Times are pretty tough in the venture capital world right now, but there are actually a lot of good reasons to raise a seed round. Although the current climate is coming down hard on some, not everyone is feeling the same effects. The companies that are being hit the hardest are the mid- to late-stage companies that took money at huge valuations but are unable to grow as fast as they had projected. It’s hard to overcome the law of large numbers.
However, in another corner of the venture capital world – the seed market – things are actually going pretty well. It isn’t operating at the same velocity as it did in 2022, but there are a lot of companies receiving funding. So why is this?
Why are Seed Funds Still Doing Well?
Reasons why seed rounds are still doing well in 2023 include:
- A lot of seed funds still have capital to put to work. There were so many VC funds created and so much capital raised in 2021 and 2022, that those funds are relatively new and still have capital to be used.
- Many seed fund limited partners are open to capital calls. Limited partners don’t like to fund a lot of capital calls when times are tough because they have to sell their other assets to fund them, and those assets are being sold at a distressed price. However, seed capital calls are small deals. They will only range from $1 to $3 million, which won’t hurt the LPs, so to speak.
- Low entry valuations benefit seed funds. The price that VCs make deals at really matters, and it seems like VCs in 2021 and 2022 forgot about that. Right now, valuations are down quite significantly, and so it’s a great time to take advantage of low entry points and buy pieces of seed companies at low prices.
- Rising interest rates are forcing many mid- to late-stage VC funds to reprioritize. Seed deals are being made more of a priority because they are less economically sensitive. If you are at a seed company, you are trying to build a product and get a million dollars of revenue. You are not trying to sign multimillion dollar deals or gain multimillion dollar customers that depend on recommendations from your pre-existing customers. That economic sensitivity really works against the mid- to late-stage companies, but it’s not a pressure that the early-stage companies feel.
- There was less funding in 2022, meaning fewer ‘me too’ companies. ‘Me too’ companies are essentially the competition. Typically, in affluent times where capital is flowing, three or four companies will go after the same markets, the same customers, and get funded at the same time. That makes it hard for entrepreneurs to separate themselves because everyone ends up copying each other’s features and it becomes very difficult to outperform. When there are less ‘me too’ companies, it’s easier to build a startup.
- Tools for startups keep getting better and cheaper. Take Kruze Consulting for example, five years ago, we were still a baby company, we were only helping 100-150 companies get their accounting and finance off the ground. Now it’s closer to 800, and we’re just one piece of this. AWS, the cloud infrastructure, service providers and all of the tools that you can take advantage of as entrepreneurs are becoming more efficient and more affordable. This makes starting a seed-stage company much easier and more effective. There is a lot of seed-stage capital out there waiting for good founders.
- There is a lot of talent hitting the market. With a large number of layoffs happening at the bigger tech companies and mid- to late-stage startups, there is a lot of talent entering the job market. Out of these people, there are quite a few who are willing to work at early-stage startups. There is also a much larger pool of potential founders. If you were laid off at a company the size of Google or Microsoft, you may be thinking about starting your own, and it’s a great time to get something off the ground.
A Great Time For Seed-Stage Companies
Raising a seed round in 2023, especially if you raised a solid pre-seed round in 2022, could be a good idea. Seed-stage funds are willing to give you capital. They want to take advantage of the low prices, the great founders, the cheap tools, and the decreased economic sensitivity of seed-stage companies. If you have any questions on seed rounds, venture capital, startup investing, startup accounting, or taxes for startups, please don’t contact us. You can also follow our youtube channel and our blog for information about accounting, finance, HR, and taxes for startups!