Just over a year ago in our coverage of the 2019 venture capital market, we noted that “United States-demarcated angel and seed deals dipped in 2019.” Our reporting concerning the Q1 2020 venture capital market had a similar tone, noting that “domestic seed rounds, in slow decline since peaks in 2017, have sharply fallen since Q3 2019.”
The same theme continued in the second quarter. Widening our lens to global seed data, we wrote that “global seed and angel deals [ … ] were down from 4,256 rounds in Q2 2019 worth $3.7 billion to 1,791 rounds worth just $2.3 billion in Q2 2020.”
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Of course, the second quarter of 2020 was the middle of the storm when it came to the temporary decline in venture capital confidence. So, what about Q3? One source noted, as we wrote at the time, that the “percentage of U.S. VC deals that were for rounds of $5 million or less was the lowest since at least 2010.” Another data source showed a slight rebound in domestic seed rounds, but it was a rare positive data point.
Then came Q4 2020 data and a full-year look at the market. We wrote that in “the U.S., seed deal count was high in 2020, around 5,227,” per that day’s data source.
Weird, right?
The Exchange leans on PitchBook, CB Insights, the NVCA, Silicon Valley Bank and Crunchbase along with other more focused data sources for its raw inputs. I’m not citing individual sources in the above (you can find them at the links) to avoid appearing to be cross with any particular entity; that’s not my goal.
Instead, I’m curious how we can have so many different seed data signals in the same year. This is a question I’ve had for some time, as whenever I’d report that seed deal volume in any particular part of the world was looking light — Europe, for example — investors would tell me, in polite tones or with sheer incredulity, that the seed data in question did not match their lived realities.
Investors were seeing a hot seed market, while data often showed a flat-to-down seed market. So, what’s going on?
SAFEs could be to blame
Thanks to angel investor and Twitter bon vivant Trace Cohen, I think we have a good idea of what’s to blame for discrepant data and reality when it comes to seed and earlier dealmaking. Per Cohen, could SAFEs be to blame?
SAFEs (simple agreements for future equity), are a quick and cheap method of raising capital. Y Combinator invented them back in 2013, and they’ve become rather popular amongst seed deals over time.
The startup accelerator hails the notes for allowing young companies to close capital with individual investors “instead of trying to coordinate a single close with all investors simultaneously.” And as their terms are somewhat standardized, everyone understands them.
These simple agreements often include a cap (the max price at which an investor’s SAFE-demarcated investment will convert to shares), a discount (a percentage discount against a future valuation), or a cap and a discount. There are a few other variations, but that’s what you need to know.
SAFEs aren’t priced like a regular round, like a Series B, for example. In those investments, a startup and lead investor agree to a pre-money valuation and largest check size. Then pro-rata kicks in, other investors are added to the group, an amount of capital is raised and the startup in question has a new post-money valuation.
Such a deal generates a public footprint, namely a Form D filing in time. And those deals tend to get announced, leading to their rapid inclusion in the various startup databases out there. But SAFEs? They aren’t priced and they don’t generate the same paperwork exhaust.
Unless a startup announces a SAFE, or you hear about it from an investor who is talking out of turn, you won’t know that it was raised. And that’s why, Cohen reckoned, we are seeing a gap between what investors are seeing on the ground and what we’re reporting from the heights of aggregated data.
SAFEs have effectively pushed a lot of public signal regarding seed deals, and even smaller rounds, underground.
No one is to blame here; this is just how things are. But there are things that the market could do to make the situation better. For example, startups could share more data earlier. Venture capitalists of all sizes and stripes could better report data into the various startup databases. There are ways to do that. Check your email.
Startups are often cautioned to keep their cards close, as if their tiny little business were the most important thing in the world. Maybe that’s smart in the occasional case, but I’ve consistently found that the most forthcoming CEOs are the ones who know the most and are going the farthest. Candor is, by my own pattern matching, a huge indicator of future success amongst startup leaders.
So please talk about what you are doing. Out loud.
Private market data improves in later and larger rounds, as does private market reporting. It’s much easier to sniff out a $100 million deal than a $1 million deal, but because all nine-figure rounds get announced, we’ll find out anyway. Seed deals are often locked in a box and not spoken about. Which is weird and mostly silly.
Anyway, we’ll continue to look at seed data, parsing it as best we can. But we’ll add some extra reporting around it to make sure that we’re taking as many perspectives into account.
For more notes on this from investors of all sorts, read this thread.