Here this post loses me, despite the lively prose:
At the same time, more companies seeded means more full-cycle money required to break through the noise and competition, which while drive dilution of seed investors who can't follow-on in subsequent larger rounds. And, importantly, don't forget to add-in the consumer-centricity of so many of these funds, all chasing a financially anaerobic U.S. consumer who is shopped out and indebted to death.
* The notion that huge numbers of seed companies smothers the market with competing firms assumes that (a) most of these firms compete, (b) that they do so with attention/promotion, and (c) that they're all destined for the meat grinder 1/10-chance VC system.
* As amusing as the words "financially anaerobic U.S. consumer" are, is there any evidence that the people who bought things from startups 5 years ago are buying less now? Because what I see is people lining up over night in the summer heat for a phone literally designed to allow AT&T to soak their bank accounts dry.
It seems to me that the reality of seed-funding is just too boring to write about: more companies getting more ideas exposure to the market with a pretty-much constant (low) success rate --- of course there are going to be a lot more failures. That's the point, right?
How can something so small crash? The total seed investment market is smaller than some hedge funds. That's the fun of it. Out of pretty much nothing, there is an opportunity for something huge.
A parallel factor to consider is that companies these days just do not run out of money. That is not a function of an abundance of capital as much as it is a function of how damn cheap it is to run a company. Burn rates of $4500 for three guys are the norm in my portfolio. Thus, there is not a dependency on seeking a Series A.
This is how our small startup is working and we didn't even need any funding besides FFF. Our budget is very tight, but the emphasis on being break-even very soon helps us focus IMO.
His main assertion is twofold: 1) that 'silly number of companies are being seeded' (what is the threshold for silly?) and 2) that valuations are being driven up as a result of the increased competition.
Reading through the comments, however, one sees very well-known / respected seed investors all saying the same thing: valuations are actually quite low, and the dollar amounts of each investment are also so low that, not only is there very little competition between funds, many times they end up co-investing in many deals.
I think Paul is missing one big piece here, which is companies that take only seed funding to become revenue positive - they're out there and they're not looking for growth capital from the big VCs, instead they're making things people will pay for...
Despite relatively few exits and a large number of overall companies funded, what we have seen is that YC isn't all that far away from getting a positive return on their seed investments, a few mid sized exits or even one facebook like company and the whole thing is a roaring financial success.
I think this will ensure seed funding stays strong, the risk is relatively small with a large potential payoff with only a small fraction of companies making it big. As opposed to say a $5 million dollar VC deal which has a much larger risk attached.
At the same time, more companies seeded means more full-cycle money required to break through the noise and competition, which while drive dilution of seed investors who can't follow-on in subsequent larger rounds. And, importantly, don't forget to add-in the consumer-centricity of so many of these funds, all chasing a financially anaerobic U.S. consumer who is shopped out and indebted to death.
* The notion that huge numbers of seed companies smothers the market with competing firms assumes that (a) most of these firms compete, (b) that they do so with attention/promotion, and (c) that they're all destined for the meat grinder 1/10-chance VC system.
* As amusing as the words "financially anaerobic U.S. consumer" are, is there any evidence that the people who bought things from startups 5 years ago are buying less now? Because what I see is people lining up over night in the summer heat for a phone literally designed to allow AT&T to soak their bank accounts dry.
It seems to me that the reality of seed-funding is just too boring to write about: more companies getting more ideas exposure to the market with a pretty-much constant (low) success rate --- of course there are going to be a lot more failures. That's the point, right?