Seed fund­ing los­ing its mojo in the US

The Star Early Edition - - INTERNATIONAL - Heather Somerville

THE BLOOM is off seed fund­ing, the business of pro­vid­ing money to new start-ups, as in­vestors take a more mea­sured ap­proach to fi­nanc­ing emerg­ing US tech­nol­ogy com­pa­nies.

Seed-stage fi­nanc­ing has been slid­ing for the past two years, with the num­ber of trans­ac­tions down about 40 per­cent since the peak in mid2015, data shows.

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 or Airbnb.

“The rea­son why start-ups 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, start-up men­tor and as­sis­tant pro­fes­sor at Stan­ford Univer­sity.

Angel in­vestors

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 the same pe­riod in 2015, a re­port re­leased last month by Seat­tle-based PitchBook, which sup­plies ven­ture cap­i­tal data, has shown.

The dol­lar amount pro­vided by seed and angel in­vestors was $1.65 bil­lion (R21.8bn) in the sec­ond quar­ter. That’s just shy of the $1.75bn for the same time pe­riod in 2016 and down sig­nif­i­cantly from 2015, which saw $2.19bn (R29bn) in­vested in fledg­ling start-ups.

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 (ini­tial pub­lic of­fer­ings) such as GoPro, Lend­ing Club and Fitbit 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 Ini­tialised 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 have amassed so much wealth they can quickly chal­lenge a hot start-up, di­min­ish­ing its value.

“In­cum­bents just get so much more power, so there are fewer su­per early-stage op­por­tu­ni­ties that are valu­able,” Tan said. “I can imag­ine a 20 to 25 per­cent re­duc­tion in in­vest­ment op­por­tu­ni­ties.”

Fund­ing cy­cles in Sil­i­con Val­ley ebb and flow. Sev­eral veter­ans say the de­cline in seed deals is bound to re­verse at some point.

Still, some early-stage in­vestors say they’re ob­serv­ing a re­think­ing of the tra­di­tional “spray and pray” ap­proach to seed fund­ing. – Reuters

R21.8bn Start-up cap­i­tal for new ven­tures, down from 2015’s R29bn

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