Trends in Seed Stage Funding for Entrepreneurs

Bill Payne , Angel Investor , Frontier Angel Fund

13 Dec 2011

I’ve recently taken a look at seed stage funding by venture capitalists (VCs) and angel investors over the past five years.  For VCs, I chose to look at all seed stage VC deals (from MoneyTree©) as well as those in five of the most active regions in the country.  Note that I merged the two Southern California regions (LA/Orange County and San Diego) into one.  Here are the trends in venture capital financings from 2006 through 2010 – the number of seed stage deals funded and total investment by region in millions of dollars.

As you can see, nearly 2/3rds seed stage VC deals were funded in these five regions.  In 2010, MoneyTree© reports that only 138 seed stage VC deals were done outside of California, New England, NYC Metro and the Pacific Northwest.

I note a couple of trends:  (1) Seed stage venture capital financing have been pretty stable over the past five years and (2) while the number of deals funded was a bit lower in 2009 and 2010 for most regions, the NYC Metro area had a significant increase in the number of seed stage deals funded.

Then, I took a look at the average seed stage deal size in 2010 ($$$$ ÷ # of deals, in millions), as follows:

Wow…four of the five most active seed VC regions reported deal size above the All Seed-VC average, while the average deals size in NYC Metro was less than half the size of the average in each of other regions reported.  VCs in NYC invested, on average, only $2.4 million in seed stage deals in 2010.  And, according to MoneyTree© for the first three quarters of 2011, the average invested in NYC Metro seed stage VC deals was even less.  You will also note that NYC Metro was the only region reporting that the number of seed stage deals increased significantly in 2010 over previous years.  Will that trend hold in 2011?  Who knows!

Then, I looked at angel investment in the US over the past five years, as reported by the Center for Venture Research, in billions of dollars.

This data on angel investing is clearly not as granular as the MoneyTree© data for VC investing.  We do not yet have data by state or even by stage of development for angels, but we do know that about 1/3 of angel deals reported are seed stage deals – approximate 20,000 seed stage companies funded with $300,000 or so, per round.

Observations

In 2010, angels funded about 50 times as many seed stage deals in the US as did VCs.  But, the average VC seed stage round of investment was about 15 times larger ($4.5 million versus $300,000) than for seed rounds from angels.  (Considering the difference in the size of the average seed round between angels and VCs, I wonder if the two groups are using similar definitions for seed investments.)

Since US angels are funding so many more seed stage deals than are VCs and investing so much less per seed stage deal, it does not appear there is much competition between angels and VCs.  In fact, my sense is that in most regions, angels and VCs are cooperating and sometimes co-funding startups.

However, in New York City, the funding environment seems a bit more spirited.  Typical VC round size is dropping and the competition (as measured by valuation and reported at 2011 Valuation Survey of North American Angel Groups) for seed stage deals in NYC Metro appears to be increasing.

All opinions expressed are those of the author,  and do not necessarily represent those of Gust.

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