The seed stage of the venture capital industry went through a boom cycle from 2006-2014 but has lately seen a sharp decline. What's happening? Is it temporary or are their structural problems? This deck answers that question.

1. What’s Happening to Seed
Stage Venture Capital?
1 Image Credit: Pexels
Mark Suster @msuster
Chang Xu @_changxu

2. The Seed sector of the Venture Capital industry started booming in 2006. This wasn’t a
result of VC’s suddenly wanting smaller funds, it was a result of massive technology
shifts making it significantly cheaper to launch a startup.
2
1999 2005 2010+
$5m
$500k
$50k
90%
90%
Costs to
Launch a
Startup

3. The first major wave was cause by open-sourced computing and horizontal
computing.
3
1999 2005
$5m
$500k
90%
Costs to
Launch a
Startup
• Open source (LAMP Stack) meant no licenses
for UNIX, web servers & Oracle databases
• Horizontal computing meant no need to buy
expensive Sun servers & EMC storage. Instead
one bought cheap arrays of PCs and when one
failed you just removed it and added another

4. The second major wave was a result of Amazon. Yup. That simple. Not Google,
Microsoft, IBM or Oracle. It was an Ecommerce company that launched AWS and
popularized Cloud Computing.
4
2005 2010+
$500k
$50k90%
Costs to
Launch a
Startup
• S3: Amazon launched S3 in 2006, which provided “web storage,”
eliminating the need for startups to invest in physical storage to
build products
• EC2: Amazon also launched EC2 (elastic compute cloud) in 2006
that meant startups could have processing power in the cloud
without buying hardware
• Auto-scaling: In the past startups had to build infrastructure for
“peak demand,” which is very expensive. Amazon launched “auto
scaling” (after the success of Santa Barbara based RightScale)
which meant that startups didn’t need to pre-commit to instances
and could scale up and scale down with traffic

5. Cloud computing, popularized by Amazon AWS, led to younger and more
technical founders aggregating where young people wanted to live.
5
• Youth: When startups required $5 million just to launch a product, founders were in
their early 30s to 40s. It was sensible to back teams with experience. When
startups required < $500k to start it became easier to back founders in their 20s (or
even, gulp, teens).
• Technical: When you could test ideas for $500k and when more products were
being built natively in the cloud you saw the rise of the “technical founder” rather
than the “MBA founder.”
• Urban: With founders being younger it’s no wonder Silicon Valley gave way to San
Francisco in the Bay Area, Waltham to Cambridge in Boston, Thames Valley to
Shoreditch in London, Pasadena to Santa Monica in LA. Youth sought out urban
environments and the VCs living in the suburbs with 3 kids had to follow suit.

6. 6
So as usual the money followed the market, not the other way around. You can see the boom in the
Seed market was during the 8-year period from 2006 to 2014. The number of Seed Funds increased
dramatically, which helped create a distinct part of the venture capital funding ecosystem. LPs took
longer to respond but leaders like Cendana & Industry Ventures rode this trend and others followed later.
2006 2007 2008 2009 2010 2011 2012 2013 2014
Number of Funds Raised for <$100M Funds
83
181
Source: Pitchbook NVCA Venture Monitor 4Q’18
220%

7. 7
With so many new funds and so many new startups, the number of pre-seed &
seed deals exploded from 2006-2014.
2006 2007 2008 2009 2010 2011 2012 2013 2014
US VC Number of Deals under $1M
488
3,543
Source: Pitchbook NVCA Venture Monitor 4Q’18
>600%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Number of $1-5M Deals
1,036
3,104
>300%

8. 8
And predictably as the seed market began to mature the median deal size
quadrupled and seed investing itself became a distinct category from Angel investing.
US VC Angel/Seed Median Deal Size ($M) by Year
$0M
$0.5M
$1M
$1.5M
$2M
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Pitchbook NVCA Venture Monitor 4Q’18
Seed
Angel

9. 9
US VC Seed Round Median Ownership
0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Methodology: Divided US VC Seed Round Median Deal Size by US VC Seed Round Median Post-Money Valuation. Discarded 2006-7 due to distorted results from few recorded deals
Source: Pitchbook NVCA Venture Monitor 4Q’18, Upfront analysis
Seed
The increase it seed deal size is partly due to valuation increases but mostly due to
seed funds maturing and realizing the importance of ownership in driving VC returns

10. 10
And by 2015 the first signs of maturity began to show as the seed industry cooled off in
terms of dollars. It has been declining for 3 years. This is a normal sign of maturity, not a
permanent weakness in the seed market.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Pitchbook NVCA Venture Monitor 4Q’18
$8.7B
$2.8B
$8.2B
$7.4B
>290%
Cooled off
by >15%
US VC Dollars Invested in Deals under $5M

11. 11
You can observer the decline in seed investing not only in dollar terms but even more
pronounced in terms of number of deals and even funds themselves being raised.
2015 2016 2017 2018
# of Deals Under $1M
3,374
2,144
Source: Pitchbook NVCA Venture Monitor 4Q’18
Down 36%
2015 2016 2017 2018
# of $1-5M Deals
3,315
2,699
Down ~20%
2015 2016 2017 2018
# of Seed Funds Raised < $100M Funds
181
129
Down 30%

12. 12
The decline in the seed market has come at a time when the overall funding in the venture markets
has risen massively. Growth investments (rounds > $50m) now account for 62% of the entire market.
US VC Capital Invested by Deal Size ($B)
2013 2014 2015 2016 2017 2018
$7B$8B$8B$9B$8B$7B
Source: Pitchbook NVCA Venture Monitor 4Q’18
Seed Stage (<$5M)
Venture Capital
($5-50M)
Growth Capital
(>$50M)
$48b
$71b
$83b
$77b
$83b
$131b
62% of the
market

13. Why Has Seed Investing
Stagnated?
13 Image Credit: Unsplash

14. 14
In part seed investing has stagnated because series A venture capital didn’t
increase much as seed investments were booming.
US VC Number of $5-10M Deals
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1,118
687
Source: Pitchbook NVCA Venture Monitor 4Q’18
4%
CAGR

15. 15
Series B funding numbers also remained fairly flat over the past decade.
US VC Number of $10-25M Deals
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
1,103
643
Source: Pitchbook NVCA Venture Monitor 4Q’18
5%
CAGR

16. 16
Seed is now a distinct phase of the venture capital ecosystem; however, the deals are still
being funneled into a downstream market that hasn’t massively increased with the
exception of the biggest, most successful deals.
Series A
funds
Series A
funds
THEN NOW
Angel / Seed
Angel / pre-seed
Seed funds
Source: Upfront analysis
Series B
funds
Series B
funds
Bottom end of the funnel haven’t changed much
Top end of
the funnel is
now 3x larger

17. 17
The result of more seed financing and not the commensurate increase in Series A,
or B has been the rise of the “Seed Extension.”
Source: Cendana Capital portfolio company data (with permission)
Time to Series A
Pre-2012 2012 2013 2014 2015 2016 2017 2018
0.9
1.2
0.8
1.1
1.2 1.2
1.4
1.6
Number of Seed Extension Rounds
Pre-2012 2012 2013 2014 2015 2016 2017 2018
69
45
52
39
28
1189
Median years from Series Seed to A

18. 18
Venture Capital
Scale or Bust Private IPOs
Growth Capital
The Start
Seed Capital
20% of deals drive
80% of returns
The venture markets are now clearly segmented. Seed investors largely take the risk of
backing startup formation. Traditional VCs take board seats, help build teams, scale
companies and shepherd companies to growth investors. Growth capital now plays the
role that early IPO investors once played.

19. Seed Stage Capital is Here
to Stay. It has Just Matured.
19 Image Credit: Pexels
Mark Suster @msuster
Chang Xu @_changxu