There are lots of early startup founders around the Valley and beyond, chasing early seed funding for their concepts, betas, and early-traction ventures. What’s the likelihoood that they’ll be able to raise the early funds they need to grow their startups to their next benchmark?
When 108 Silicon Valley, Seattle, and Los Angeles capital transactions were reviewed in 2010-2011, it provided some seed funding data that will give those founders a better understanding of the dealflow that was actually taking place in the recent past. The survey points out that important aspects of the seed financing picture is changing. Besides that change, it’s also growing at a rapid clip—news that many claim to want to hear:
- Dow Jones VentureSource (“VentureSource”) reports that venture capital seed round investments grew 52% in 2011 from 2010.
- VentureSource says that 500 Startups, SV Angel, and First Round Capital dominated seed rounds in Silicon Valley in 2011′s 4th quarter.
Looking back from the perspective 18 months gives us regarding post-seed investment at 52 startups sureyed in 2010, here’s their current status:
- 45% raised a VC first or first and subsequent round
- 12% raised more seed funding
- 12% were acquired
- 4% quit
- 21% were still operating but had not raised additional funding
- 6% fell into the categories of other or non-responsive
What was different in 2011 compared to the prior year?
- Seed funding using convertible notes increased 10% while use of preferred stock went down the same amount
- The median amount raised in convertible note deals jumped 51% year-to-year, while the median for preferred stock transactions remained flat—now, both are at roughly $1 million. Respectively, pre-money valuations for convertable note-based transactionsincreased $3.5 million (all transactions) compared to $0.6 million (Internet/digital media) to $0.8 million (software) for preferred stock-based transactions.
- For the convertible note deals, the percentage of notes that convert at discount to the next round’s valuation rose 16% to 83%
Most of these trends—with the notable exception of discount provisions for conversion—are generally believed to be more beneficial to entrepreneurs and may alternatively reflect either greater competition facing investors as they deal shop for the best opportunities or a generally higher-quality and more effective group of founders exercising their negotiation skills.
Some other highlights:
- The number of 2011 deals in the general category of Internet/Digital Media grew 4% to 75%, while software startups dropped 4% to 25% compared to 2010. It’s my personal opinion that most software development startups have become very capital efficient—many don’t raise early seed rounds at all but instead head straight to market tests of their low-cost apps and application software to generate working funds.
- Round leaders continued to be Seed Funds (up 3%), while deals led by professional angels dropped a few points and VC Funds stayed essentially flat.
- Amounts invested by leader category were lowest for professional angels, rising for Seed Funds, and highest for VC Funds.
What’s the take-home for startup entrepreneurs? Should they try to raise a seed round?
Those seeking a median $1 million seed round with each investor putting up a stake in the range of $150-250K will probably face a round leader that is a professional angel with more than a few notches on his or her belt. By comparison, those raising $400-500K per investor should identify Seed Funds or early VC Funds to lead their rounds.
Robert Dolezal is CEO of Consultq and is Program Chair of SVForum’s East Bay Series, a monthly educational program for entrepreneurs who work, live, or transit through the East Bay.