added another

The second major wave was
a result of Amazon. Yup. That simple. Not Google, Microsoft, IBM or Oracle. It was an Ecommerce company that launched AWS and popularized Cloud Computing. 4 2005 2010+ $500k $50k90% Costs to Launch a Startup • S3: Amazon launched S3 in 2006, which provided “web storage,” eliminating the need for startups to invest in physical storage to build products • EC2: Amazon also launched EC2 (elastic compute cloud) in 2006 that meant startups could have processing power in the cloud without buying hardware • Auto-scaling: In the past startups had to build infrastructure for “peak demand,” which is very expensive. Amazon launched “auto scaling” (after the success of Santa Barbara based RightScale) which meant that startups didn’t need to pre-commit to instances and could scale up and scale down with traffic

Cloud computing, popularized by Amazon
AWS, led to younger and more technical founders aggregating where young people wanted to live. 5 • Youth: When startups required $5 million just to launch a product, founders were in their early 30s to 40s. It was sensible to back teams with experience. When startups required < $500k to start it became easier to back founders in their 20s (or even, gulp, teens). • Technical: When you could test ideas for $500k and when more products were being built natively in the cloud you saw the rise of the “technical founder” rather than the “MBA founder.” • Urban: With founders being younger it’s no wonder Silicon Valley gave way to San Francisco in the Bay Area, Waltham to Cambridge in Boston, Thames Valley to Shoreditch in London, Pasadena to Santa Monica in LA. Youth sought out urban environments and the VCs living in the suburbs with 3 kids had to follow suit.

6 So as usual the
money followed the market, not the other way around. You can see the boom in the Seed market was during the 8-year period from 2006 to 2014. The number of Seed Funds increased dramatically, which helped create a distinct part of the venture capital funding ecosystem. LPs took longer to respond but leaders like Cendana & Industry Ventures rode this trend and others followed later. 2006 2007 2008 2009 2010 2011 2012 2013 2014 Number of Funds Raised for <$100M Funds 83 181 Source: Pitchbook NVCA Venture Monitor 4Q’18 220%

7 With so many new
funds and so many new startups, the number of pre-seed & seed deals exploded from 2006-2014. 2006 2007 2008 2009 2010 2011 2012 2013 2014 US VC Number of Deals under $1M 488 3,543 Source: Pitchbook NVCA Venture Monitor 4Q’18 >600% 2006 2007 2008 2009 2010 2011 2012 2013 2014 Number of $1-5M Deals 1,036 3,104 >300%

8 And predictably as the
seed market began to mature the median deal size quadrupled and seed investing itself became a distinct category from Angel investing. US VC Angel/Seed Median Deal Size ($M) by Year $0M $0.5M $1M $1.5M $2M 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Pitchbook NVCA Venture Monitor 4Q’18 Seed Angel

9 US VC Seed Round
Median Ownership 0% 5% 10% 15% 20% 25% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Methodology: Divided US VC Seed Round Median Deal Size by US VC Seed Round Median Post-Money Valuation. Discarded 2006-7 due to distorted results from few recorded deals Source: Pitchbook NVCA Venture Monitor 4Q’18, Upfront analysis Seed The increase it seed deal size is partly due to valuation increases but mostly due to seed funds maturing and realizing the importance of ownership in driving VC returns

10 And by 2015 the
first signs of maturity began to show as the seed industry cooled off in terms of dollars. It has been declining for 3 years. This is a normal sign of maturity, not a permanent weakness in the seed market. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Pitchbook NVCA Venture Monitor 4Q’18 $8.7B $2.8B $8.2B $7.4B >290% Cooled off by >15% US VC Dollars Invested in Deals under $5M

11 You can observer the
decline in seed investing not only in dollar terms but even more pronounced in terms of number of deals and even funds themselves being raised. 2015 2016 2017 2018 # of Deals Under $1M 3,374 2,144 Source: Pitchbook NVCA Venture Monitor 4Q’18 Down 36% 2015 2016 2017 2018 # of $1-5M Deals 3,315 2,699 Down ~20% 2015 2016 2017 2018 # of Seed Funds Raised < $100M Funds 181 129 Down 30%

12 The decline in the
seed market has come at a time when the overall funding in the venture markets has risen massively. Growth investments (rounds > $50m) now account for 62% of the entire market. US VC Capital Invested by Deal Size ($B) 2013 2014 2015 2016 2017 2018 $7B$8B$8B$9B$8B$7B Source: Pitchbook NVCA Venture Monitor 4Q’18 Seed Stage (<$5M) Venture Capital ($5-50M) Growth Capital (>$50M) $48b $71b $83b $77b $83b $131b 62% of the market

Why Has Seed Investing Stagnated?
13 Image Credit: Unsplash

14 In part seed investing
has stagnated because series A venture capital didn’t increase much as seed investments were booming. US VC Number of $5-10M Deals 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1,118 687 Source: Pitchbook NVCA Venture Monitor 4Q’18 4% CAGR

15 Series B funding numbers
also remained fairly flat over the past decade. US VC Number of $10-25M Deals 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 1,103 643 Source: Pitchbook NVCA Venture Monitor 4Q’18 5% CAGR

16 Seed is now a
distinct phase of the venture capital ecosystem; however, the deals are still being funneled into a downstream market that hasn’t massively increased with the exception of the biggest, most successful deals. Series A funds Series A funds THEN NOW Angel / Seed Angel / pre-seed Seed funds Source: Upfront analysis Series B funds Series B funds Bottom end of the funnel haven’t changed much Top end of the funnel is now 3x larger

17 The result of more
seed financing and not the commensurate increase in Series A, or B has been the rise of the “Seed Extension.” Source: Cendana Capital portfolio company data (with permission) Time to Series A Pre-2012 2012 2013 2014 2015 2016 2017 2018 0.9 1.2 0.8 1.1 1.2 1.2 1.4 1.6 Number of Seed Extension Rounds Pre-2012 2012 2013 2014 2015 2016 2017 2018 69 45 52 39 28 1189 Median years from Series Seed to A

18 Venture Capital Scale or
Bust Private IPOs Growth Capital The Start Seed Capital 20% of deals drive 80% of returns The venture markets are now clearly segmented. Seed investors largely take the risk of backing startup formation. Traditional VCs take board seats, help build teams, scale companies and shepherd companies to growth investors. Growth capital now plays the role that early IPO investors once played.

Seed Stage Capital is Here
to Stay. It has Just Matured. 19 Image Credit: Pexels Mark Suster @msuster Chang Xu @_changxu