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Every quarter, we survey top Seed and Series A stage investors to gauge their thoughts on the current state of the market and understand what they expect over the coming years on topics like startup valuations, exit opportunities, and capital availability. The 20-page report also features insight into what sectors investors expect to take off in coming periods and how changes to other parts of the venture ecosystem will impact the ability to Seed Stage companies to successfully raise capital.
3 Key Questions on the Future of the Seed Stage Market
Investors are an opinionated bunch — if you’ve ever sat in a pitch with them, you know this to be true. So when you ask them for their take on where the market is heading, there is no shortage of disagreement and debate. This opinionated nature leads to interesting insight into what is next and their differing viewpoints help open up many questions about how different factors will impact the the way companies raise capital and operate in future periods.
1. Will the flow of LP capital continue to support the Seed Stage?
2014 was a record setting year for fund formation at the early stages, with 133 sub-$50MM funds raised to support Seed Stage ventures.
As a result of that massive influx, capital will likely remain widely available for the next couple of years. The question then becomes whether the funds that raised during 2014 will have success getting LPs to re-up when it comes time to fundraise again.
Generally, the time between funds has hovered around 4 years and the median time to raise is just under 1 year…
Market conditions 3 years from now will be greatly impacted by the success these firms have fundraising which helped cause almost a 7% downtick in long term global VC sentiment from Q3 (96.71 Index Score) to Q4 (90.24 Index Score).
2. Why are investors in the U.S. Midwest so optimistic relative to the rest of the VC universe?
In what has become a recurring theme in The Sentiment Index, investors from the U.S. Midwest displayed a far more optimistic outlook in almost every area we measure, leading to a 23% jump in Midwest investor sentiment vs. the global index.
We’ve identified a few key reasons that investors from flyover county (we can say that, Visible is based in flyover country) are so bullish on the early stage market in their region for the coming years:
- An M&A and corporate venture market that is starting to catch up with the coasts
- More sensible valuations and companies that begin life with a focus on quickly reaching profitability
- Influx of new capital focused specifically on sectors where the Midwest has traditionally shone
If you are interested in reading more about the growth of the Midwest venture ecosystem, check out this article on how the market has evolved in recent years and some of the challenges the market still faces.
3. How will changes to the way growth stage companies are funded trickle down to the Seed Stage?
You don’t have to look far to find articles analyzing (and often taking delight in) the struggles of late stage companies. A recent CNBC article from Ari Levy (which is less celebratory and more matter of fact than most) lists a number of companies that have hit rough patches – like Dropbox, Evernote, and the recently defunct Rdio – and notes the difficulties many early employees have had unloading shares on secondary markets.
The questions on the minds of many investors in our survey was whether “trickle-down tech-onomics” would play a part in the ability of emerging companies to raise capital. In addition to asking multiple-choice questions, we also give investors the opportunity to add color to their thoughts. Here are a few quotes we picked out to illustrate the concerns many have about trouble moving down the venture stack:
“I can sense the headwinds, starting at revaluation of unicorns and now moving downstream, takes time but now routine Series As and Bs are getting hard to get done as the bar is moving higher and later stage investors are taking a wait and see approach. This will continue for foreseeable future.”
“The “bubble” has largely burst for late stage companies with high net burn rates and sub-optimal operating and growth metrics. Those wells have dried up. For early stage companies, there continues to be active venture investing for high potential entrepreneurs.”
“Series A funding is always tough – but good companies tend to get funded. Growth trumps all at this point, but it can’t come with negative gross margins and terrible unit economics. That might raise a couple rounds but doesn’t build a business.”
“Many companies currently in Series A stage will face a Valley of Death when it comes to growth financing.”
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