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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Photo: “WHOA Stop Sign” by Lynn Friedman is licensed under CC BY-NC-ND 2.0.