Despite a significant slowdown in global startup investment over the past two years, investors say the U.S. seed funding environment has been the most dynamic in comparison with other funding stages during the downturn.
In fact, US seed funding in 2022 is up almost 10% in terms of dollars invested, in contrast to the downturn in all other funding stages. In 2023, U.S. seed funding dropped 31% – a significant chunk – but yr over yr it’s still lower than other funding stages, evaluation shows Crunch Base data shows. (It is also value noting that the remaining stages in 2022 have already seen year-over-year declines).
In today’s startup financing market, “we’re seeing a lot more great talent excited to launch,” he said Renata Quintinico-founder Renegade Partnersa Bay Area-based investment firm that focuses on Series A firms and is subsequently near the seed ecosystem.
Other investors share this enthusiasm. “Valuations are coming down, there is more talent available in the market,” he said Michał Kardamon seed investor from New York Forum events. “Many of these seed and Series A companies are looking to scale into the next bull market.”
Seed trends over the decade
It’s no surprise that seeds have grown as an asset class in the U.S. over the past decade. In 2014, slightly below $5 billion was invested in seed development. At the market’s peak in 2022, seed investment totaled greater than $16 billion, although it dropped to $11.5 billion in 2023.
Despite the economic downturn, seed funding in 2023 in the U.S. was still $2 billion to $3 billion higher than in 2019 and 2020 before the pandemic.
Higher bar, costlier cartridges, higher priced
However, in a tougher market, seed investors are more selective about the firms they finance.
“We are much more disciplined and patient, knowing how difficult it is for these companies to get to Series A and beyond,” he said Jenny Lefcourtgeneral partner at Seed Investor based in the Bay Area The capital of freestyle. “Our bar for conviction is higher than it was in the glory days when everything was funded.”
In a slower funding environment, a company invests later, at the seed stage, “leaning towards ‘seed plus’ or ‘A minus'” – pick your favorite term – because I feel like I’m seeing more risk reduction. I see more data,” she said.
Freestyle seeks to own roughly 12-15% of the firms it supports. “The reason is our model,” Lefcourt said. “We are low-volume, high-conviction investors.”
And because the company invests in non-Series A firms, “our valuations were actually higher in this market, which we didn’t anticipate.
“But the data we have seen shows that we are not alone in this,” she said.
Series A is maturing
By the time they reach Series A, “companies have been around longer. They are increasingly scoffing,” said Quintini, who sees more mature firms leaning toward raising Series A financing in this market.
Crunchbase data shows that the typical time between seed and Series A funding for US startups has increased over the past decade. In the case of Series A closed in 2014, the average time from the first startup to boost $1 million or more was 14 months. In 2020, this period increased to 24 months.
At the peak of the market in 2021 and 2022, the median time decreased barely again, to 22 months in each yr.
However, in 2023, the median time between a $1 million-plus start-up and a Serie A appearance has increased to twenty-eight months.
However, as Quintini notes, “venture is an industry of outliers where neither the median nor the mean gives a real, true picture.”
We compared the average raise time to the top quartile that raised a Series A from a first seed round of $1 million. The top quartile did it in lower than 12 months, with the exception of the Series A rounds in 2023.
At the starting of the decade, fewer firms reached this milestone, but they raised their Series A more quickly.
In 2021, the top quartile accelerated to eight months.
In 2023, it took 12 months for top quartile firms to succeed in Series A from an initial $1 million seed.
“We accelerated [Series] A, because people don’t desire to remain outside the group of outliers,” Quintini said. In this market, we see less expropriation when investors invest nine months in a seed company’s business – except for artificial intelligence, she said.
This feeling is echoed by Cardamone. (*2*)
Because firms take longer to succeed in Series A and face a higher fundraising bar, “there will be a higher death rate, a much lower percentage of companies getting to Series A.” [Series] And that means it’s now a tougher task for seed investors, although they have more information to secure,” Cardamone said.
Methodology
Seed financing in the U.S. includes angel, pre-seed, seed financing, as well as equity crowdfunding and convertible bonds valued at $3 million or less. For the purposes of this evaluation, we excluded seed funding of $100 million or more.