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The Seed Stage Slump...What is Next?
Howard Lindzon
December 03, 2017
This morning I read Fred Wilson’s post about the ‘early stage slump‘ and felt I needed to expand on some of what Fred started. Fred shared some data showing how the early stage market has cooled since 2012 so please read it first.
So…
Way back in the olden days of web 2.0 (2005-2008), seed deals were getting done at $2 million pre-money. I know because I was writing a lot of checks. A lot of seed deals I participated in including Tweetdeck and my own Wallstrip (acquired by CBS) and Stocktwits were done at valuations under $1 million – post money!
By 2011, angel fever (not to be mistaken with crypto fever today) was in full swing and uncapped notes started to get funded. It was stupid and I called it out on this blog.
While investors chased crazy angel investing terms – which actually continues today in the ICO market – FANG stocks and Chinese internet behemoths exploded in valuations. The markets changed and rewarded large market capitalization, liquid momentum investing.
By 2013, the term BTFD (Buy The F@#king Dip) took hold and the relentless buying all the S&P dips took hold.
As if BTFD being a meme is not enough tempting of the market gods…
In 2017, Donald Trump takes credit for the stock market rise. He went so far last week to say that if he had lost to Hillary, the markets would have dropped 50 percent by now. This from the guy who actually sold his stocks in June of 2016, after he called the stock market a bubble (do not bark at me about how he had to as he has ignored every other financial conflict).
The market has a way of punishing people that chase and those that confuse a bull market with brains or economic policy.
While seed stage investing returns have dropped as a whole, pretty much every single human with a smartphone and access to the internet could have bought Bitcoin and or Ethereum the last few years and trounced the best angel investors and venture capitalists.
The biggest returns moved away from seed investing and the stock market when the market got crowded and people chased returns.
In 2017 we are left with people questioning the whole angel investing landscape. As Fred highlighted:
When I talk to my friends who do a lot of angel investing, I hear that they are being more selective, licking some wounds, and waiting for liquidity on their better investments.
When I talk to my friends who started seed funds in the past decade, I hear them thinking about moving up market into larger funds and Series A rounds.
You can see that in the data. Less deals and bigger deals.
Here is the thing. Seed is really hard. You lose way more than you win. You wait the longest for liquidity. You lose influence as larger investors come into the cap table and start throwing their weight around.
It is where most people start out. Making angel investments, raising small seed funds. They learn the business and many see better economics higher up in the food chain and head there as soon as they can.
Fred is right…seed is really hard. I am glad that the great ones move up the food chain and others are moving on to the next shiny return object. Less competition for me.
I have been investing as an angel – the last 10 via Social Leverage – for over 20 years now. There are good cycles and bad. Back in 2014 I did a podcast that covered a lot of my 20 years. There is a purity to angel investing. Being a micro VC, like Jeff Clavier explains, is a category that is here to stay.
I do not think the cycles can be timed. I have learned that investing consistenly, in great founders, at reasonable valuations over a long period of time is a fantastic way to make outsized returns. It helps that I keep investing time in my network and living in the future by playing with all the toys.
I plan on doing the same for the next 20 plus years.
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