Venture Capital

Investment activity flat in the US – Series A crunch isn’t putting off seed investors

By April 11, 2013 No Comments

As you can see the latest data out from CBInsights shows a modest increase in investment activity in the US from Q4 to Q1 and no change in the split between Seed, Series A and so on. There isn’t much seasonality in this data, so I think it is more meaningful to look at the quarter to quarter trend than the difference to the same quarter one year ago.

I guess the most remarkable thing about this is that all the talk about a coming Series A crunch hasn’t impacted seed funding. I can think of two explanations for that. Firstly investors are always slow to respond to new data. When they hear things that cause them to re-think their strategy they typically do that rethink over a period of weeks whilst they complete on the deals they have in process. Most angels wouldn’t feel right turning to an entrepreneur and saying “I know I said I would invest in your company but following everything I’ve read I’m now too worried about the Series A crunch”. They would rather honour their commitment. Secondly, investors might be hearing the talk of a Series A crunch but not really believing it yet. In this scenario they will wait until there is blood on the streets before they stop investing.

The other thing that is going on, of course, is that the cost of innovation is continuing to decline meaning that more value can be created with less capital and that all else being equal I would expect seed deals as a percentage of the total to be increasing.

Putting it all together I would expect that over the coming quarters the impact of the Series A crunch, both in expectation and reality, will outweigh the secular trend towards more seed deals and the share of seed deals will drop.

The picture from the other side of the market, LPs investing into VC funds, is also fairly static. I haven’t seen hard numbers recently, but anecdotally top tier funds are continuing to close funds successfully, some of them at an increased size, whilst second tier funds and new funds continue to find it difficult. I don’t expect this to change much until returns start to improve or unless we have a significant upswing in the economy.

This post has been about the US rather than Europe, but I think the trends are the same here, except maybe that seed investment is growing in the UK on the back of the EIS and SEIS tax incentive schemes.