In 2006, the average early-stage seed round for a startup was just under $600,000. A decade later, this has peaked at $2.2 million. In the era of mega-rounds, mega-valuations, over-funding, and mega-burn it is becoming increasingly common for startups to raise not one, but multiple seed rounds. What is driving this trend? Are startups really better off raising multiple seed rounds, and what does this mean for seed funding in 2017?
By definition, seed rounds exist for investors to be the first and earliest-stage investors (and by default take the most risk) in a startup. However, despite seed funding having dropped by 4 percent year-over-year in 2016, the ticket value of a seed round has also increased by 3x in the last decade. In 2006, a seed startup could expect to raise $700,000 tops. Today, the average ticket-size for a seed round is $2.2 million — or $2.81 million if you’re lucky enough to be located in the Bay Area.
Increasingly, this has meant early-stage VCs have had to dish out the cash for startups that have a Series A valuation but with pre-revenue risk. To counteract this hefty bias, Micro-VC funds have been gaining traction, offering pre-seed capital ranging from $150,000 to $500,000. In 2015 alone, 106 of these new ‘pre-seeders’ popped up in the US, giving early-stage startups an even greater pool of capital to pick from and eliminating the “awkwardness” that comes with raising rounds under $500,000.
We heard it enough times from founders we know and trust that it’s really awkward in this market to raise $500,000 as a seed round.
–Nicholas Chirls, Notation Capital
The evolution of seed capital
Before we examine seed funding trends, let’s first break down why the seed funding landscape has evolved so drastically, and why startups now feel the need to raise multiple seed rounds.
1. The early-stage funding cycle shifted. Pre-2005, as a startup, you could expect to bankroll your idea through family and friends and then tap into two major sources of capital: business angels and VCs. Basically, you could get a potentially great idea financed quite early on, before you even had any market traction or product fit. Seed was the lead-up to generating traction, and then you would score a Series A to fuel a product-market fit, then go for a Series B or C to fuel your growth. The second Internet bubble, disruptive business models, and growth of institutional funds changed all that. Suddenly startups were growing faster, becoming more capital efficient, and experiencing better unit economics, and institutional funds were becoming bigger. As Rob Go from NextView explains, this considerably altered the funding cycle. Seed investors were looking for more traction, and Series A rounds got larger. As a result, startups have to tap into multiple sources of funding to even qualify for what VCs look for in early-stage seed or Series A.
2. The market for seed got saturated. Circa 2005,entrepreneurship became hip. Pure economics (affected by a number of market, financial, and policy conditions we are all familiar with) increased the demand for seed capital and startup supply. In 2005, Y Combinator launched, followed closely by TechStars. In 2008, there were 16 startup accelerators — in 2015 this peaked at 170 — growing by an average of 50 percent year-over-year. This isn’t even counting the number of entrepreneurship programs, startup grants, and funds competing to finance seed startups. The result? More than 5,000 early-stage investments accumulating to $19.5 billion in funding. With such a window of opportunity, startups had access to a pool of seed funding from multiple types of investors — each with different criteria and investment goals — which drove up the value of follow-on funding. Today, it is not uncommon for startups to go through numerous pre-seed and seed funding rounds from multiple investors…