If you’re looking at the current seed funding climate and thinking it’s rough out there, you’re not alone. The last few years have been a roller coaster for startups. First came the uncertainty in the early days of the pandemic, then came the exuberance mid to late in the pandemic when cash flowed freely to startups of nearly every stripe. Seed funding sizes were up, and so were valuations.
Today, things aren’t quite so copacetic. Money is tighter, and the hurdles for startups are higher. But for entrepreneurs early in their journey, that doesn’t mean it’s not a good time to raise a seed round.
“I’ve been really excited by the types of entrepreneurs that we’ve been meeting in the seed stage ecosystem right now,” Talia Goldberg, partner at Bessemer Venture Partners, told TechCrunch+. “In some ways, when the markets are down a bit, the real entrepreneurs come out.”
To understand what’s happening with seed rounds this year, TechCrunch+ spoke with Goldberg and two other seasoned investors: Pae Wu, general partner at SOSV, and Maren Bannon, partner at January Ventures. They offered their perspectives on what milestones they look for when evaluating seed-stage pitches, what sorts of round sizes and valuations they’re seeing, and what advice they’re giving their portfolio companies.
Seed round: current mood
The definition of a seed-stage startup has been evolving over the years as round sizes and valuations creep higher. Investors are also expecting to see a bit more from prospective companies, in terms of market fit and revenue. The pandemic is partly to blame, Bannon told TechCrunch+.
“There was a lot of capital in the COVID era that came in — all these angel funds, operator funds, rolling funds, a lot of that was spreading capital at pre-seed,” she said.
As a result, pre-seed valuations were higher than they are today. But recently those funds have backed off, Bannon added, which has depressed pre-seed valuations. For companies that have raised pre-seeds in the last few years, that can make subsequent fundraising more challenging.
“The bar is higher now,” Wu told TechCrunch+. “Investors are starting to ask diligence questions that in 2021 would have been Series A kind of questions.”
Despite investors’ increasing scrutiny at the seed stage, all three investors TechCrunch+ spoke with acknowledge that they don’t expect startups to have it all figured out at this point.
“At the very highest level, you’re investing in people,” Goldberg said. “At the seed stage, even if you have a product and a market, it’s highly likely that you’re going to be changing a bit. The market is going to evolve, and the products are going to evolve. Having a really strong vision and thesis as to where you’re going is critical.”
Bannon concurred, adding that “at seed, most startups don’t have product-market fit, but they should be showing that they have some early signs of it.”
Seed funding milestones and valuations
Beyond expectations about product-market fit, seed round milestones have been ramping up over the years. Recently, the seed round has started to resemble Series A rounds of yesterday.
“I’m advising our portfolio companies that $300,000 to $1 million in ARR is strong to go raise a seed round,” Bannon said. Three years ago, the high end of that was enough to raise a solid Series A.
There are some exceptions, such as deep tech companies or AI startups, she added, where an interesting story or compelling team can raise with less traction in the market. “But I think in general, investors are just looking for more traction than they were a couple of years ago.”
While revenue is not required for deep tech startups, “substantive traction on the business side” is, Wu said. That might include partnerships or collaborations with bigger companies. Investors also want to see a strong proof of concept along with a strong timeline to get to a pilot-scale demonstration. “These are not hard and fast rules, but having clear determination that your thing can work in the real world is where things are at these days,” she said.
Round size at the seed stage is highly variable. In December and January, median deal sizes were $2 million, according to a TechCrunch+ analysis of PitchBook data, with most falling between about $800,000 and $4 million. The median pre-money valuation was $10 million, and the majority spanned $5 million to $20 million.
Those valuations might be a holdover from previous years, Bannon said. She’s been seeing a lot of bridge rounds where the valuations aren’t updated. “You’re taking these inflated prices from two years ago, doing a bridge, and that’s kind of bolstering the market,” she said.
Seed funding market conditions
Though valuations might be inflated, investors remain generally optimistic about this year’s outlook. AI is a driving force. “It’s no longer just buzz. There’s a lot of substance,” Goldberg said. “If you look back, some of the best times to be investing are at the beginning of these major platform shifts and new market areas.”
But that doesn’t mean a rewind to 2021, when deals were closing quickly.
“Everything’s still taking a long time,” Wu said. “Everybody’s bar is higher, and there are also a lot of early stage companies that are raising. That means that seed stage funds can be quite selective and are not necessarily as prone to FOMO as they had been before.”
No matter what the market looks like, though, investors are always looking for new portfolio companies. “We have to make investments both in good markets and in bad markets,” Goldberg said.
The trajectory of today’s seed rounds are somewhat correlated to what happens to startups in the later stages of fundraising. “If the later stage recovers, then the seed stage will just keep going up,” Bannon said.
Advice investors are giving to founders
In previous years, a strong team could show up with a good pitch and walk out with a solid seed round.
“In 2021, you could raise off of one part of your story being really incredible, like an amazing founding team,” Bannon said. “Now it feels like you need an amazing founding team and a compelling business idea and a good market and a little bit of customer traction. I think investors have gotten burned by some of the buzzy teams that have come out and haven’t had something meaningful built.”
Once a startup has those pieces in place, there are other things to consider when planning a seed round. “Time it around an inflection point,” Bannon said. Founders should start laying the groundwork well in advance, she added, so that when revenue or customer growth starts taking hold, they’re ready to pitch.
When founders do walk into a pitch meeting, Goldberg urges them to be prepared not just for the pitch, but also for who is listening. It’s important that founders know the differences between angels, seed funds, and larger venture firms, she said. Also get to know what animates specific investors. The best pitches, she added, are those where the founders clearly show why they’re the best people to bring a product to life.
Goldberg advises founders to manage the fundraising process carefully, to think about who to talk to and when so that when a deal does come together, one firm takes the lead to anchor the round. Without a clear lead, the process can be like “herding cats,” she said, and occupy a lot of a founder’s time. “Make sure that you’re not being overly aggressive, but also aren’t stuck in no-man’s-land where you have a lot of people that aren’t saying no, but not really saying yes.”
In the end, the best way to successfully raise a seed round is to build a business that people want to invest in, Wu said. “Worry less about story, and worry a lot more about making your company a real company. That’s the number one thing.”