Seed funding losing its mojo in the US

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