The State of Seed and Early Stage Investing

The State of Seed and Early Stage Investing: A Quarterly Update by Saxon Baum, Partner at Florida Funders

Hello friends – Saxon Baum here, partner at Florida Funders, the Southeast’s most active venture capital firm. In this quarterly update, I delve into Q3 2023 data for seed and early-stage investing in the venture capital landscape and provide insights into how Florida Funders is using this data to inform our investment approach. As always, we rely on live data like this to optimize outcomes for our portfolio companies and investors and always operate on the cutting edge of the VC space.

High-Level Market and IPO Insights

The third quarter of 2023 marked a continued downturn, witnessing the lowest overall venture deal value in six years and the lowest deal count in approximately three years. The relative share of pre-seed to early-stage deals consistently declined over the past year.

As I predicted last quarter, there was a marginal uptick in IPO activity, featuring prominent companies like Instacart and Klaviyo going public. However, the IPO window remains somewhat closed, leaving 75 companies waiting for a more favorable environment to make their public debut.

Pre-Seed and Seed

Turning our attention to the current outlook on pre-seed and seed investments, deal value and count have regressed to pre-pandemic levels like those observed in 2018. Venture capitalists have deliberately decelerated their investment pace, affording them the opportunity to conduct more thorough due diligence. This approach has unveiled red flags that may have been overlooked during the rush to secure deals in 2021 and early 2022, a silver lining that has likely helped VCs avoid the wrong deals.

Despite the reduced investment pace, the median year-to-date pre-seed deal size and pre-money valuation for 2023 have held firm at $0.5 million and $5.7 million, respectively. The scarcity of quantitative performance metrics for due diligence has heightened the emphasis on qualitative assessments, making asset repricing less straightforward for pre-seed and seed investors. This is why we aren’t seeing much of a change here.

Early Stage

Shifting our focus to the early stage (Series A) sector, the annual deal value is on track to reach a six-year low. Many startups within this category are grappling with operational bloat resulting from the growth-at-all-costs mentality of recent years. They are actively seeking ways to extend their cash runway, potentially hindering their revenue targets.

Q3’s deal activity lagged behind prior quarters, with only $8.5 billion invested across an estimated 1,341 deals—the lowest quarterly deal value figure since Q3 2017. In contrast to prevailing seed valuations, the median year-to-date early-stage pre-money valuation stands at $40.0 million, reflecting a 13.4% decrease from the 2022 median of $46.2 million but aligning with the 2021 median.

Overall Outlook

Addressing the market’s overall outlook, the question looms: have we reached the bottom? It remains uncertain. While it seems that we might be approaching it, the lack of liquidity in the market coupled with stagnant IPOs and M&A activities focusing on traditional businesses leaves fewer options. Limited partners are seeking returns, and fund managers are holding onto reserves for their existing portfolios.

But where some VCs view these developments as a sign to slow down, Florida Funders sees an opening to tap into motivated founders and scrappy startups willing to fight against the tide to come out stronger. After all, those who remain dedicated stand to win the most.

Reiterating what was mentioned in the last quarter, this period presents an opportune moment for investing in early-stage companies. Florida Funders firmly believes that this subdued environment will yield substantial returns and contribute to the creation of robust fund vintages.
Want to get involved in our investing efforts? Learn more about investing in VC with Florida Funders.

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