What are the latest trends in seed funding for startups?

Funding pre-seed companies has fallen mainly back to friends and family rounds. There was a surge of institutional investor activity in preproduct and pre-seed companies from late 2020 - 2022 but that has stopped almost entirely. I see more friends and family rounds and angel rounds. The cost of building software and products has decreased so much that investors have become much more accustomed to seeing a product. You can still raise but you need the right story and the right investor!

Some of the latest trends include: 1. Remote Seed Investing: With the rise of remote work and virtual interactions, seed investors are increasingly open to investing in startups regardless of their location. 2. Pre-seed and Pre-product Funding: Investors are showing interest in funding startups at an even earlier stage, often before they have a fully developed product. 3. Syndicate Funding & Crowdfunding: Syndicate funding involves a lead investor who brings together a group of individual investors to collectively invest in a startup. Crowdfunding has made investments more accessible for the masses. 4. Impact Investing: Impact investing, which aims to generate both financial returns and positive social or environmental impact.

There continues to be a huge demand for capital at the sub $500k mark. At shipshape.vc we saw 700+ pre-seed raises in 2023 (total demand of ~$138m, average pre-seed round size of $196k), with the top 3 sectors that startups are building in being: 1. Fintech 2. AI 3. Cleantech Rounding up the top 10: 4. Life Sciences & Healthtech 5. Mobility and Logistics 6. Edtech 7. Media & Entertainment 8. Agritech 9. Retail tech 10. Cybersecurity & Defence We've seen more funds write smaller cheques (or launch funds that cater for pre-seed/very early stage businesses) where they have high conviction.

Un reported pre- seed rounds are at all time high. Because 1. entrepreneurs are getting money from friend and family 2. Lots of incubation cells at colleges / universities 3. Startup investing is no longer restricted to HNIs and even people with jobs have started investing in startup’s. The other side is Structured money is getting harder to get. Because 1. Startup’s (number of) are at all time high. And growing. 2. Deal size for PE / VC is on the rise. So smaller amounts don’t interest them anymore.

Pre-seed and pre-launch funding are on the rise, as investors look to get in early with smaller checks. Solo capital seed rounds from a single investor are growing in popularity. With growing macro uncertainty, investors seek obvious monetization potential at seed stage. Traction milestones or clear path to revenue matter more given tighter financings. Remote-first and asynchronous communication startups continue garnering strong seed attention, as demand increased for these workflows since 2020. Same for digital health and climate tech. Platform shifts remain enticing still, with investors seeking the next big disruptive SaaS platforms to emerge across verticals like consumer services, fintech, media, healthcare, etc.

It's important to note that larger seed rounds also bring about higher valuations, which can lead to greater dilution for founders and early investors. Additionally, with more capital at stake, there is an intensified pressure on startups to deliver tangible results and meet the heightened expectations of both investors and customers. This dynamic underscores the evolving landscape of early-stage funding, where the benefits of increased funding are balanced against the challenges of managing growth and investor expectations.

I think a big part of this is due to the maturity of the venture market. More capital in general means more cash into each round.

Someone said it – startups are raising blindly and greedily. The more you raise, the more you're thought of as a success. Then the ultimate demise happens due to the burnout from trying to grow too fast.

Seed rounds have grown significantly in recent years, reflecting a broader trend towards larger, more competitive funding rounds across the venture capital industry. Here are a few additional points to consider about seed rounds: Higher expectations: As you mentioned, startups in today's market face higher expectations from investors and customers. They are expected to achieve faster growth, show stronger traction, and demonstrate a clear path to profitability. More competition: With more startups competing for seed funding, it can be harder for founders to stand out and attract the attention of investors.

Asia is experiencing a different scenario, likely due to a deficit of funds allocated to venture capital investments. This shortfall is attributed to the cautious approach of family offices and high-net-worth individuals (HNWIs) in a high-interest rate environment. As a result, the seed funding landscape in Asia is marked by smaller rounds and possibly more stringent funding conditions, unlike the larger, more competitive seed rounds seen in the US.

In the current competitive landscape, despite the initial rise of remote fundraising during the COVID-19 pandemic, it appears that the traditional, in-person approach to meeting investors is regaining prominence. While remote fundraising offered advantages like broader investor access and savings on travel, it seems to fall short in effectively building trust, rapport, and clear communication compared to face-to-face interactions. In a scenario where competitors are opting for direct, personal engagements with investors, relying solely on remote methods could be a disadvantage, underscoring the importance of in-person meetings in the fundraising process.

While there are challenges associated with remote fundraising, such as building relationships and managing multiple processes, startups can overcome these by leveraging new tools and processes, and by focusing on building trust and rapport with investors. As the startup funding landscape continues to evolve, remote fundraising is likely to remain a key part of the process, providing startups with greater access to funding and the ability to scale more quickly. However, it will be important for startups to balance the benefits of remote fundraising with the need to maintain strong, long-term relationships with investors, and to carefully manage the risks and challenges associated with the process.

I’m not a big fan of remote funding. It’s super difficult to get to the crux of a businesses culture without being face to face and, ideally, in their offices.

Remote fundraising may be a bridge to actual fundraising. However one should always be aware of the General solicitation rules and regulations, always being compliant with them. In person meetings are more effective and is an opportunity for building trust and relationships.

Remote fundraising enables greater specialisation for funds. This is great news for founders. Founders can identify highly relevant prospective buyers of their equity around the globe, even if founders are developing in a niche technology domain. At shipshape.vc we've observed a greater degree of specialisation in niche tech domains from new funds.

One area with greater diversification is the rise of specialist funds. Diversification of domain expertise means a better funding landscape for founders. Greater specialisation of domain expertise gives those building new technologies a better chance to have their journey accelerated by genuine 'smart money'. It doesn't mean the end of generalist investors (who have to possess other valuable 'value-add' characteristics to be successful in the long run). Additionally, diversification of how capital markets itself (e.g. through a thesis that focuses on immigrant founders) means more opportunities.

Startups are benefitting from global investment networks, connecting with investors beyond geographical boundaries. International conferences like Web Summit and networking forums like TechCrunch Disrupt are serving as hubs for global investment discussions. Engaging with these networks can open doors to funding, mentorship, and strategic partnerships on a global scale.

While the concept of a more diverse and inclusive seed funding ecosystem is gaining attention, in practice, the majority of seed investments still predominantly come from traditional sources such as venture capitalists (VCs), family offices, and high-net-worth individuals (HNWIs). Despite the growing presence of varied investors like female investors, underrepresented minorities, and crowdfunding platforms, they currently represent a small fraction of the total seed funding landscape. The core of seed financing, therefore, remains largely unchanged, with VCs, family offices, and HNWIs continuing to be the primary contributors.

In 2023, more diverse and niche VCs appeared worldwide. For example, 30+ new VCs opened in Africa. Smaller VCs increased in almost every market. This is unprecedented. As newer VCs are moving into emerging markets and investing in leapfrog countries, they are narrowing in on issues within the UN's STG goals and matters close to the heart (freshwater, health, education, sustainability, waste reduction). Why now? The barrier to being an LP is lower and so is the cost of establishing a fund. Additionally, the general attitude of legacy VCs is eroding, and diverse teams are coming together to fix the funding market. Diverse teams know they can't wait for traditional GPs to invest in diverse companies, so they are doing it themselves!

By embracing diversity and inclusivity in the funding process, startups can build stronger, more resilient businesses that are better positioned to succeed in today's competitive marketplace. It's also worth noting that fostering diversity and inclusivity is not just a moral imperative, but also a strategic one - research has shown that diverse teams perform better, make better decisions, and are more innovative than homogeneous ones.

This is highly dependent on where a business is based. In the US there’s a chunky portion of rounds that are CLNs / SAFEs. In the UK that a significantly smaller percentage as most investors prefer a priced round.

SAFE notes & CLNs unpopular with angel investors in the UK as they don't offer the amazing tax reliefs of the SEIS/EIS schemes. The options in the UK are Advance Subscription Agreements (ASAs), priced round or agile investment

There surely is a shift from the traditional sources of financing, which is widely being seen in niched down early stage startups and is being adopted at pace by the wider belts of startups looking to raise. SAFE was the quickest to gain popularity amidst founders and investors alike, and venture debt is the latest to have seen a pickup as an alternative to traditional VC funding. This approach appeals to founders who want to retain ownership while extending their financial runway. As there is no right or wrong option here, it all depends heavily on the stage, status, structure and soundness of the business model.

The venture debt model is currently a hot topic among investors, particularly in the context of alternative financing options for startups. This approach, where startups borrow money and repay it with interest and fees, is gaining traction. However, there's still some uncertainty about its long-term viability. The main concern is the extended duration between seed investments and successful exits, which can pose significant risks for both investors and startups. This extended timeline makes it challenging to assess whether venture debt will be a consistently successful strategy in the long run.

Crowdfunding is a viable option for startups looking to raise capital, especially if they have an active user base that is using their product. We have a portfolio company in the wealth tech space that has raised over $45M following our initial investment from over 7k of its users.

We're seeing a large increase in post-seed rounds to bridge to a Series A, given the current fundraising environment. It's important for investors and founders to understand where these post-seed rounds can realistically get a company, because the industry addage is no one likes a "bridge to nowhere."

?? If it were possible to upload a picture here, the later stage could be depicted as a horrific mass crash on a highway! ????

Look at the entire eco system from the other side. It used to be startup’s ; now it’s about entrepreneurship. The difference is structure versus Un-Structured. Today a college student can have an idea and approach people and get a positive response. Someone can enter construction business is a tier 2/3/4 city and easily get funding. Because people in general understand money and returns better. A few years back it was only about tech ; no longer so today. Any one with any idea to make money can attract investors. Entrepreneurship is picking up.

The bar for pre-Seed, Seed and beyond rounds continues to go up while valuations trend lower and rounds become more structured. Companies are facing extended fundraising timelines, often due to founders fighting market reality. Prolonged time in the market without deal momentum can disqualify your startup from capital just as lack of growth can. Entrepreneurs: internalize real-time market feedback and adjust course accordingly.

I'd also mention Rolling closes. Seed rounds structured with multiple closings over time as milestones are met, vs one lump raise provides flexibility.

Increasingly startups are stepping off the venture capital path. The VC business model biases a ‘raise a lot, spend a lot’ paradigm that is inconsistent with the organic pattern of many companies. Founders often find themselves under a heavy preference stack with fewer options for future fundraising. There are other alternatives which help companies chart a more organic path towards sustainable profitability. Founders who decide to take this direction are finding sustainable growth and a path towards a healthier life and profitable exit.

Angel Investors have turned super active in the ecosystem. In the Indian VC ecosystem, angels are more than happy to write a cheque of INR 25L either individually or do a larger cheque of INR 50-75L to help startups build their early product. With high risk, comes high reward where these investors seek 5-15% equity for their investment amount.