The bloom is off seed funding, the business of providing money to brand-new startups, as investors take a more measured approach to financing emerging U.S. technology companies. Seed-stage financing has been sliding for the last two years, with the number of transactions down about 40 percent since the peak in mid-2015, data show. Dollar investments in fledgling companies have also declined, although less dramatically, dropping more than 24 percent over the same period. The slowdown comes despite an explosion of interest by wealthy individuals and foreign investors looking to park money in the next big thing. And it has potentially big implications for Silicon Valley.
Early-stage funding is the lifeblood of a technology ecosystem built on risk-taking. Denied critical resources in infancy, companies can't hope to scale quickly enough to unseat incumbent industries and grow into the next Uber Technologies Inc or Airbnb. "The reason why startups are disrupting companies in the 21st Century is not because they are smarter. It's because they have capital to do so," said Steve Blank, a serial entrepreneur, startup mentor and adjunct professor at Stanford University.
Early-stage investors, known in Silicon Valley vernacular as seed and angel investors, often act as farm teams do in sports. They provide the first significant money and mentoring to help entrepreneurs prove their technology and hit milestones needed to attract even bigger investments from venture capitalists later on. But the zeal that prevailed just two years ago has faded. Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data.
The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That's just shy of the $1.75 billion for the same time period of 2016 and down significantly from 2015, which saw $2.19 billion invested into fledgling startups. Veteran seed investors and industry analysts offer a number of reasons for the decline.
They cite concerns over inflated valuations as well as a tepid market for initial public offerings, which provide seed funders a way to recoup their investments. After some much-hyped IPOs such as GoPro Inc, LendingClub Corp and Fitbit Inc lost their sizzle, Wall Street has curbed its appetite for shares in unproven private companies with billion-dollar-plus valuations. Others blame the rise of technology leviathans for the decline in seed funding deals. San Francisco seed fund Initialized Capital, for example, has slowed its investment pace to about 20 companies a year, down from 50 to 60 just a few years ago, even though its fund size more than tripled to $125 million, according to managing partner Garry Tan.
Among his concerns: dominant players such as Facebook Inc have amassed so much wealth they can quickly challenge a hot startup, diminishing its value. "Incumbents just get so much more power, so there are fewer super early-stage opportunities that are very valuable," Tan said. "I can imagine a 20 to 25 percent reduction in valuable investment opportunities."