There has been a lot of talk lately about the changing landscape of early-stage venture capital.
TechCrunch wrote last month about the "implosion" in early-stage funding caused by the end of the app-funding era, a decrease in venture capital investments in SaaS and more. Union Square Ventures partner Fred Wilson followed up with a blog post stating that the "seed and early-stage investing market has cooled substantially."
According to PitchBook data, deal count in the US is indeed dropping, while seed and Series A deal sizes, conversely, are increasing rapidly. Most notably, there appears to be a mass exodus from seed, as the number of deals not only dipped this year but the completed deals look a whole lot like Series A-sized investments.
The data cited below, however, is subject to change as companies complete later-stage rounds and disclose early-stage funding details.
Investors move downstreamAt the 500 Startups PreMoney conference, Upfront Ventures partner Mark Suster noted that seed investors are "muscling into proper A round deals with real sized checks," or at least trying to. A close look at PitchBook data for early-stage deals in 2017 would appear to substantiate this claim.
Investors, it seems, are moving downstream, writing larger and larger checks for early-stage companies and, subsequently, turning seed deals into A deals. Here's a closer look at the increase in US median seed deal size:
Anamitra Banerji, co-founder of the new $47 million "pre-seed" fund Afore Capital and a former partner at Foundation Capital, says he's noticed an increase in the size of seed funds, a pattern that will undoubtedly lead to greater seed deal sizes.
"I think more and more we will see seed stage collide with Series A funds," Banerji told PitchBook.
Afore aims to institutionalize "pre-seed" investing as seed deals have become too large for the nascent startups they are intended to serve. Banerji and his co-founder Gaurav Jain, a former investor at Founder Collective, agree that several factors have pushed investors downstream, including the undeniable appeal of a sight line to IPO that only late-stage investing can offer.
Wilson also touched on this point in his post: "It is where most people start out. Making angel investments, raising small seed funds. They learn the business and many see better economics higher up in the food chain and head there as soon as they can. ... But those bets take a long time to get liquid. And if you don't hit one or two right, you end up with a mediocre portfolio."
A mass exodus from seedThis year, the number of seed deals dropped. According to PitchBook data, only 1,547 deals have been completed at this stage—a major low—vs. the more than 1,900 that closed last year. Meanwhile, the highest amount of capital has been invested since 2012—$3.34 billion.
Roughly two-thirds of the deals were between $1 million and $5 million, while only about 5% were between $500,000 and $900,000—which was once the typical range for a seed deal.
Here is a look at the simultaneous increase in capital invested and decrease in seed deal count:
For Jain and Banerji, the exodus is an opportunity. Afore can be the first to institutionalize what used to be the seed-stage as the new pre-seed investment.
"There's going to be more players at the pre-seed stage," Banerji said. "I think 2018 will be the year of pre-seed."
What about Series A?The Series A landscape is changing: 1,165 Series A deals were completed this year at $12.7 billion in total value. Compare that to 2012, when about the same number of Series A deals were completed (1,192) at less than half the value ($5.7 billion). PitchBook data shows a median Series A in 2012 as $2.8 million, with a 2017 median Series A sitting at $6.1 million. That's also a 23% increase in median deal size from 2016.
Here's a look at how median A rounds have grown since 2012:
A focus on 2017 data alone paints a picture of extremely rapid growth in deal size: 39% of venture capital deals at the Series A stage were $25 million or larger, while less than a quarter were between $5 million and $10 million. It wouldn't be too bold to predict a much more dramatic spike in the average size of A round deals in 2018.
Here's a breakdown of Series A deal sizes this past year:
Sapphire Ventures partner Elizabeth "Beezer" Clarkson told PitchBook that there "is no shortage of capital available to invest in early-stage companies. ... What seems to have changed, however, is that investors are moving to concentrate their capital in fewer and hopefully higher quality deals."
Beezer is working on a Medium series of posts that dive deeper into the downward trend in A rounds. She added in her comments to PitchBook that "the good news for early-stage companies is that there's plenty of capital available–they just need to prove that they're worth it."
Related: European Series A deals fading away