The state of the global venture capital market leaves much to be desired, and the United States hasn’t escaped the slowdown: PitchBook and the NVCA both reported that the “third quarter of 2023 nearly saw the lowest overall venture deal value in six years and the lowest deal count in roughly three.”
In fewer words: Things are not good.
The news is not all bad, though. Despite PitchBook data indicating that venture totals were nearly flat in Q3 2023 compared to Q2 2023, deal volume has apparently also declined. The fact that startups managed to raise roughly the same amount of money in fewer rounds means that each round raised more capital, on average.
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And the seed stage is where this good news comes from. Sure, the total value of pre-seed and seed deals fell again in the third quarter and deal volume is also in decline in the United States. But seed rounds are getting more expensive as deal count sags faster than the total value of transactions.
Per PitchBook, through the third quarter of 2023, seed-stage startups clocked a median pre-money valuation of $12 million, up from $11.1 million last year. That 2022 figure was a record and startups are set to surpass it this year.
The median and mean deal sizes at this stage are also ticking higher. The median seed round size in the United States is flat this year at $3 million, meaning that the investors paying top dollar are likely getting less for their money than they did last year. Notably, the 75th percentile seed deal reached a high point of $5.3 million thus far in 2023, while the average dipped a little to $4.5 million through Q3 2023 compared to $4.9 million in 2022.
So while there is nuance to how big seed deals are today, rising median valuations imply that investors aren’t getting as good a deal as they did a year ago. No wonder they’re complaining so loudly.
The situation is a little confusing. Over the past two years, it’s been more than a little odd to hear complaints about funding being scarce while seed deals have been getting more expensive. You would expect the former to make the latter less likely: When capital is abundant, investors have to compete to get into rounds, which pushes up prices. If capital is becoming harder to secure, why are prices going up?
A few reasons come to mind:
- Distance from the public markets: We’re seeing few mega-rounds these days because late-stage startups can be very easily compared to their public-market peers. But public companies are trading at levels that are far lower than they have been in recent years, so a great number of late-stage startups are struggling to close the gap. Seed-stage startups, however, are on the opposite end of the startup life cycle. As such, they can still count on the power of optimism to shield them from the cold accounting of public-market comps. Thus, higher prices?
- Accelerator-driven sticky prices: Another theory is the anchoring impact of startup accelerator packages. The new Y Combinator deal is the obvious datapoint here. YC’s revamped standard deal added more capital to its programs. Could the accelerator offering more funds to a few hundred nascent startups twice each year impact the market enough to cause median prices to rise?
Neither of these theses are enough to explain the entire situation. Certainly, distance from public markets helps seed deals, but prices at this stage have been rising for years anyway — even when the public markets were hot. So while this distance from an exit could explain why seed-stage startups are under less pressure than their older counterparts, it doesn’t tell us why they are getting more expensive.
And, yes, Y Combinator has added more capital to its funded startups, but $375,000 is still less than a half-million dollars. Sure, that’s a lot of capital for a new company, but it’s just 8% of the average seed round in 2023. How much of an impact could such an amount really make?
The gist is that I don’t know why seed deals have managed to ascend so much in recent years, and why the trend has continued despite generally cloudier venture skies across the world. But we’ll surely reach the peak at some point, right?
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