Conference Presentation, Fireside Chat, Panel, Roundtable
DEBATE: State of Seed Investing w/ Jason Lemkin, Sam Lessin, Frank Rotman & Harry Stebbings | E1047
- The current market cycle is expected to extend significantly beyond the previous 18-month timeframe, ending the "factory model" of predictable $1 billion to $10 billion company creation and shifting toward a bespoke approach reliant on pattern recognition and a power law of few huge victories versus many losses.
- A four-stage de-risking process (seed, A, B, C) is anticipated to replace the previous "alphabet soup" of extension rounds, with failure rates projected at 20 to 30 percent between seed and Series A, and a similar rate between Series A and Series B.
- Pricing corrections are predicted to ripple from public markets through later and mid-stages to earlier seed stages, potentially causing seed-funded companies to receive "no bids" at Series A if valuations are not ratcheted down, as venture capitalists prefer issuing no bids rather than facilitating flat or down rounds.
- Founders are expected to resist valuation corrections, necessitating a shift where companies must demonstrate profitability at low scale sizes and where seed capital funds businesses that are already working rather than serving merely as experiments to de-risk for future rounds.
- Exit strategies are forecast to move away from the "magical seed" model targeting $40 billion valuations, with $200 to $300 million exits potentially delivering strong returns for properly financed companies, while mega seed funds may struggle to achieve meaningful returns as a $2 billion return represents only a 3x gain on a $2 billion fund.
- Institutional investors may consolidate into smaller $50 million funds to improve risk management, while mid-tier firms with mediocre results face difficulty raising capital as LPs rationalize capital in response to depressed track records and markdowns.
- The public market IPO window is unlikely to open until the second half of 2024 or later, with an estimated 26 IPOs possible in that period, though public markets will likely favor massive winners, megadons, or private equity-style roll-ups over mid-sized IPOs.
- A recovery in 2024 is anticipated to be steeper than expected, with capital flowing back into the ecosystem upon the IPO window opening, while future growth may theoretically have no upper bound compared to historical limits.
- Capital efficiency will become critical at the earliest stage, with narrative-driven fundraising ceasing at seed as results become paramount in Series A and Series B, driving a focus on high profitability and "weird" areas with under $5 million raises.