Seed Investing Report – Startup Orphans and the Series A Crunch

Our Seed Investing Report analyzes 4056 seed investments made into US-based technology companies since Q1 2009. For clarification, seed investments are early stage investment (typically less than $1.5 million) made by either angel investors (those investing their own money) or venture capitalists (those investing others money).

Below are some of the highlights/findings of our analysis.

The “Series A Crunch” is Just Math

Despite the concerns about a crunch, the reality is that the level of Series A activity is holding steady. At the same time, the number of seed deals have exploded.  As a result, the Series A Crunch is nothing more than excessive demand for a limited supply of Series A financings.

The “natural selection” this forces will be a net positive (see below) but will mean that many startups will be orphaned and that some investors will lose their money.

1000+ Startups Will be Orphaned; $1 Billion+ Lost

The process of natural selection that will happen with seed companies (and which we’d argue should happen) will result in over 1000 recently funded seed companies being orphaned, i.e. unable to raise follow-on financing.

This will result in over $1 billion of investment into these companies being incinerated, but again, this is nothing new. Seed investments are the riskiest bets an investor can make and the reality is most will not return money. Again, the death of startups and the loss of investment dollars is part of the process of separating the best companies and investors from those which aren’t.

The eventual death of many of these companies may also help the tight labor market for other startups who are looking for capable and driven talent.

Seeded Cos Need 13+ Months to Raise Next Round

Across quarterly investment vintages, we see that it takes Seeded companies slightly more than 13 months to raise financing on average. The speed with which follow-on financing is raised has seemingly accelerated over time.

As the leverage increasingly looks like it is shifting towards investors, it would seem that the amount of time it will take to raise follow-on financing will increase over time for recent and future vintages.

Almost 4 of 10 Seeded Cos Get Follow-On Financing

On average, 39.4% of seeded companies go onto raise follow-on financing. Interestingly and contrary to what the punditry have often said, seed deals in which VCs participate have a historically higher rate of getting follow-on financing as compared to seed deals in which VCs are not participating.

Internet Sector is Tops for Seed Deals

Not surprisingly, the internet sector is the primary destination for seed investing. Interestingly, follow-on financing rates to the computer hardware & services sector is the highest of all tech sectors.

Cali and NY Dominate for # of Seed Deals

California is the clear #1 for seed investment activity followed by strong #2 New York. Massachusetts is a distant #3 but in terms of the rate of follow-on financing, Mass has the highest rate.

The New York seed boom which has buoyed the state’s investment activity #s for some time probably also means that NY will see the highest proportion of orphaned startups. This could also spell opportunity for those in the acqu-hire game or for companies looking to recruit talent away from these companies.