I read with interest Stacey Higginbotham’s GigaOm post on VC investment in 2007. The gist was that there’s no bubble here, at least compared to how much had been invested in the last bubble. The chart presented shows that there was a good-sized drop in investments in the wake of 2001 (a bubble bursting), and that while levels have steadily grown, they’re not really back to the levels of the bubble. What I found more interesting was the apparent indication that the relative mix of investing stages is unchanged. The chart shows VC’s invest about as much in startup or seeds as they ever did.
As usual, the Big Picture tells us very little. That’s why I can’t leave data like this alone, because you never get the whole story from a single chart or average. There’s almost always some juicy insights if you drill down. Fortunately, the data is readily available. It came from PriceWaterhouseCoopers quarterly MoneyTree report. The thing that was bothering me about the original article was that I know for a fact seed investing has changed radically. Once upon a time seed investing was all the rage. The biggies got big by making the right seed investments. Many of them used to look with some disdain at firms that were later stage investors. In fact, the disdain extended to entrepreneurs who accepted Angel money rather than going with a top drawer firm for their seed money. Such entrepreneurs were doomed never to be able to get the “good” money if they strayed from the path.
These days VC’s will euphemistically tell you they’ve become “stage agnostic.” Having been out looking at the landscape, talking to VC’s, and talking to entrepreneurs, I have become skeptical. While there is still some seed money available, it seems that by and large the VC’s would much prefer if you raised your seed from Angels and didn’t darken their doorsteps too much until you’d proven your deal had legs by building a product and getting some customers. Less risk, in other words. The question the entrepreneurs ask, and I confess I still don’t have a straight answer, is whether that process means additional dilution. Many of the entrepreneurs I talk to are taking a view that they’d rather just try to go it without VC rather than deal with “the new model” (as one VC I know called it).
Getting back to these numbers, they didn’t mesh with what I’d heard. So I started crunching. First thing is to just look at Software. I’m a Software Guy, the others I talk to are also Software Guys (and Gals), so what’s happening with Semiconductors or Green Energy is of little interest to us. Here, the numbers tell an interesting story. Take a look at what’s happened to the % of dollars out of all dollars invested that go out in seed rounds:
To be clear, these are only software dollars being considered, but as I said, I’m a Software Guy. And now we can see it. Seed investing in Software companies started falling like crazy in late 1999 and has never really recovered. I considered that perhaps the drop was due to the oft-repeated claim that it is much cheaper to start a software company these days (LAMP and all that sort of thing, you know). The problem is the curve looks the same when we consider the number of seed investments as it does when we look at the dollars. There are just a lot fewer seed investments being made. And that’s exactly what one hears on the street.
Did all the money go to Green Energy or something? Unclear, but VC’s invest about as much in Software as they ever did, just not at the Seed stage. Here I’ve overlaid the $ of Total VC dollars invested in Software against the other curves:
Note how Software took off in the beginning and has been pretty stable ever since, although the last data point has dropped off to a low not seen since the early 90’s. Perhaps those entrepreneurs who don’t like The New Model are having a go of bootstrapping all the way. Or maybe software is just not in vogue as much any more. Still, that green line is pretty noisy. It’s a bit early to call definitive.
Out of curiousity (some might say spite), I wanted to compare this to Fred Wilson’s data on VC fund returns:
Now that’s just fascinating. The two are certainly highly correlated: fund returns fell off at the same time the VC’s quit making seed investments. Is there cause and effect? Who the heck knows? It would be interesting to understand whether those few VC’s still doing much seed investing are the ones showing good returns relative to those who are not. One thing is for sure. The VC biz changed for the worse about the time the Software Seed investments stopped.