Super seed rounds are still on the rise

In the plant world, we usually perceive a seed as something small. In fact, the dimensions vary greatly – from orchid seeds the size of a dust molecule to coconut palm seeds that can weigh more than 50 pounds.

The same can be said about investing in a startup in the incorporation stage. While we might think of a typical investment as a few million dollars, round sizes classified as seeds range from tens of thousands to hundreds of millions.

However, the emergence of large seed rounds is mostly a recent phenomenon. The numbers have grown particularly sharply in the past two years, coinciding with a sharp increase in total investment in projects.

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β€œThe main driver has been more and more capital going into the seed stage,” said Eugene Zhang, co-founder of TSVC, a Silicon Valley-based company that has been making seed investments over the past 11 years. During that time, valuations have grown several times, which means that they simply cost more for a large stake in a promising startup.

Using Crunchbase data, we analyzed the rise of so-called giant seed rounds β€” investments of $10 million and above β€” over the past eight years.

It’s clear that these rounds are on the rise in the US, with 2022 heading upwards even amid a downturn in overall venture capital:

Sometimes innovative companies collect big rounds labeled as seed, even though they’ve been around for a while.

To correct this, we made another chart that only looks at initial rounds of companies that were established at least three calendar years before the deal closed. The numbers are somewhat lower, but the trend lines remain the same:

The companies that breed these giant seeds are a diverse group, representing a wide range of industries and geographies.

Where did the big seeds go?

This year’s biggest seed deal went to Yuga Labs, the NFT platform known to the Bored Ape Yacht Club. The Miami-based company raised a staggering $450 million in rounds in March, less than two years after it was founded.

Among the other biggest rounds, we see a broad mix of sectors, including fintech, employee benefits, pet care, crypto, space technology, mental health, drug discovery and many more.

Some of the initial inflation is likely stemming from increased activity at this point from wealthy startup investors known to support big deals. For example, Tiger Global, which ranks as the leading clear-spending startup investor this year, closed 18 initial deals globally in 2022, according to Crunchbase data. Andreessen Horowitz has done about twelve years this year.

Pretty much across the world of core investors, checks are on the rise. When TSVC started nearly a decade ago, the typical first check size was between $500,000 and $1 million, with a valuation of less than $5 million.

Now, TSVC managing partner Spencer Green said the usual first check is $2 million to $5 million, with a valuation of $6 to $29 million.

A fine line

As seed round volumes approach the levels associated with Series A, the two phases can fizzle out a bit.

However, there are some differences. Typically, a seed deal is made as a convertible note and a Series A as a priced round, Green notes, although there can be exceptions. In Series A, it is also common to expect a company to have a “reproducible formula on the market”, which is not the case for seeds.

With these seeds being the stage at which they can reap the highest multi-stage return on a successful investment, it is not surprising to see more multi-stage investors looking to get in sooner.

Moreover, with cloud storage, low-code development tools and a suite of applications and SaaS tools for managing and scaling operations, one can demonstrate that startups are able to take off much faster than they have been in the past.

But with higher potential returns come higher risks. Historically, most funded companies fail to set up, and investors make their profits from the prevailing few. While making bigger bets in the early stages of company formation doesn’t necessarily improve those odds, it does leave a larger amount to lose.

Illustration: Dom Guzman

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