Coming Seed Crash?

In a recent blog post, Paul Kedrosky wrote:

[T]he super-seed crash is coming. We have silly numbers of companies being seeded — I had someone at a well-known, larger venture fund tell me yesterday in San Francisco that they were seeing dozens of Series A-seeking newly angel-funded companies a week. Valuations are escalating as super-seeding angels compete against one another, while fourth-quartile incumbent VCs jack prices to buy deals through dint of having more money to put to work.

I think he’s spot on.

Between angel friends, friend starting seed funds, VC friends doing seed investments, and VC friends starting seed funds out of their venture funds, it’s getting a little absurd.   This hasn’t felt right for a while, and I think Paul nailed it.

Some argue this supply of capital is nothing but good for entrepreneurs.  I disagree, and Paul touches on this as well:

[M]ore companies seeded means more full-cycle money required to break through the noise and competition, which while drive dilution of seed investors who can’t follow-on in subsequent larger rounds

Easy and excess capital creates a “weedy ecosystem”, which makes it harder for everyone.  Even if you’re the best idea in that ecosystem, the bar is raised by those around you.

5 thoughts on “Coming Seed Crash?

  1. I recognize that today’s seed funded companies can pursue a dual track strategy. They can do alot with a little, and theoretically pursue an early exit for technology price multiples that still see the entrepreneur and seed investors do well. Or, they can double down and tap into the more traditional VC funding ecosystem and “go for it”.

    If all of today’s seed funded startups go for it, then the follow on funding ecosystem has not grown to keep pace with what we’re seeing at the seed level. In fact, it has shrunk. So, from that perspective I share your concerns.

    I do think that what we are seeing with seed, micro VC, super angel activity is a new wave of venture investor. And I think its here to stay.

  2. I’m very interested in the implications for entrepreneurs.

    I assume the lifecycle costs are still lower than in the past because customer acquisition (i.e., online marketing) and technology development are now cheaper.

    But, do you think the “weedy ecosystem” will also depress exit values as the AOL’s, IAC’s and TWC’s can choose from 6 startups doing about the same thing?

    Phil
    http://kartme.com/about

  3. Pingback: More on the “Seed Fund Crash” at blog.payne.org

  4. Not sure I agree. If you start with the word “excess” you assume the conclusion. By definition “excess” is too much. Would you come to the same conclusion if you said “abundant” capital ….? It is possible that business growth and innovation require lots of bets (many of which lose). Abundant capital, of course, makes it harder on investors and entrepreneurs as spaces become crowded (weedy) and there is competition for exits. We may not be at the right equilibrium and there may be a crash coming. But, I wonder if this kind of cyclical disruption is all bad. I find it hard to imagine a nice steady regular balanced pace of investment and innovation in business. Seems unlikely doesn’t it?

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>