The current state of 2022 pre/seed investing

It’s been a weird few months and will take some time to get back to “normal” times

We made a dozen new investments in 2021 at an average valuation of $8M — half of which were pre-product/rev. So far we have made 0 new investments this year because I have no idea where the market is headed. It’s an investor's job to “invest where the market will be” in 12months+ and honestly right now I dont really know… In the last two years, there were so many new and cool trends that played out, some succeeded or at least got follow-on funding to show it is still of interest.

I saw this chart posted a few days ago (by Shai Goldman on Twitter) and haven’t stopped thinking about it since… AngelList is a small subset of the overall market but a good indication of what the “top/hot” deals are still commanding in terms of valuation.

https://twitter.com/shaig/status/1519501979445248005

This data is based on rolling funds, funds, and syndicate/SPVs being run through the platform. Not sure the % of each but generally I assume they all invest at the higher end of the market because of the behavioral nature of herd investing.

  • Preseed is what used to be seed a few years ago because billions of new dollars came into the market and earlier rounds ballooned in size. Based on this chart, I play/invest in preseed as we’re very price sensitive and only invest <$10M valuations. When I started 6yrs ago, that was called seed. Why? Because that’s where we believe you make venture scale returns
https://twitter.com/Trace_Cohen/status/1512108273322930179
  • Seed rounds are now $3–5M on $15–$40M vals. They are either preseed rounds that got some initial traction so the $100M to $1B+ multi-stage funds will throw an exploratory check hoping to lead the next real round OR a very experienced team that kind of deserves it. Why take the additional risk of getting in a little earlier when you can pay up to see some data.
  • GPs are LPs in lots of new funds. This has been a growing trend I’ve been seeing in a lot of the funds my friends started and the three emerging funds I’ve invested in. It’s a genius tactic from the top GPs to basically buy data and the top deal flow from the level below them — they invest as LP, the fund is basically their scout, take their best investments, invest and mark up their own investments, rinse and repeat.
  • VC is still a hit business but now with more competition. A rare look at a top seed VC funds data.

-Dilution sucks — this data includes 5 unicorns ($1b+) from seed
-Follow-on dollars significantly reduce total multiple
-16/41 returned less than 1x (almost 40%!)

https://twitter.com/chadbyers/status/1519806151801466880

From my earlier tweet about venture math, you can now see how it works… I assume the 5 unicorns are the top multiples here with a massive difference from “only” 10x to 160x. A few things to note here

  • They probably entered at $20–40M valuations hence the “smaller” multiple on a few of the unicorns
  • They probably did follow-on which further “reduces” the multiple because they invest more at a higher valuation. Put more money into your winners hopefully
  • I assume the big return is either Flexport recently valued at $8B or Robinhood (public but way down at $8B+ too) which was their first investment (wow!) “The first deal I did in the fund was Robinhood,” Byers says, a $250,000 investment in 2013.”

Growth stage investments are alive but stalled. A few of my investments are currently in talks for Series A/B/C but the game has changed — they’re getting offers but lower than the market 6months ago which hurts. I own a few stonks but am no expert by any means but it’s easy to ascertain that P/E + rev multiples and growth at all costs mentality are all being recalculated.

So what’s next? My predictions for the next year

A slowdown… just like we thought in 2020 when Covid started and we were all completely wrong a few months later.

Data just came in from Carta that shows there actually was a decrease in investment amount/number of rounds. After a breakneck investment pace over the last two years, this is probably healthy and expected. How long will it last? I actually think through the end of the year because of all the macro world events as well. But we forget fast so I think it will be directly correlated with the public markets.

https://twitter.com/PeterJ_Walker/status/1521150462892068864

Lots of down, flat and bridge rounds through the end of the year. So many startups raised because they could, at very high valuations based on competition or rev multiples. Right now cash is king and runways/burn are very important (in my professional VC voice).

Huge influx of experienced talent. As the FANG and other major public tech companies' stock falls, it will be very difficult to retain and hire new talent. A huge problem for late-stage, highly valued private tech startups as well — a major boon for early-stage that still has the BIG upside.

Just be cognizant that most of the funding news you’re reading now is generally delayed and not a good indicator of the current funding environment. We still haven’t announced half of our investments from last year yet — some you can find here

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