Seed Market Evolution During A Downturn

The start of 2022 marked a change in financial markets. Since then, many believed risk capital would dry up, early-stage valuations would fall (just like all other valuations). Now that we are nearly two years into this downturn, I wanted to briefly take stock of what actually happened versus what was speculated.

1/ Seed-stage valuations have generally been left-unchanged, and I could argue even they’ve gone up since the beginning of 2022. Looking back now, it makes sense – VC firms have lots of dry powder, and while they may have slowed down relative to 2021, they’re still making investments. Early-stage is perhaps a more attractive stage to deploy smaller dollars these days – a friend remarked everyone wants to gamble, but no one wants to sit at the whale tables just yet.

2/ Angel investors are tightening things up. I’ve been a bit surprised by individual angel investors holding more of a line or just preserving liquidity. This makes sense, too. I’ve seen two responses from the networks of angels we frequently syndicate with — one half simply won’t engage unless a valuation or post-money CAP is at $10M or below; the other half have left the market entirely as they wait for liquidity from their existing assets. Founders are fortunate the pre-seed & seed VC activity has institutionalized over the past decade, because if that hadn’t happened, angel/pre-seed capital would be much harder to raise right now.

3/ Y Combinator has a huge shot in the arm with the installation of Garry Tan. Garry is a designer, engineer, builder, strategies, and systems thinker. It’s already a machine, and I would suspect Garry and his new team will make their engines even more efficient.

4/ Where founders live matters again. It’s not acceptable yet to say this bluntly on Twitter, but in private, many investors remark how they’re enjoying deal evaluation in person (primarily in the Bay Area and NYC), and when possible, they’d prefer to seed companies in those locations specifically.

5/ Where seed investors lives matters a bit less, but still matters. A seed-stage VC relic of the pandemic is that nearly all initial screenings and much of the evaluation happens on video, even when founders live near investors. But while seed stage VCs are quietly tacking to founding teams based in the Bay Area and/or New York, where those seed stage VCs live matters less and less, though one could argue founders may want more local, on-the-ground investors now given how hard future financings have been.

6/ Speaking of future financings, the conversion of these early-stage investments from pre-seed to seed, or seed to Series A (I’ve given up deciphering the nomenclature) has suffered dramatically since the start of 2022. If we take out the AI-hype or momentum deals from 2023, the traditional Series A firms have really slowed down as they’ve digested the portfolio triage that needed to happen while waiting for evidence-based momentum deals to invest in after years of narrative-driven high-priced Series As.

I could go on, but that feels like enough for now. What I’ll maybe add in closing is that the quality of founding teams out there seem to be increasing, and when we meet them, they’re not thinking about interest rates, or overseas conflicts, or public market valuations — all of those things are important, but they’re not really on the radar of today’s technical creators, and perhaps for that reason alone, the analysis above makes sense in hindsight. All that said, there’s enormous pressures on these founders to gather enough positive evidence to keep going and raise more capital. While the ecosystem is still flush “starter capital,” that’s where the party stops. Let’s see what happens.