17 ms·

Seed funding slows in Silicon Valley

133 points by justswim 9y ago

bretthellman 9y ago
"slow down" = great time to start a company
- quaz3l 9y ago
  Why is that? There is less money in circulation, so less chance you'll get any. Are they making wiser choices? So if you're company is a wise choice you'll get funding?
  - kqr2 9y ago
    Perhaps he is referring to Paul Graham's essay Why To Start A Startup In A Bad Economy : http://paulgraham.com/badeconomy.html http://paulgraham.com/badeconomy.html
  - cocktailpeanuts 9y ago
    You don't need funding to build a great company. In fact most great companies started out without huge funding.
- zitterbewegung 9y ago
  Yup Office Space, office equipment will be cheaper. Vendors with less sales will fight to be competitive. VC's won't tolerate superfluous startups and it would be a great time to bootstrap your own.
- BlackjackCF 9y ago
  Agreed. I also don't think the slow down is necessarily a bad thing. It's not that VCs aren't interested. They're just much more cautious about funding companies that end up being sustainable and viable. I think after all these unicorns, VCs have finally been brought back down to earth and are looking in the long term.
- johansch 9y ago
  (Warning: Really loud screaming. Do mute your sound before watching this.) https://www.youtube.com/watch?v=qydSKppGRD8&t=38 https://www.youtube.com/watch?v=qydSKppGRD8&t=38
  - sctb 9y ago
    Please don't post off topic like this.
- acchow 9y ago
  This is both true and false - makes it easier to hire talent and attract users/customers, but harder to raise capital. Works out great if you're running as a small business and don't need to raise capital.
- cylinder 9y ago
  Great time for real entrepreneurs starting real companies in organic ways, not shysters looking for $30M seed for their app so they can pay themselves and their buddies comfortable salaries while they work 5 hours/day in a trendy WeWork in SoHo.
nickspag 9y ago
The particular point about incumbent advantage, which admittedly has always been a factor, is particularly poignant in my mind. A lot of the recommendation is that founders shout from the rooftops about what they're working on, but in this climate is the better route to be relatively quiet with a small group of beta testers/a personal network? And go public more feature-rich or stable? If you hit a chord early on an incumbent could shift, even just "enough," and water-down your competitive edge to the point where the slag to viability just isn't realistic.
- tarunkotia 9y ago
  In theory, yes the incumbent can shift just enough to water-down your competitive edge but a company or a team with this kind of agility are few and far between. Getting a consensus is one of the hardest thing to do, let alone the speed at which you have to execute.
  - bdamm 9y ago
    In my experience this is one of the greatest hindrances to corporate evolution. If you or anyone else knows of any research into this phenomenon and how to help groups move beyond it I would love to see it and learn from it.
ryandamm 9y ago
I'm not sure the pause in unicorn IPOs is directly related to a slowdown in seed funding -- perhaps indirectly by minting fewer angel investors. A lot of the popular press -- even the popular tech press -- conflates startup funding. But late stage investing, which is mostly where unicorns play, is a totally different game from seed investing. Also, there are two stories here... one is about the shift in average check size and fewer deals. This is really just investment grade inflation, where larger deals are being called 'seed.' Not sure why but it's how it works. So much of the former seed rounds are probably underreported angel / micro fund rounds now. [Source: my startup's funding isn't publicly disclosed for that precise reason.]
- estsauver 9y ago
  It really has to do with expectations. The expectations of a company that has raised a "Seed" are X, the expectations of a company that's raised an A are 3X, a series B are 15x etc. By positioning yourself as having only raised a seed it makes it easier to raise later rounds. It's a very real anchoring effect.
mtl_usr 9y ago
I think it has to do with the traditional app model slowly being phased out. There is a huge saturation of apps on every major platform and it's getting harder and harder for new devs to get enough userbase that way.
- pc86 9y ago
  Being phased out by what?
  - nibstwo 9y ago
    The platform building that functionality themselves. Vertical integration in the customer-facing direction. 90% of my apps are Google-made now.
    - thisisit 9y ago
      What does "functionality themselves" mean? If possible please elaborate a bit? TIA
      - rusht 9y ago
        I assume they mean most of the features that were once in separate apps are now built into the OS.
      - pm90 9y ago
        I think he's referring to the platform itself providing most of the apps. e.g. Google Play Music replaced spotify for me when I used android. It can now play podcasts (like Apple's podcasts app) and also recognize music playing (like Shazam). Google's Inbox replaced Dropbox's mailbox. Google Map has a lot of features I used to find in Waze, even some extra ones (like Timeline). etcetc It reminds me of what Microsoft used to do: embrace, extend, extinguish.
        mtl_usr 9y ago
        > It reminds me of what Microsoft used to do: embrace, extend, extinguish. I guess they still do it on the enterprise level. But they have fallen behind in terms of consumer ecosystem.
tejay 9y ago
I don't think this is terrible news for entrepreneurs. It forces more operating discipline in the earlier stages. And, I believe we could do with more discipline as an ecosystem. As long as there's growth capital around once the business _is_ prepared to scale, we're all good.
readhn 9y ago
Everything is cyclical. We have not had a major crisis since 2008... Perhaps something is coming our way. Who knows.
- acchow 9y ago
  Pretty much every dynamic system that doesn't collapse ebbs and flows.
kylehotchkiss 9y ago
Probably an unpopular opinion, but when the startups receive $120,000,000 to make a juice machine that is only really accessible to the top 1 or 2% of the USA, it's not a bad idea to give funding a reset and give people a reason to step back from trying to raise funds and more time to work on more innovative ideas. America has it's fair of crises now, yet a good chunk of people have a smartphone. How can startups help people in the midwest and the coasts? Or what interesting things could be done given most of the world is online now? I'm sure we'll see some cool ideas and another funding boom again with some cool new ideas soon.
- pm90 9y ago
  Its not an unpopular opinion, but that Juicing thing was definitely an exception, not the norm. As to why everyone is chasing unicorns, one of my friends who's actively trying to get funding for his hardware startup sums it this way: VC's would make more from 1 unicorn than 50 other mildly successful businesses, and the other 50 businesses would probably require just as much work as the unicorn. Its a really fucked up calculus to be sure. I'm not sure what the solution is though. How do we encourage VC's to invest in more meaningful startups?
  - dimaggiosghost 9y ago
    The problem is it's impossible to predict success in an early stage company. Optimal way to ensure profit is to place many bets and hope one pays off enough to cover the costs of the losers. Asymmetrical outcomes are a requirement for sane strategic investors. If all you can do is buy lotto tickets, you are better off buying insane payoff opportunities than trying to pick which lotto tickets will have a higher frequency of payoff, but a much lower yield.
    - pm90 9y ago
      The point though is that these are not really lotto tickets. A lot of high-tech startups are working on monetizing some obscure technology, or inventing a more efficient way to do a task, or something along those lines. They are actually providing value, other than the payoff from their sale or IPO. I think we as a society are failing somewhat to give an appropriate monetary value to that kind of contribution.
austenallred 9y ago
From NYT that has actual numbers: > Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data. > The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That's just shy of the $1.75 billion for the same time period of 2016. That's slowing from 2015, but IMO these changes are pretty insignificant.
cblock811 9y ago
I've been hoping funding would slow so all the dead wood (we don't need all these delivery apps) can burn off without adding more to replace them. Hopefully we'll see companies try to grow sustainable businesses rather than a bunch of zombie startups that persist when they really shouldn't.
whatsmyhandle 9y ago
"The median seed deal is now $1.6 million, according to Pitchbook, up from about $500,000 five years ago. That's more in line with what big venture firms used to invest." Cost of living, office space, employees (due to the cost of living) has to be a factor here. Maybe $500k was viable a few years ago in the Bay Area, but imagine these days a company NEEDS a larger seed round in order to get to a viable state.
- cassieramen 9y ago
  Can anyone who was at a seed stage startup 5 years ago provide some insight into what salary looked like? I moved here about 2 years ago and constantly here how crazy housing and salary have gotten in just the last few.
  - kurttheviking 9y ago
    We were seed stage in 2011. We squeaked by in Redwood City on ~$30k/yr salary sharing 1-bedroom apartments which ran about $1,200/mo. That same unit now rents for $3-4k/mo.
- JohnnyConatus 9y ago
  Yup. Assume there's two founders both of which draw a 50k salary, likely after months of bootstrapping. 400k is not even three engineers in SF.
  - seanp2k2 9y ago
    400k is like the fully-loaded cost of a single engineer if you're trying to hire "top talent" and actually get them to come work for you (i.e. they're valuing any equity you're offering at the likely result of $0).
    - pkaye 9y ago
      But those "top talent" engineers will be starting their own company so you don't have to worry about that.
Powerofmene 9y ago
As it has historically done, this will level out and correct without any intervention required.
jwilliams 9y ago
The cost of starting a company is also declining. So there is an offset there - In early stage the big outlier in SV is rent. However, most other aspects are getting considerably cheaper (including cloud platforms being very generous with credits)

133 points by justswim 9y ago

bretthellman 9y ago

"slow down" = great time to start a company

quaz3l 9y ago
Why is that? There is less money in circulation, so less chance you'll get any. Are they making wiser choices? So if you're company is a wise choice you'll get funding?
- kqr2 9y ago
  Perhaps he is referring to Paul Graham's essay Why To Start A Startup In A Bad Economy : http://paulgraham.com/badeconomy.html http://paulgraham.com/badeconomy.html
- cocktailpeanuts 9y ago
  You don't need funding to build a great company. In fact most great companies started out without huge funding.
zitterbewegung 9y ago
Yup Office Space, office equipment will be cheaper. Vendors with less sales will fight to be competitive. VC's won't tolerate superfluous startups and it would be a great time to bootstrap your own.
BlackjackCF 9y ago
Agreed. I also don't think the slow down is necessarily a bad thing. It's not that VCs aren't interested. They're just much more cautious about funding companies that end up being sustainable and viable. I think after all these unicorns, VCs have finally been brought back down to earth and are looking in the long term.
johansch 9y ago
(Warning: Really loud screaming. Do mute your sound before watching this.) https://www.youtube.com/watch?v=qydSKppGRD8&t=38 https://www.youtube.com/watch?v=qydSKppGRD8&t=38
- sctb 9y ago
  Please don't post off topic like this.
acchow 9y ago
This is both true and false - makes it easier to hire talent and attract users/customers, but harder to raise capital. Works out great if you're running as a small business and don't need to raise capital.
cylinder 9y ago
Great time for real entrepreneurs starting real companies in organic ways, not shysters looking for $30M seed for their app so they can pay themselves and their buddies comfortable salaries while they work 5 hours/day in a trendy WeWork in SoHo.

nickspag 9y ago

The particular point about incumbent advantage, which admittedly has always been a factor, is particularly poignant in my mind. A lot of the recommendation is that founders shout from the rooftops about what they're working on, but in this climate is the better route to be relatively quiet with a small group of beta testers/a personal network? And go public more feature-rich or stable? If you hit a chord early on an incumbent could shift, even just "enough," and water-down your competitive edge to the point where the slag to viability just isn't realistic.

tarunkotia 9y ago
In theory, yes the incumbent can shift just enough to water-down your competitive edge but a company or a team with this kind of agility are few and far between. Getting a consensus is one of the hardest thing to do, let alone the speed at which you have to execute.
- bdamm 9y ago
  In my experience this is one of the greatest hindrances to corporate evolution. If you or anyone else knows of any research into this phenomenon and how to help groups move beyond it I would love to see it and learn from it.

ryandamm 9y ago

I'm not sure the pause in unicorn IPOs is directly related to a slowdown in seed funding -- perhaps indirectly by minting fewer angel investors. A lot of the popular press -- even the popular tech press -- conflates startup funding. But late stage investing, which is mostly where unicorns play, is a totally different game from seed investing. Also, there are two stories here... one is about the shift in average check size and fewer deals. This is really just investment grade inflation, where larger deals are being called 'seed.' Not sure why but it's how it works. So much of the former seed rounds are probably underreported angel / micro fund rounds now. [Source: my startup's funding isn't publicly disclosed for that precise reason.]

estsauver 9y ago
It really has to do with expectations. The expectations of a company that has raised a "Seed" are X, the expectations of a company that's raised an A are 3X, a series B are 15x etc. By positioning yourself as having only raised a seed it makes it easier to raise later rounds. It's a very real anchoring effect.

mtl_usr 9y ago

I think it has to do with the traditional app model slowly being phased out. There is a huge saturation of apps on every major platform and it's getting harder and harder for new devs to get enough userbase that way.

pc86 9y ago
Being phased out by what?
- nibstwo 9y ago
  The platform building that functionality themselves. Vertical integration in the customer-facing direction. 90% of my apps are Google-made now.
  - thisisit 9y ago
    What does "functionality themselves" mean? If possible please elaborate a bit? TIA
    - rusht 9y ago
      I assume they mean most of the features that were once in separate apps are now built into the OS.
    - pm90 9y ago
      I think he's referring to the platform itself providing most of the apps. e.g. Google Play Music replaced spotify for me when I used android. It can now play podcasts (like Apple's podcasts app) and also recognize music playing (like Shazam). Google's Inbox replaced Dropbox's mailbox. Google Map has a lot of features I used to find in Waze, even some extra ones (like Timeline). etcetc It reminds me of what Microsoft used to do: embrace, extend, extinguish.
      - mtl_usr 9y ago
        > It reminds me of what Microsoft used to do: embrace, extend, extinguish. I guess they still do it on the enterprise level. But they have fallen behind in terms of consumer ecosystem.

tejay 9y ago

I don't think this is terrible news for entrepreneurs. It forces more operating discipline in the earlier stages. And, I believe we could do with more discipline as an ecosystem. As long as there's growth capital around once the business _is_ prepared to scale, we're all good.

readhn 9y ago

Everything is cyclical. We have not had a major crisis since 2008... Perhaps something is coming our way. Who knows.

acchow 9y ago
Pretty much every dynamic system that doesn't collapse ebbs and flows.

kylehotchkiss 9y ago

Probably an unpopular opinion, but when the startups receive $120,000,000 to make a juice machine that is only really accessible to the top 1 or 2% of the USA, it's not a bad idea to give funding a reset and give people a reason to step back from trying to raise funds and more time to work on more innovative ideas. America has it's fair of crises now, yet a good chunk of people have a smartphone. How can startups help people in the midwest and the coasts? Or what interesting things could be done given most of the world is online now? I'm sure we'll see some cool ideas and another funding boom again with some cool new ideas soon.

pm90 9y ago
Its not an unpopular opinion, but that Juicing thing was definitely an exception, not the norm. As to why everyone is chasing unicorns, one of my friends who's actively trying to get funding for his hardware startup sums it this way: VC's would make more from 1 unicorn than 50 other mildly successful businesses, and the other 50 businesses would probably require just as much work as the unicorn. Its a really fucked up calculus to be sure. I'm not sure what the solution is though. How do we encourage VC's to invest in more meaningful startups?
- dimaggiosghost 9y ago
  The problem is it's impossible to predict success in an early stage company. Optimal way to ensure profit is to place many bets and hope one pays off enough to cover the costs of the losers. Asymmetrical outcomes are a requirement for sane strategic investors. If all you can do is buy lotto tickets, you are better off buying insane payoff opportunities than trying to pick which lotto tickets will have a higher frequency of payoff, but a much lower yield.
  - pm90 9y ago
    The point though is that these are not really lotto tickets. A lot of high-tech startups are working on monetizing some obscure technology, or inventing a more efficient way to do a task, or something along those lines. They are actually providing value, other than the payoff from their sale or IPO. I think we as a society are failing somewhat to give an appropriate monetary value to that kind of contribution.

austenallred 9y ago

From NYT that has actual numbers: > Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data. > The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That's just shy of the $1.75 billion for the same time period of 2016. That's slowing from 2015, but IMO these changes are pretty insignificant.

cblock811 9y ago

I've been hoping funding would slow so all the dead wood (we don't need all these delivery apps) can burn off without adding more to replace them. Hopefully we'll see companies try to grow sustainable businesses rather than a bunch of zombie startups that persist when they really shouldn't.

whatsmyhandle 9y ago

"The median seed deal is now $1.6 million, according to Pitchbook, up from about $500,000 five years ago. That's more in line with what big venture firms used to invest." Cost of living, office space, employees (due to the cost of living) has to be a factor here. Maybe $500k was viable a few years ago in the Bay Area, but imagine these days a company NEEDS a larger seed round in order to get to a viable state.

cassieramen 9y ago
Can anyone who was at a seed stage startup 5 years ago provide some insight into what salary looked like? I moved here about 2 years ago and constantly here how crazy housing and salary have gotten in just the last few.
- kurttheviking 9y ago
  We were seed stage in 2011. We squeaked by in Redwood City on ~$30k/yr salary sharing 1-bedroom apartments which ran about $1,200/mo. That same unit now rents for $3-4k/mo.
JohnnyConatus 9y ago
Yup. Assume there's two founders both of which draw a 50k salary, likely after months of bootstrapping. 400k is not even three engineers in SF.
- seanp2k2 9y ago
  400k is like the fully-loaded cost of a single engineer if you're trying to hire "top talent" and actually get them to come work for you (i.e. they're valuing any equity you're offering at the likely result of $0).
  - pkaye 9y ago
    But those "top talent" engineers will be starting their own company so you don't have to worry about that.

Powerofmene 9y ago

As it has historically done, this will level out and correct without any intervention required.

jwilliams 9y ago

The cost of starting a company is also declining. So there is an offset there - In early stage the big outlier in SV is rent. However, most other aspects are getting considerably cheaper (including cloud platforms being very generous with credits)