Tag Archives: Bay Area

Inside the Seed Funding Slowdown

Every morning for the last couple of months, I see the same thing: fewer deals in my inbox. So it’s no surprise that new data from Pitchbook show a drop in seed funding for the second quarter:


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From an analysis of the data that just came out in The Wall Street Journal:

Even funding for seed-stage deals, often the first source of outside financing for companies still developing their products, has taken a hit. U.S. deal volume dropped 11% to $3.9 billion in the second quarter compared with the year-earlier period, the first such quarterly drop on a year-over-year basis in almost two years, according to data from PitchBook.

“The seed and Series A funding environment is the toughest I’ve ever seen in my career managing a fund,” said Jeff Morris Jr., who manages a crypto-focused early-stage fund called Chapter One. “It will be painful in the short-term.”

Remember there’s a big lag in this data. Even in the boom times, a round could take 2 or 3 months to close.

Now, I often see deals sitting out there for 4 months or more. So we won’t see the full extent of the slowdown for another quarter at least.

That’s probably why Pitchbook shows an increase in seed valuations. Deals in the market today are priced lower.

I’m seeing around a 30% drop in seed stage valuations. The typical seed round is at $8-12 million post-money.

These valuations are for strong companies with rapid revenue growth. They often have $250,000 or more in annual revenue.

Those companies might have commanded $20 million or more last year.

In this environment, founders are changing their focus. From The Wall Street Journal:

Amid the chilled environment, investors say even the youngest startups are now being expected to demonstrate they have a clear path to generating revenue and profits.

I see portfolio companies of mine retooling to focus on revenue. They know that user growth alone won’t cut it anymore.

They’re also changing their fundraising approach:

Some seed startups are already struggling to raise Series A rounds, an investment stage where investors typically expect businesses to show clear signs of traction among customers. Many of these companies are now raising extension rounds, capital usually offered from existing investors at the same price as the last round, according to Ms. Achadjian and other venture capitalists.

I see some of my companies doing this, even strong ones. But unless there’s a new investor coming in to price the round higher, I usually stand pat.

I want the startup’s progress to be validated in the market before doubling down.

One interesting nugget in the report: NYC is booming. The Bay Area has done 1,692 deals this year to NYC’s 1,156.

The Bay Area’s share of funding remains much higher. But this likely reflects big checks going into late stage companies.

A decade ago, you had to be in the Bay to create a major startup. Today’s late stage companies were founded during that time.

Now, the market is more distributed. I think you’ll see the New York area catch up as our companies mature.

In all, the Pitchbook report is concerning but not disastrous. If you’re focused on signing up customers and making them happy, you’ll do great!

What are you seeing in today’s funding environment? Leave a comment at the bottom and let me know!

More on tech:

The Top 5 Things I’ve Learned from Angel Investing

Twilight of the Quick Delivery Startups

Did LinkedIn Just Build the Future of Work?

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Inside a Startup Accelerator Demo Day

Yesterday, I attended the Remote Demo Day for the latest class from the Launch Accelerator, a startup accelerator run by noted investor Jason Calacanis. We hear a lot about accelerators (also known as incubators), from famous programs like Y Combinator or Techstars to small, local outfits.

One thing most of them have in common is a demo day. This occurs at the end of the accelerator program and gives the startups an opportunity to pitch their company to investors.

So what goes on at these demo days?

Seven companies had three minutes each to present. A panel of judges (investors at venture firms) and members of The Syndicate (Calacanis’ investment group) submitted questions. Founders then had two minutes respond. Finally, both the judges and syndicate members voted on their favorites.

Here are some interesting trends I noticed from the meeting:

1) Business-to-business companies got a better reception than business-to-consumer companies. Business customers are less fickle and more likely to remain customers once acquired. They also have deeper pockets, and if you can show them that a technology clearly saves them money or gives them an important new capability, they’re likely to buy. Consumers are harder to pin down.

2) Startups are very diverse now, in terms of race, gender and geography. Two of 7 founders were female, and two were minorities. This isn’t equal representation, but it is progress. The companies came from all over America, from the usual suspects (Bay Area, NYC) to the South and even Europe.

3) It’s not all software companies. My favorite was actually a beverage company. Show investors some substantial recurring revenue and fast growth, and you may find checks flying back at you. What’s more, so many companies these days have a tech angle. This company sells their beverages online in a subscription model.

4) Everyone’s nice. Despite stereotypes of grizzled money guys telling you “It’ll never work!” the reality is that reputation is critical in this industry. Expect specific questions that might be hard to answer, but don’t expect (or tolerate) jerks.

Expect specific questions that might be hard to answer, but don’t expect (or tolerate) jerks. #startups

5) Even early stage companies fresh out of an accelerator have real products and revenues. There were no companies just trying to get an idea funded or still working on a prototype. They wouldn’t have made it into the accelerator in the first place, and even if they had, they wouldn’t have attracted any investor interest. Investors help business scale. They don’t help ideas become products.

So, who got funded? That remains to be seen, but if there’s enough interest from syndicate members, several could potentially get the nod. I know I’m interested in investing in two of the startups I saw.

We are so fortunate to live in a country that produces incredible entrepreneurs with such regularity. This was the 21st class to go through the accelerator, and there will be many more!

Congrats to all the great founders that presented, and a happy weekend to all my readers!

Dig into these posts for more on startups:

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Apartments Are Banned from 76% of San Francisco

I came across in incredible stat today. Apartments are banned in 76% of San Francisco. It’s no wonder that it’s the most expensive city in the United States.

In fact, given increasingly restrictive zoning, 54% of the homes in San Francisco could not be built today! The picture in New York City is similar, where 40% of Manhattan homes couldn’t be built under current zoning codes.

I find the anti-development discourse often focuses on “greedy developers” when a more appropriate person to focus on might be “working class mom who doesn’t want to live 90 minutes from work.” How we frame the problem may be the key to winning the argument. The “neighborhood character” trope is another NIMBY standby, but against a struggling single mom who spends four hours a day commuting on a bus to her job as a nanny and just wants an affordable place near her job, i think their argument loses its punch.

Housing in expensive cities like SF and NYC could get more affordable in a different, more painful way. Everyone I know of who lives in San Francisco is decrying staggering amounts of crime and school closures that have gone on over a year. The tech industry has moved to Zoom and found real efficiencies there. I live in the NYC area and can attest that crime has increased substantially.

Perhaps the way San Francisco and similar cities get cheaper isn’t by building, but by self-destruction.

For more on zoning and politics, check out these posts:

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