By Keith Teare • Issue #286 • View online
More Seed stage companies die than ever before. And more money is going into seed than ever before. And later stage investors are investing $20 for every $1 invested at the seed stage. Is it the best or worst of times for the seed stage investors and companies?
- Seed: The Best of Times, The Worst of Times
- Venture: Who is your competitor?
- Jack Dorsey, David Marcus, and Crypto
- The Regulation of Big Tech
- Startup of the Week
- Tweet of the Week
The week after Thanksgiving, and the week of Hanukkah (happy holidays) has been full of news but not necessarily enlightening news. Jack Dorsey left Twitter. David Marcus left Meta, Omicron became a variant and the stock markets were super volatile. Also, I spent 3 days in the first SignalRank team offsite. So, if I am not mistaken there is no overriding theme to the week.
In addition, we are not doing a video this week as Andrew Keen is overseas.
So what better than to drill down into the seed investment ecosystem?
Crunchbase News published the latest statistics on the death rate of seed-funded startups. Pitchbook published US venture startup valuation trends, Samir Kaji tweeted a chart showing the seed ecosystem compared in size to the venture and growth ecosystem.
All three helped to shine a light on the early-stage venture funding climate. According to Crunchbase, only 28% of seed-funded startups went on to raise a Series A round (2018 data). The total number of companies funded is large and so too is the death rate.
However, Pitchbook data shows that the valuation of early-stage companies continues to rise. It’s US VC, Q3 2021 valuation report indicates median valuations have reached $53m and the average valuation is over $135m.
So you might die young or you might survive and prosper.
Samir Kaji focuses on the relative size of the seed-stage investment ecosystem compared to the rest.
He shows that the seed stage aggregate financing is around $10 billion compared to over $50 billion at the early stage and over $170 billion late-stage. This is 2021 to date.
Another way of looking at that chart is to see that less than $5 billion of seed money in 2017 and 2018 produced over $200 billion of investments in 2021 as early and late-stage venture invested in previously seed-funded companies. Despite the fact that 73% or more of them will never raise more capital.
The seed-stage ecosystem is the foundation on which venture capital rests. 2021 seed investments of $10 billion will likely attract over $400 billion of later-stage investments in 2022, 23, and 24, into only 20% or so of the seed-funded companies. It is the best of times for seed investors because they have more capital and because their best companies are being backed earlier and with more capital than ever before.
And if you are one of the companies that fail to raise it is the worst of times.
To repeat, no video this week, enjoy the curated articles below.
Seed: The Best of Times, The Worst of Times
Seed funding experienced steep growth in the past decade, with more than 40,000 U.S.-based startups raising this early capital since 2011, per Crunchbase data.
Subscribe to the Crunchbase Daily
With all this growth, are a greater proportion of startups stonewalled at seed? How many of these startups are successfully raising post-seed funding to graduate to the next phase? It turns out that while the odds of raising funding post-seed have not changed significantly, per our analysis, raising a large seed round of $1 million and above significantly improves a startup’s chance of subsequent funding.
Let’s dive in.
Sequential funding post-seed
From an analysis of startups that raised their most recent seed or pre-seed funding in the U.S. between 2011 and 2018, we found an average of 1 in 3 startups went on to raise either a Series A or later-stage funding rounds in any subsequent year.
Here’s a closer at seven key charts that depict how startup valuations have changed amid the frenzied dealmaking of the last few quarters.
The venture industry has continued to prove its resiliency in 2021 — a year marked by outsized funds, numerous mega-deals and the soaring interest of multistage investors looking to back younger startups.
As a result, valuations of VC-backed companies are on the rise across most stages in the third quarter. Our latest US VC Valuations report takes a deep dive into startup valuations across the venture lifecycle through Q3 2021, including spotlights on sectors such as biotech, climate tech and enterprise tech.
Here’s a closer look at seven key charts that depict how startup valuations have changed amid the frenzied dealmaking of the last few quarters.
Venture: Who is your competitor?
Investors that may have previously confined themselves to public markets are now clomping all over the venture capital landscape
“The creative spirits. The underdogs. The resolute.” This ethos describes precisely the people who read this column, I have no doubt, putting us in alignment with Sequoia, the US venture capital firm that began a much-talked-about blog post recently by addressing just such groups. Also “the independent thinkers”, “the fighters” and the “true believers”. Sequoia has a relentless drive to help them succeed, too, and naturally so does this column. Overblown it may have been, but Sequoia’s post announcing a radical overhaul of its investment practices is a significant moment for the venture capital industry. The firm is facing more competition than ever for the affections of those creative spirits and independent thinkers, by which it means start-up founders, whose options for raising capital now range far beyond traditional VC. From wealthy individuals and family offices at the seed and early stages, to traditional asset and wealth managers getting in on pre-initial public offering rounds — not to mention hedge funds — investors that may have previously confined themselves to public markets are now clomping all over the VC landscape. Endowments and pension funds, the main providers of cash to VC funds, are also keen to cut out the middleman and invest in start-ups directly. These rival sources of capital are not locked into the rigid life cycles of a VC fund, which typically has to exit its investments and disburse profits by the 10-year mark.
The business of funding disruptive businesses is booming — and is itself being disrupted | Finance & economics
Young companies everywhere were preparing for doomsday in March 2020. Sequoia Capital, a large venture-capital (vc) firm, warned of Armageddon; others predicted a “Great Unwinding”. Airbnb and other startups trimmed their workforces in expectation of an economic bloodbath. Yet within months the gloom had lifted and a historic boom had begun. America unleashed huge stimulus; the dominance of tech firms increased as locked-down consumers spent even more of their time online. Many companies, including Airbnb, took advantage of the bullish mood by listing on the stockmarket. The market capitalisation of American vc-backed firms that went public last year amounted to a record $200bn; it is on course to reach $500bn in 2021.
Venture capitalists investing in consumer startups are writing more checks for crypto companies than ever before. The deals underscore how blockchain technology is reshaping industries like gaming and e-commerce, pushing long-standing consumer investors to remake themselves as crypto backers.
Investors have poured $3.7 billion into cryptocurrency-based gaming, commerce and shopping startups this year, including non-fungible token marketplace OpenSea and Sky Mavis, developer of the popular blockchain-based game Axie Infinity. That’s up 26 times from all of last year, according to an analysis of Crunchbase data by The Information. The growth outpaced that of venture-backed crypto investments overall, which have risen more than five times over the same period, to $23.7 billion. Investments in consumer crypto startups are even higher with the inclusion of financial firms such as crypto exchange FTX, which services both retail and institutional customers.
To honor YouTube’s place in that story, and to celebrate the unpredictable upside of foundational technologies like crypto, we’re minting an NFT of the original YouTube investment memo and auctioning it on OpenSea . At this transitional moment in crypto, we’ve been reflecting on that 2005 YouTube investment memo.
Prominent crypto investor Coatue, known for backing Chainalysis, invested $300 million in Niantic’s metaverse project.
The blockchain is a shared ledger that allows companies, applications, governments, and communities to programmatically and transparently exchange value (assets, currencies, property, etc.) with each other, without requiring custodians, brokers, or intermediaries — all of which constrain innovation while extracting massive rents. WebAssembly built around Web3 patterns of self-sovereign identity, programmatic value-exchange and decentralization have the potential to radically change the landscape of the various application store ecosystems.
Jack Dorsey, David Marcus and Crypto
The exit of David Marcus from Facebook-parent Meta Platforms at the end of this year throws another wrench into the company’s crypto plans. Marcus, who heads Meta’s Novi financial products division, has been integral to the company’s crypto-related projects during his seven-year tenure.
Marcus co-created libra, the predecessor to diem, the long-delayed cryptocurrency that Meta is helping develop. After libra faced concerns from U.S. lawmakers, regulators and its own financial backers about user privacy and global financial stability, it underwent a redesign in 2020. The cryptocurrency became diem, a stablecoin pegged to the U.S. dollar that is now managed by the Meta-backed nonprofit Diem Association. Marcus serves on the association’s board, and his departure from Meta could cast doubt on diem’s future as the trade group lobbies regulators for its approval.
Jack Dorsey was serving as both the CEO of Twitter and Square, his digital payments company.
Jack Dorsey, the man who helped create one of the most frenetic social media platforms in existence, is nothing like his creation. Dorsey’s strength at Twitter was two-fold: He has a deep commitment to the platform he created, and I think he sees better than most the underlying motivations behind Twitter engagements (both posting and tweet consumption).
Over the past year, Twitter has stepped up efforts to appeal to creators, including acquiring newsletter service Revue, adding live audio feature Spaces, introducing tipping and starting Super Follows, which allow creators to charge their top fans for bonus tweets.
Now the question is whether its new CEO Parag Agrawal will accelerate those efforts — or prioritize others if some fall flat. On Monday, Twitter announced CEO Jack Dorsey would step down from the company he co-founded in 2006, and that the company’s chief technology officer Agrawal will replace him.
Regulation of Big Tech
Jon Porter, reporting for The Verge:
The UK’s competition regulator has officially ruled that Facebook parent company Meta’s acquisition of Giphy should be unwound, a year and a half after the social media giant first said it was acquiring the popular GIF-making and sharing website. In a press release, the Competition and Markets Authority (CMA) said that it had come to the decision after its investigation found an acquisition could harm competition between social media platforms, and that its concerns “can only be addressed by Facebook selling Giphy in its entirety to an approved buyer.”
The CMA said the acquisition could be used to deny or limit other platforms’ access to Giphy GIFs and drive more traffic to Facebook, WhatsApp, and Instagram. It also raised concerns that it could be used to require other platforms to provide more data to access the GIFs. Finally, the CMA also believes that Giphy’s advertising services could have competed with Meta’s, but that these were shuttered as a result of the merger.
Can you imagine Facebook trying to buy Instagram or WhatsApp now? I mean if even the Giphy acquisition is now considered problematic — Giphy! — imagine something bigger.
Regulator’s lawsuit threatens to scuttle the largest chip merger in history.
The Federal Trade Commission has sued to block Nvidia’s acquisition of Arm, the semiconductor design firm, saying that the blockbuster deal would unfairly stifle competition.
“The FTC is suing to block the largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies,” Holly Vedova, director of the FTC’s competition bureau, said in a statement. “Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets. This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.”
Nvidia first announced its intention to acquire Arm in September 2020. At the time, the deal was worth $40 billion, but since then, Arm’s stock price has soared, and the cost of the cash and stock transaction has risen to $75 billion. The FTC lawsuit threatens to scuttle the deal entirely.
“As we move into this next step in the FTC process, we will continue to work to demonstrate that this transaction will benefit the industry and promote competition,” an Nvidia spokesperson told Ars. “Nvidia is committed to preserving Arm’s open licensing model and ensuring that its IP is available to all interested licensees, current and future.”
The EU’s Proposal for a Digital Market Act (DMA) is an attempt to create a fairer and more competitive market for online platforms in the EU. It sets out a standard for very large platforms, which act as gatekeepers between business users and end users. As gatekeepers “have substantial control over the access to, and are entrenched in digital markets,” the DMA sets out a list of dos and don’ts with which platforms will have to comply. There was a lot to like in the initial proposal: we agreed with the DMA’s premise that gatekeepers are international in nature, applauded the “self-executing” nature of many obligations, and supported the use of effective penalties to ensure compliance. Several anti-monopoly provisions showed ambition to end the corporate concentration and revitalize competition, such as the ban on mixing data ((Art 5(a)), the ban on forced single sign-ons (Art 5(e)), the ban on cross-tying (Art 5(f)), and the ban on lock-ins (Art 6(e).
End-Users Perspective: EFF Pushes for Interoperability
However, we didn’t like that the DMA proposals missed the mark from the end-user perspective, in particular the lack of interoperability obligations for platforms. The Commission met us half-way by introducing a real-time data portability mandate into the DMA, but it failed to go the full distance. Would it lead to a measurable behavioral change of Facebook if frustrated users could only benefit from data portability if they continued being signed up to Facebook’s terms of service? We doubt it.
Startup of the Week
Crypto payments infrastructure service MoonPay has announced that it has raised a monster $555 million from Coatue and Tiger Global, hitting a $3.4 billion valuation. Now, the ambition is to connect billions of people to trillions of dollars worth of digital assets,” says Soto-Wright.