Last night I spoke at the Enterprise Tech VC Panel. We discussed five trends in the seed market and the outlook for 2013. These are the five most important trends for 2013, in my view.
Call it micro-VC or mega-seed fund, there’s a new investor class which raises funds between $50 and $100M to invest in seed-stage companies. Felicis manages a $70M fund, Jeff Clavier at Softech invests from a $55M fund and Steve Anderson of Baseline has raised at two funds totaling $100M. These seed investors invest larger amounts than before (both initially and during follow-on rounds) and invest in more startups.
In 2008, when I first started in venture, a$500k seed was sizable. A $1M seed turned heads. Today, those amounts are routine, if small. In the past year, micro-VCs have doubled the capital they invest each year to $1.6B. In addition, traditional VCs also have continued to participate actively in the seed market. As a result of these two pools of capital entering the market, seed rounds are approaching Series A sizes. Lacking accurate census data to illustrate the trend, I’ll use an extreme case to prove the point: Virool raised $6.6M last week in a “party” seed round.
No one can argue with the success of fund raising campaigns on KickStarter and Indiegogo. Ouya effectively raised a $8.6M Series A in the form of early orders on Kickstarter. In addition to crowdsourcing sites, Angelist (in partnership with SecondMarket) and FundersClub attract $1k+ investment sizes from non-traditional angels looking for exposure to startups. As a friend pointed out to me, it all feels a bit like the 1999 bubble, when everyone can and wants to invest in a dot-com. Instead of using the public markets to buy shares, private markets have blossomed to meet this demand.
You don’t often hear the word mezzanine in the valley. It’s much more common in private equity conversations. But with the boom in seed investments, driven by the capital flooding the asset class, mezzanine seed funds have taken root. Mezz seed funds target startups who have raised a seed round, but haven’t been able to achieve the milestones to attract a Series A investment. So they seek a second seed round, a mezzanine seed round, for a bit more runway and a second chance to raise an A.
As infrastructure costs plummet, labor costs are soaring because of a talent supply/demand imbalance. These labor costs require larger seed rounds to achieve the same runway. In fact, for most of Redpoint’s portfolio companies, labor is the single biggest line item on the P&L.
On the other side of the coin, the overwhelming demand for top talent drives the acquihire market. Every major technology company has a talent acquisition strategy based on M&A. Acquisitions by FB, GOOG, YHOO, EBAY and others provide a landing place for struggling seed companies looking for strategic options and a non-zero return for investors.
The seed market feels like a bull market: lots of capital rushing in, new asset classes being created, and a ton of opportunity for entrepreneurs looking for some early capital to change the world.
NB: Thanks to Sundeep Peechu and Chris Gottschalk who inspired this post. And thanks to Mike and Victor for inviting me to the panel discussion.