Early-Stage Investing: Notes From The Field, Mid-March 2016

Where is the early-stage financing market for startups today, mid-March 2016? In my opinion, and depending on where specifically you sit, right back where it left off.

After a few bumps over the last 9 months, with little shocks in July 2015, a bigger shock in August 2015, and a ruthless slashing of very visible and great public technology companies in January and February 2016, many people (and yours truly) commented that the entire environment has “chilled.” Now, as March is unfolding, that is changing a bit. Working backwards, here’s a brief snapshot of what I’m seeing in the SF / Bay Area market — just one guy’s opinion:

1. Series B (“the second board member”): These are known as the Rounds of Death. As the private late-stage dries up, Series B and C investors, who structurally need billion dollar plus exits to make their models work, know that IPO windows are jagged, brittle, and chilly, and since M&A over a billion is quite rare, many have either held off or suggested flat/down rounds to make new investments. (Yes, I know, some companies still get funded.)
2. The Series A Rounds (“the first board member”): These are happening, albeit slower, but the caveat is that there are now new kinds of Series A rounds which can distort where a company is. It used to be that a classic Series A is when an institutional VC joins as the first real board member of a company and makes a life-cycle commitment to the company and founders. Now, there are more funds and more people doing rounds the sizes of the old-school A, say $5m give or take, plus or minus. This could be insiders protecting an investment, or LPs coming in to buy more direct ownership — or, it could be one of the many new funds being formed almost weekly to put dollars to work in tech and get ownership.
3. All The Seed Notes Before The A: This includes pre-seed, seed, second seeds, seed prime, seed extensions….the never-ending parade of convertible notes that we’ve all come to love. It is here, early before the A, that I see little to no change in the market relative to how Series B investors are extremely cautious or Series A investors that are taking their time (yes, I know, and still doing deals). There is not only so much money to be deployed across the seed market, I have learned from being on the fundraising circuit myself that there is more money just sitting on the sidelines, and we will see this in the form of new funds (new ones every week), and they have to deploy those funds, and seed is where most of us play because there is no barrier to entry — there are some barriers to entry to doing Series As because founders want those to be branded and institutional, but at seed, it’s loose, fast, convertible debt that matures in two years or, if you’re lucky, less. Given these factors, founders in the right spaces with good teams raising seeds now can get higher prices, and that’s especially true in/around some of the most successful accelerators and incubators.

This is where I see the market today, mid-March 2016. Seeds are a plenty, and growing well; Series As are happening, but a bit slower; and Series Bs are when founders feel the most friction. All in all, it is still a great time to start a company, but we may find out over the next few years that we’ll have startups turning over quicker and perhaps more replenishment at seed as the larger institutions wait for conditions to become “just right” before making a life-cycle commitment to a new company.