9 ms·

Seed funding has declined

219 points by lnguyen 9y ago

PaulHoule 9y ago
I have known about it for two years or so and I can't say that I'm terribly well connected.
empath75 9y ago
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-crash-but-no-one-will-say-it http://talkingpointsmemo.com/edblog/theres-a-digital-media-c...
- mustacheemperor 9y ago
  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 9y ago
    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 9y ago
      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 9y ago
        "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 9y ago
        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.
- smcnally 9y ago
  More than some of that is the ongoing contraction in publishing as a whole. That's been going on for ~20 years, but knowledge transfer has been incomplete. Even in good times, successful publishers don't often throw off the multiples VCs prefer. A flight to quality would be great.
jgh 9y ago
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.
- ProAm 9y ago
  I would view Softbank as more of a holding company than a VC investor. They do make some speculative investments but it seems more of their investments are in industry specific established companies.
- hkmurakami 9y ago
  There's a cap on governance that these funds can do, no matter what the size (ex: 10 companies per parnter, or whatever the standard is). So if SB has a $100B Fund, that predisposes them to very late stage deals. In fact their deals will look more like PE than VC.
- stevenj 9y ago
  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.
nl 9y ago
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 9y ago
  That can explain the trend in #fundings, which is a silly metric anyway. But $$$ has also plateaued and started to drop.
  - nl 9y ago
    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.
TuringNYC 9y ago
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 9y ago
  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 9y ago
    What more could they say really? They already expect most of their investments to fail expect for a few big outliers.
    - leggomylibro 9y ago
      "We expected X, Y happened, and we learned Z" would work for me.
      - IMTDb 9y ago
        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.
- hkmurakami 9y ago
  Hence Funds were being raised 2-3 years ago to record amounts. The amount of capital that can be deployed right now, if desired, should still be very large.
muzani 9y ago
Y Combinator partners have been saying for a while now that accelerators were a bubble. I see what they mean now.
- hkmurakami 9y ago
  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?
  - stevenj 9y ago
    Early in this case means before Series A.
  - muzani 9y ago
    I feel like a lot of it includes angels who instead chose to buy Bitcoin.
- dmritard96 9y ago
  Sure, but its also in their interest to push that narrative. Doesnt mean its wrong, just that its not as simple as a neutral observer. That and when ever any prediction is right, there are always tons of people that predicted it as a result of just large numbers. I think they wohld rather just convince investors that their program is the only quality accel. around. If they can, it means more funding for their investments and less for their competitors...
gozur88 9y ago
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?
- muzani 9y ago
  A startup growing 5% week on week is worth 1100% more in a year. Of course, it's a lot less liquid and likely to lose everything. Huge risk, huge returns.
  - gozur88 9y ago
    Sure, so you have a portfolio with lots of startups to spread the risk. If your total portfolio made less than 20% this year, you wasted a whole lot of time.
- deleted 9y ago
  [deleted]
- matte_black 9y ago
  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.
  - quickthrower2 9y ago
    They are related, in that you are hoping your startup will become a future stock. So if stock prices are down, so is your E(V) at startups.
    - matte_black 9y ago
      Becoming a stock is only one way to exit. The startup could also get acquired for a ton of money by a bigger company.
      - 9y ago
speedplane 9y ago
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 9y ago
  Because startups create value in the real world?
  - lwansbrough 9y ago
    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 9y ago
      Yes, the best of one category is better than the worst of another category.
      - lwansbrough 9y ago
        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?
    - SomeStupidPoint 9y ago
      If you look at per energy expenditure, I'd argue that "webcams for pets" or "delivery for X" are probably delivering more value per unit energy used, because of relative efficiency.
- flamedoge 9y ago
  Lots of alt-coin startups... ICOs are mini IPOs
  - 9y ago
jamiesonbecker 9y ago
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).
hkmurakami 9y ago
>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.
sneak 9y ago
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 9y ago
  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 9y ago
    It has happened hundreds of times actually. There have been tons of ICOs. I would not underestimate it.
sulam 9y ago
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 9y ago
  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.
  - sulam 9y ago
    I buy your first one but not so much the second. People and funds investing in seed rounds aren’t putting money into Uber right now.
    - pc86 9y ago
      No but might Uber and similarly sized financing rounds be taking money from people who typically invest in seed/A/B? So those investors' funds flow away from the seed rounds? Just postulating.
      - sulam 9y ago
        Not really. These are completely different classes of investors, and different classes of investment.
        staticautomatic 9y ago
pascalxus 9y ago
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 9y ago
  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 9y ago
    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 9y ago
      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 9y ago
        They started out as fundamental ideas, not little ideas.
deleted 9y ago
[deleted]
ramzyo 9y ago
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 9y ago
  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 9y ago
    Right, so what are possible explanations for interest in alternative asset classes not increasing, and why is that worrisome?
    - ghaff 9y ago
      I'm not sure it's worrisome but putting your money in asset classes with low appreciation potential is still an improvement over setting it on fire.
    - clay_to_n 9y ago
      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).
- skgoa 9y ago
  Essentially: 1) Stocks are super expensive, so future yields from stocks are expected to be low. (Since price increases will be low and dividend per invested dollar will be low.) 2) Bonds yields are super low, because interest rates are super low. This means that logically you should put your money into other investments. Which just isn't happening that much . Uncertainty has led to a "flight to safety" into US stocks and cash. Investors currently seem to prefer buying big, expensive companies instead of gambling on higher yield/risk investments.
pjzedalis 9y ago
It is all going to Bitcoin.
- perbu 9y ago
  I assume this is blatant speculation. Do you have any data or any other indication that indicates that venture funds are putting money into Bitcoin? Or if the investors in the funds are pouring money into bitcoin.
- api 9y ago
  ... and into the air as CO2. Last I heard mining consumes as much power as the entire nation of Ireland.
  - moreless 9y ago
    Yes, but did you hear how much power nation of Ireland is consuming? Last I heard as much as whole Bitcoin blockchain! </s>
- moreless 9y ago
  Could be - or it could be going to ICOs. It seems the initial scams phase is (mostly) over* and they are becoming more and more like regular investments. EDIT: * not to say you should invest in ICOs without proper research and without knowing what you will get out of it.
- acjohnson55 9y ago
  That would be a cruel joke, given that bitcoin is essential to very few people.
vadimberman 9y ago
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.
immad 9y ago
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.
- onion2k 9y ago
  You need less and less money at seed stage so expectations are higher and one would expect less funding activity. It's definitely true that starting a tech company is cheaper than ever ... but only for a certain type of tech company. If you're a developer starting a SaaS business in an industry you know and you have connections to get customers already you can get to the stage where you have your first paying customer by spending about $5/month (write the code, stick it on Digital Ocean, take payments with Stripe's pay-as-you-go tier). However, there are a lot of businesses like physical manufacturing, knowledge-driven research, complex software, etc that you can't do that with. You need the money up front or you can't even start. If seed money falls away then only the already wealthy will be able to start in those industries. I think we'll miss out on some great ideas that could turn in to huge businesses if that's the case.
  - timthelion 9y ago
    "complex software" as far as I can tell, the complexity of problems solved by startups decreases over time. The true hack isn't coming up with a hard solution to a hard problem, but in finding the simplest thing that people will interact with and share.
  - dmritard96 9y ago
    Yes. So many articles about funding and startups live in this small little bubble of thinking that all startups make a silly little app and that their trajectory will be that of the social mobile craze a few years ago (get users, retain, monetize). I run a hardware startup and this is really obvious as most funds simply can't understand how you can make a thing, sell it, and grow the business to a large size, as if selling atoms instead of electrons is so weird. Even when that hardware has its core value in software. We are lucky enough that we already make money and don't need VC. From the meetings that I have been asked to, I get this sense that many VCs won't seriously look at businesses that do anything substantial in the seed to A funding stages. There is no shortage of ppl that will write a 5M check with a couple other similar sized checks, but few will write a check for 500k/1M. The classic descriptions I have always heard are seed = build and find product market fit. A = with that fit, do your first bit of aggressive growth. But when you talk to folks right now, their requirements for an A seem to be that you have already grown a lot. And if you're a cashflow business like ours, it leaves me scratching my head, as at that point I dont need their money and def won't take their 'raise another seed' type offers. The number of times I have gone into meetings, been told that they werent sure if it was a 1B business is my favorite. These guys dont want to buy shares but they and their buddies buy the product! lol I think early VC is scared. They have no idea what makes sense and what doesnt. They have all these rules of thumb that apply to a narrow type of company and now that the barriers to entry on those are so low, the noise is overtaking the signal.
mef 9y ago
Anyone know why the title was changed away from the actual title of the article?
- skbohra123 9y ago
  no
- nostrademons 9y ago
  https://news.ycombinator.com/item?id=15822097 https://news.ycombinator.com/item?id=15822097
njpatel 9y ago
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.
- ig1 9y ago
  That doesn't really make sense from the VC perspective. At seed a startup normally has a much cheaper valuation so the VC can get the equity stake they want at a much cheaper price. VCs can also take a board seat at seed level (most don't because they don't have the time to take board meetings for all their seed companies).
- CalChris 9y ago
  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.
zerostar07 9y ago
it's official, we are running out of ideas
- pascalxus 9y ago
  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 9y ago
    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 9y ago
      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.
DrNuke 9y ago
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.
rblion 9y ago
Hopefully seedy people along with it.
king07828 9y ago
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 9y ago
  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.
  - king07828 9y ago
    This is exactly the problem. Patents used to be a tool that little guys could use against the big guys. Like when Google started with a patent on its search algorithm that prevented Yahoo from copying its idea. Interestingly, this was also a form of wealth redistribution that forced large companies to give money to smaller companies with good ideas. If you assume that the patent system is being weakened, it is interesting how it aligns with a reduction in seed funding while at the same time seeing massive market valuations for already enormous tech companies.
  - socialentp 9y ago
    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.
- starfishjenga 9y ago
  Do you have any evidence for this hypothesis?
- 9y ago
danielblazevski 9y ago
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.
- yellowbrick 9y ago
  I mean, was giving $5 million to every startup that had “blockchain” in the pitch going to help much anyway? Look at San Francisco and tell me with a straight face that things weren’t already incredibly bad.
- deleted 9y ago
  [deleted]
- matte_black 9y ago
  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 9y ago
    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 9y ago
  Perhaps so, but it's a reflection of the opportunities, or rather lack thereof.
j_s 9y ago
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 9y ago
  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-capital-gains-tax-rates_large.PNG https://g.foolcdn.com/editorial/images/433057/maximum-capita... 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.
clay_to_n 9y ago
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.
s73ver_ 9y ago
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.

219 points by lnguyen 9y ago

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

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

mustacheemperor 9y ago
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 9y ago
  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 9y ago
    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 9y ago
      "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 9y ago
        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.
smcnally 9y ago
More than some of that is the ongoing contraction in publishing as a whole. That's been going on for ~20 years, but knowledge transfer has been incomplete. Even in good times, successful publishers don't often throw off the multiples VCs prefer. A flight to quality would be great.

jgh 9y ago

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.

ProAm 9y ago
I would view Softbank as more of a holding company than a VC investor. They do make some speculative investments but it seems more of their investments are in industry specific established companies.
hkmurakami 9y ago
There's a cap on governance that these funds can do, no matter what the size (ex: 10 companies per parnter, or whatever the standard is). So if SB has a $100B Fund, that predisposes them to very late stage deals. In fact their deals will look more like PE than VC.
stevenj 9y ago
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.

nl 9y ago

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 9y ago
That can explain the trend in #fundings, which is a silly metric anyway. But $$$ has also plateaued and started to drop.
- nl 9y ago
  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.

TuringNYC 9y ago

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 9y ago
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 9y ago
  What more could they say really? They already expect most of their investments to fail expect for a few big outliers.
  - leggomylibro 9y ago
    "We expected X, Y happened, and we learned Z" would work for me.
    - IMTDb 9y ago
      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.
hkmurakami 9y ago
Hence Funds were being raised 2-3 years ago to record amounts. The amount of capital that can be deployed right now, if desired, should still be very large.

muzani 9y ago

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

hkmurakami 9y ago
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?
- stevenj 9y ago
  Early in this case means before Series A.
- muzani 9y ago
  I feel like a lot of it includes angels who instead chose to buy Bitcoin.
dmritard96 9y ago
Sure, but its also in their interest to push that narrative. Doesnt mean its wrong, just that its not as simple as a neutral observer. That and when ever any prediction is right, there are always tons of people that predicted it as a result of just large numbers. I think they wohld rather just convince investors that their program is the only quality accel. around. If they can, it means more funding for their investments and less for their competitors...

gozur88 9y ago

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?

muzani 9y ago
A startup growing 5% week on week is worth 1100% more in a year. Of course, it's a lot less liquid and likely to lose everything. Huge risk, huge returns.
- gozur88 9y ago
  Sure, so you have a portfolio with lots of startups to spread the risk. If your total portfolio made less than 20% this year, you wasted a whole lot of time.
deleted 9y ago
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matte_black 9y ago
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.
- quickthrower2 9y ago
  They are related, in that you are hoping your startup will become a future stock. So if stock prices are down, so is your E(V) at startups.
  - matte_black 9y ago
    Becoming a stock is only one way to exit. The startup could also get acquired for a ton of money by a bigger company.
    - 9y ago

speedplane 9y ago

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 9y ago
Because startups create value in the real world?
- lwansbrough 9y ago
  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 9y ago
    Yes, the best of one category is better than the worst of another category.
    - lwansbrough 9y ago
      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?
  - SomeStupidPoint 9y ago
    If you look at per energy expenditure, I'd argue that "webcams for pets" or "delivery for X" are probably delivering more value per unit energy used, because of relative efficiency.
flamedoge 9y ago
Lots of alt-coin startups... ICOs are mini IPOs
- 9y ago

jamiesonbecker 9y ago

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).

hkmurakami 9y ago

>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.

sneak 9y ago

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 9y ago
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 9y ago
  It has happened hundreds of times actually. There have been tons of ICOs. I would not underestimate it.

sulam 9y ago

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 9y ago
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.
- sulam 9y ago
  I buy your first one but not so much the second. People and funds investing in seed rounds aren’t putting money into Uber right now.
  - pc86 9y ago
    No but might Uber and similarly sized financing rounds be taking money from people who typically invest in seed/A/B? So those investors' funds flow away from the seed rounds? Just postulating.
    - sulam 9y ago
      Not really. These are completely different classes of investors, and different classes of investment.
      - staticautomatic 9y ago

pascalxus 9y ago

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 9y ago
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 9y ago
  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 9y ago
    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 9y ago
      They started out as fundamental ideas, not little ideas.

deleted 9y ago

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ramzyo 9y ago

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 9y ago
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 9y ago
  Right, so what are possible explanations for interest in alternative asset classes not increasing, and why is that worrisome?
  - ghaff 9y ago
    I'm not sure it's worrisome but putting your money in asset classes with low appreciation potential is still an improvement over setting it on fire.
  - clay_to_n 9y ago
    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).
skgoa 9y ago
Essentially: 1) Stocks are super expensive, so future yields from stocks are expected to be low. (Since price increases will be low and dividend per invested dollar will be low.) 2) Bonds yields are super low, because interest rates are super low. This means that logically you should put your money into other investments. Which just isn't happening that much . Uncertainty has led to a "flight to safety" into US stocks and cash. Investors currently seem to prefer buying big, expensive companies instead of gambling on higher yield/risk investments.

pjzedalis 9y ago

It is all going to Bitcoin.

perbu 9y ago
I assume this is blatant speculation. Do you have any data or any other indication that indicates that venture funds are putting money into Bitcoin? Or if the investors in the funds are pouring money into bitcoin.
api 9y ago
... and into the air as CO2. Last I heard mining consumes as much power as the entire nation of Ireland.
- moreless 9y ago
  Yes, but did you hear how much power nation of Ireland is consuming? Last I heard as much as whole Bitcoin blockchain! </s>
moreless 9y ago
Could be - or it could be going to ICOs. It seems the initial scams phase is (mostly) over* and they are becoming more and more like regular investments. EDIT: * not to say you should invest in ICOs without proper research and without knowing what you will get out of it.
acjohnson55 9y ago
That would be a cruel joke, given that bitcoin is essential to very few people.

vadimberman 9y ago

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.

immad 9y ago

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.

onion2k 9y ago
You need less and less money at seed stage so expectations are higher and one would expect less funding activity. It's definitely true that starting a tech company is cheaper than ever ... but only for a certain type of tech company. If you're a developer starting a SaaS business in an industry you know and you have connections to get customers already you can get to the stage where you have your first paying customer by spending about $5/month (write the code, stick it on Digital Ocean, take payments with Stripe's pay-as-you-go tier). However, there are a lot of businesses like physical manufacturing, knowledge-driven research, complex software, etc that you can't do that with. You need the money up front or you can't even start. If seed money falls away then only the already wealthy will be able to start in those industries. I think we'll miss out on some great ideas that could turn in to huge businesses if that's the case.
- timthelion 9y ago
  "complex software" as far as I can tell, the complexity of problems solved by startups decreases over time. The true hack isn't coming up with a hard solution to a hard problem, but in finding the simplest thing that people will interact with and share.
- dmritard96 9y ago
  Yes. So many articles about funding and startups live in this small little bubble of thinking that all startups make a silly little app and that their trajectory will be that of the social mobile craze a few years ago (get users, retain, monetize). I run a hardware startup and this is really obvious as most funds simply can't understand how you can make a thing, sell it, and grow the business to a large size, as if selling atoms instead of electrons is so weird. Even when that hardware has its core value in software. We are lucky enough that we already make money and don't need VC. From the meetings that I have been asked to, I get this sense that many VCs won't seriously look at businesses that do anything substantial in the seed to A funding stages. There is no shortage of ppl that will write a 5M check with a couple other similar sized checks, but few will write a check for 500k/1M. The classic descriptions I have always heard are seed = build and find product market fit. A = with that fit, do your first bit of aggressive growth. But when you talk to folks right now, their requirements for an A seem to be that you have already grown a lot. And if you're a cashflow business like ours, it leaves me scratching my head, as at that point I dont need their money and def won't take their 'raise another seed' type offers. The number of times I have gone into meetings, been told that they werent sure if it was a 1B business is my favorite. These guys dont want to buy shares but they and their buddies buy the product! lol I think early VC is scared. They have no idea what makes sense and what doesnt. They have all these rules of thumb that apply to a narrow type of company and now that the barriers to entry on those are so low, the noise is overtaking the signal.

mef 9y ago

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

skbohra123 9y ago
no
nostrademons 9y ago
https://news.ycombinator.com/item?id=15822097 https://news.ycombinator.com/item?id=15822097

njpatel 9y ago

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.

ig1 9y ago
That doesn't really make sense from the VC perspective. At seed a startup normally has a much cheaper valuation so the VC can get the equity stake they want at a much cheaper price. VCs can also take a board seat at seed level (most don't because they don't have the time to take board meetings for all their seed companies).
CalChris 9y ago
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.

zerostar07 9y ago

it's official, we are running out of ideas

pascalxus 9y ago
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 9y ago
  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 9y ago
    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.

DrNuke 9y ago

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.

rblion 9y ago

Hopefully seedy people along with it.

king07828 9y ago

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 9y ago
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.
- king07828 9y ago
  This is exactly the problem. Patents used to be a tool that little guys could use against the big guys. Like when Google started with a patent on its search algorithm that prevented Yahoo from copying its idea. Interestingly, this was also a form of wealth redistribution that forced large companies to give money to smaller companies with good ideas. If you assume that the patent system is being weakened, it is interesting how it aligns with a reduction in seed funding while at the same time seeing massive market valuations for already enormous tech companies.
- socialentp 9y ago
  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.
starfishjenga 9y ago
Do you have any evidence for this hypothesis?
9y ago

danielblazevski 9y ago

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.

yellowbrick 9y ago
I mean, was giving $5 million to every startup that had “blockchain” in the pitch going to help much anyway? Look at San Francisco and tell me with a straight face that things weren’t already incredibly bad.
deleted 9y ago
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matte_black 9y ago
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 9y ago
  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 9y ago
Perhaps so, but it's a reflection of the opportunities, or rather lack thereof.

j_s 9y ago

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 9y ago
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-capital-gains-tax-rates_large.PNG https://g.foolcdn.com/editorial/images/433057/maximum-capita... 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.

clay_to_n 9y ago

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.

s73ver_ 9y ago

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.