What does the seed fundraising market look like right now?
Seed is open. The era of small teams is upon us.
First, what are numbers at seed?
To understand what is happening in the seed landscape, first, let us look at the numbers. I’m a numbers person. (I have chosen the UK as I was speaking to UK founders, I think this broadly applies across Europe.)
UK 2022 (1.5 months to go): 1073 investment rounds
$25.5 bill total (down -30% from 2021, 1.3x from 2019, 12.1x on 2014)
Preseed ($0.5 - $2mm)= 292 rounds = total of $293mm
Seed ($2mm-$8mm) = 382 rounds = $1.5billion
UK 2021: 1082 investment rounds
$36.5 billion total
Preseed ($0.5mm- $2mm) = 243 rounds, $251mm
Seed ($2mm- $8mm) = 384 rounds, $1.5b
Zoomed out
UK 2019 (baseline year) 564 investment rounds, $11 billion
UK 2014 (dark ages of VC 😀) 225 investment rounds $2.1 billion
What does this tell us?
I can already see the coming headlines in news articles at the end of the year will read that venture funding in the UK is down close to 30% year on year (slight less if we add the average of the next weeks ahead). But if we look below the line of the headline figure and the stark difference of $11 billion, it all comes from a slowdown in the later-stage investment bracket.
Early-stage funding is a different story. Preseed investment rounds are up 16.7%, and funding dollars are up 20.5%! The Seed bracket is basically unchanged from the hottest funding year on record. Now that is something to be positive about for early-stage founders and teams.
What do we see on the ground?
As a reminder, we at Angular are a first-check enterprise tech VC firm.
We have an interesting point of view as we see and invest in the seed landscape across Europe and Israel. From a firm perspective, we are not deviating from our normal pacing, which is roughly two new investments per quarter or eight per year. Although it isn’t a hard number, we continue to follow our high conviction, low volume strategy. Since our investment horizon is long-term and we aren’t expecting an exit event in the companies that we are backing today for another 7-12 years, our view is to continue to find, back and work with teams beyond the current macro headwinds.
As noted above, the later stage is still very slow and working itself out. Either by triaging their current portfolio or working out to deploy capital while paying close attention to public market software multiple gyrations. This behaviour of moving slowly and with less capital reverberates down the venture capital stack. Series A and Seed + (now a bigger category then I can remember) are hard pivoting from growth at all costs to scalably economic growth which is tough to do, Sarah Guo has a great piece on the hard reset. While seed isn’t immune, it is usually without the size and scope of those problems. From a top-of-funnel or company creation point of view, it is near the high number of new companies we saw in 2021, although it is tapering slightly. The valuations and round sizes are down (-35%) to more modest amounts (Pre-seed $300k-$2mm, Seed $750k- $3mm), and the timing of rounds completely has been widening from 2-6 weeks to now 6-14 weeks. With drawn-out close times and approaching the Christmas period, unless you have started your process already, it might be worth holding off until 2023.
The style of pitches has changed to reflect the new reality with more line-of-sight economics of the business rather than proxies to revenues and expectation of funding in under 18 months. Small teams with lean plans are raising modest amounts of capital for clear goals. It is healthy. The quality of founding teams, while I can’t show quantitatively, feels like it is up, and teams are more aligned with the mission, possibly because founders and early joiners are rethinking job risk. Hiring people into startups hasn’t been easier in years. There are many layoff trackers of good people who have been retrenched, and stock grants awarded to people at tech companies have taken a bath. The golden handcuffs don’t look so golden. It is worth reaching out and talking to people.
Overall: Seed rounds are getting done. The age of small teams is here. Those who have focused plans and are raising modest amounts of capital are the most attractive.
As a startup how do you navigate the seed landscape?
My colleague Gil Dibner when asked about raising a seed round in 2022, had a great slide on planning. This should be your first step before going out to fundraise.
Part 1: Planning
Imagine the next 24 months and be sure you have a clear picture of where you are heading:
Milestones. What will you be able to achieve?
Team
Technology
Product
Traction/Adoption
Financial metrics
De-risking. How and when does the company become de-risked?
Attractiveness. At what point over the next 24 months will you be most attractive for new investors? What will they expect to see? How will they justify the valuation you are asking for?
Scenarios. What are the best, worst, and base case scenarios? Are you prepared for them?
From this exercise, hopefully, you should be able to think through the combination of milestones you want to prove that will unlock the next stage of your business. And, more importantly, what isn’t necessary. You can then break those milestones down by funding amounts and the personnel you need to execute them. You might come out with two plans a) a baseline lean plan and b) a quicker, more ambitious plan should you end up getting more interest in raising more.
Part 2: Fundraising a seed round.
Terrence Rohan, an angel investor in Figma, Front, Notion and others, had a thought provoking tweet that got me thinking this might be a near optimal path for fundraising in this environment at the earliest of stages.
I’d amend his plan (slightly!) to put notional dollars against point one.
Pick a fundraising amount from the planning exercise above but for preseed try to keep it to less than $800k, preferably closer to $500k and for seed, less than $1.5mm. You are lowering the capital bar to make this amount ‘angel-able’, not a word, but for the plan to work, angel money has to be able to get you somewhere interesting.
Open a SAFE note that can quickly sign people up to as they come onboad. You can pick a valuation capping the upside and downside
In parallel, pitch first check smaller and larger funds and see the response
Update funds w/ new commitments (social proof)
You either (a) get traded up to a bigger round / val or (b) you land safe w/ Angels.
If you end up getting more interest, you can show the more ambitious plan you had designed during the planning phase.
Build interest, demand and momentum and adjust as you go. It is important to remember in all ofthis that dilution matters. Try to keep yourself from diluting more than 20-25% (ideally less) unless the capital seems like a good tradeoff to your plan, and recognise you are raising at a tough time and need to get money through the door to continue the business. Live to fight another day.
By keeping the capital and valuation bar low, you get the optionality to the momentum of closing a round from different capital sources: friends and family, angels, smaller VCs to larger multistage VCs. This not only increases the potential of closing this round it also increases the chance of closing your next round. The reason being, if your valuation isn’t sky high, your ability to grow into that amount and hopefully at a higher amount will be easier.
If you were to raise $5mm at a $30mm post, you need the plan to get to $2-$3 million in ARR to grow into and justify a higher next round. If you didn’t get there, it might be hard to raise ANY amount in the current climate. Whereas if you raise $1mm on $8mm and have not diluted too much, you could be a highly investible proposition and ‘default alive’ in many scenarios. You will have collected objections from investors and judged interest along the way, so when you raise your next round, you will have a lot more information about how attractive and to who a lot better, and the macro environment may have improved.
Angel tips
With mentioning angels, I thought I’d add a few notes about targeting them, in case this blog post isn’t long enough.
Who? I bucket angels in broadly three categories.
Domain expert: The person who is a titan of industry and can help with introductions and help you manoeuvre from their network and expertise of a long time working in that industry. (Pharma, Finance, Construction etc)
Weakness expert: An angel with strength and excellence in a set of skills that are lacking in the company AND in an area that is a high priority to the success of the business.
Celebrity angel: This person might not be that useful in terms of ongoing support, but they might give some credibility to what you’re working on and open up other doors along the way.
Map the risks of the company and get a mix of the above.
How? Angels usually invest in packs. If you get a yes, ask for at least 2-3 introductions to their friends. If your odds of closing a random angel are 5%, an introduction from a friend who is investing, I would put the odds of investing skyrocket to around 50% in my estimation. From this effect, you will see blocks of commitments, but you first need to convert someone and roll that up.
Where? Start to get a list together. There are prominent angels like Charlie Songhurt or fintech super angel Chris Adelsbach. Another helpful tip is to go to Crunchbase. Look up companies in the region or the type of company you are trying to build. Go to the investor's tab and look at the angel round, create a list and start reaching out.
SLA: To save on later frustrations, it’s worth understanding how both of you will work going forward. Some angels like to see progress in the business. Some like to invest and rarely interact. Both are ok as long as both sides know what expectations are.
Time to leave it here.
As always, thanks for reading. If you’re in the early stages and building something interesting in Europe or Israel, please reach out.
Cheers,
AP