Big, costly seed deals were the exception in 2023's lackluster venture capital market

Hopes that it would become easier for startups to raise capital in 2023 were left unmet as the year ended.

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New data from business database PitchBook paints a modestly dim picture of venture capital investment activity in the fourth quarter of 2023. Per PitchBook’s preliminary count, startups in the U.S. raised 2,879 rounds worth about $37.5 billion in the fourth quarter — the lowest quarterly deal value since Q3 2019 and the lowest deal count since Q4 2017.

Across stages, venture capital investment activity in the United States is flagging, and this extends past aggregate figures — for example, we saw less total capital invested in U.S. startups last year than in 2020.

However, there is an interesting wrinkle in the data: We saw a decline in the number of seed deals, in keeping with the trend in the rest of the market, but it seems the youngest startups are generally faring better than everyone else. Observe:

There was a decline in the median deal value between 2022 and 2023 for all startup fundraises at Series A onward, but 2023’s median deal value at the seed stage matched the $3 million record set in 2022. (The average value of U.S. seed deals rose to $1.3 million last year, which we last saw happen in 2006.)While the median pre-money valuation for all Series A and later rounds declined in 2023 compared to 2022, seed deals’ median pre-money price tag rose to $12 million in 2023, up from $11 million in 2022.

The news is not all good, though. As we noted above, seed-stage startups were not immune to the wider decline in deal activity, and the number of pre-seed and seed deals declined in 2023 to roughly the same point as Q4 2017.

So, what all this adds up to is: fewer but costlier seed deals in the U.S. Is this trend healthy for startups in the world’s biggest VC market? It’s too early to say, but there is evidence that the rising median valuations for seed deals are shaking up the venture industry and, consequently, startup land.

TechCrunch scooped the shuttering of Countdown Capital earlier this week, and the following paragraphs from that story have been stuck in my head (emphasis ours):

The letter posits [from Countdown Capital founder Jai Malik] larger narratives about early-stage hard tech industrials investing that throw into doubt the ability of small, specialist funds to compete against multi-stage incumbents.

Malik explicitly touches on this fact toward the end of the letter, when he writes: “To be clear, we’re not bearish on venture capital or the future success of venture-scale hard tech companies at large. We’re bearish on the ability of small, early-stage funds — particularly sectionally focused ones — to continue exploiting these opportunities profitably.”

In the letter, Malik connects large multi-stage firms investing in hard tech industrial startups to the slowdown in growth in software-as-a-service (SaaS) businesses. But he says that the rate of overall value growth for industrial startups will not outpace the rate of investment from large firms. “Consequently, we think early access to the best companies for a specialized, early-stage venture firm like Countdown will become more limited,” he says. “The most successful early-stage, specialist firms may simply resemble less-profitable ‘derivatives’ of top-performing multi-stage firms, like Founders Fund.”  . . .

He said that this lack of competitive advantage was already noticeable: In three cases, Countdown came close to investing in a company’s first round, only for the firm to be priced out by a larger multi-stage firm: “A 50-100% price difference at the pre-seed and seed stage is immaterial to a multi-stage firm managing billions of dollars, but can and should be the difference between a yes and no for a firm of our size.”

It’s worth noting that larger funds are less price-sensitive in early-stage dealmaking because they expect to build their stake as the startup scales. Paying more — overpaying, if you want to call it that — for an initial stake represents a very small percentage of their total anticipated investment; what matters is early ownership that can be levered into larger stakes later on. If you expect to invest $100 million into a company over time and spend $5 million on a seed deal instead of $4 million, you aren’t going to be staying up at night worried about the price. But if you intend to invest less, spending that extra seven figures early can jumble your math.

Connecting this to our above work, I posit that the multistage impact that Countdown Capital outlined on early-stage investing is showing up more generally in the market. That’s resulting in more expensive seed deals. This could also be playing into the falling number of seed fundraises happening, but I am less sure of this logic on that front.