September 6, 2023

Looking for Your First Startup’s Funding? Welcome to the 2023 VC Roller Coaster.
If you're a first-time entrepreneur seeking initial capital, this article provides insights into comparing three funding sources for your new venture: angel investors, seed investors, and corporate investors. In 2023, they are more different than ever before.

1. Angels: Are They Worth Chasing in 2023?

While interest rates have been on a swift rise in the US, the quantum of money that angel investors are now willing to invest in budding entrepreneurs has dwindled to the lowest point in a decade. Pitchbook's data for 2023 reveals a significant shift – the average commitment from angel investors, which stood at around 1 million dollars in 2019, has contracted to 0.6 million. Consequently, the returns on the time invested in courting angel investors have notably diminished.
Yet, it's not merely the reduction in funding amounts; the prolonged duration required to secure funds from angels has cast a shadow over their allure as a capital source today. The timeline for fundraising from angel investors has lengthened compared to previous years. In 2023, the median age of a startup during the angel funding round hit a ten-year high at 3.3 years, up from approximately 2.2 years in 2013. This means contemporary young entrepreneurs must invest approximately 50% more time, equivalent to around 14 months, compared to their counterparts a decade ago, to secure angel funding. These additional months can spell jeopardy for numerous early-stage companies, for whom each day is pivotal to their survival journey.
What a bummer. By the time young founders secure their first funding, they are not so young anymore. Consider this: if you opt for the traditional funding trajectory, waiting for the subsequent seed round post angel funding, it will consume over 6 years to accomplish both angel and seed funding objectives! And remember, you're still in the initial phases of your entrepreneurial odyssey. The road ahead involves product development, team recruitment, honing product-market fit, and raising subsequent funding rounds. Ponder this before announcing to your partner that you aspire to be a startup founder with the intent of achieving rapid financial success!

2. Seed Investment: The Train Is Still on Track, but Don't Dally!
Not everything for first-time founders today is cast in shadow. If you navigate the initial hurdle, securing your angel funding, the next station - the seed stage - offers a brighter landscape. The dwindling sums available from today's angel investors stand in stark contrast to the record-breaking deals and valuations attainable by your startup at the hands of professional VC managers, who invest funds entrusted to them by prior investors. It appears this pool of capital remains plentiful in the market.
In 2023, the median seed deal size for nascent startups reached an all-time high of $2.9 million, with their median seed valuations soaring close to a remarkable $15 million. Knowledge is power, so as an entrepreneur, leverage these data points when engaging with your seed investors.

In practical terms, this entails being ready to allocate approximately a quarter of your equity to your seed investors in exchange for a median funding injection of $3 million USD. Now, you can proudly announce to friends and family that your enterprise carries an impressive valuation of around $15 million. An achievement worth celebrating, especially considering the six-plus years of toil and reliance on the support of friends and family to get here.

For those startups that aren't simply another "just-an-idea," there's an opportunity for a more favorable deal with today's seed investors. With the exception of Q1 2023, for the past six quarters, the top-decile seed deal size has consistently hovered around $8.0 million. This may serve as the upper limit for an above-average startup, where VCs believe there's ample capital to validate product-market fit, exhibit customer traction, and position themselves favorably for a Series A round.

What accounts for this stark disparity in the appetites of angel investors versus seed investors? After all, both groups appear to be investing in fundamentally similar markets - early-stage startups. The explanation, in my view, stems from the fact that angel investors use their personal funds, making them more attracted to reallocating capital to the banking sector due to rising interest rates and the promise of risk-free returns. In contrast, seed fund managers still operate with funds committed by their limited partners during the previous fundraising cycle when interest rates were lower. This divergence helps clarify why seed valuations have been expanding while angel valuations have been contracting since the previous year, reflecting shifting investment priorities among angel investors.
Therefore, my fundraising advice for today: if you require early-stage capital for your promising new concept, don't squander your time on angel investors. Go straight to the seed funds. And be swift, for seed deal sizes and valuations are unlikely to remain at these elevated levels indefinitely. It's a temporary phase, and we currently find ourselves amid what I term "the seed hype cycle." This is because organizations and institutional funds that generously supported seed investors in the past two to three years are less likely to be as benevolent in the coming years, as higher interest rates may lure them toward better risk-adjusted returns from bank CDs, government bonds, and corporate bonds. It's plausible that seed investors will soon experience a reduction in funding from their sources as these sources recognize the superior risk-reward ratio offered by the banking sector.

3. Corporate Venture Capital: A Rising Star on the Scene.
For budding entrepreneurs, the idea of turning to corporate venture capitalists (CVCs) may not initially top the list. Historically, corporate venture capital has been synonymous with larger investments in later-stage ventures, protracted decision-making processes, and relatively modest overall investment volumes.

However, the landscape has undergone a remarkable transformation in recent years. The annual global capital infusion into VC deals involving corporate participation has surged more than tenfold in the past decade, ascending from $18 billion in 2012 to an estimated $219 billion in 2022. While data for 2022 is incomplete and 2023 is still uncharted, the trend unmistakably points toward an enduring corporate presence in the venture capital arena. Established enterprises have evidently recognized the peril of being upended by nimble startups and have opted to actively engage in the venture capital realm. As the adage goes, "If you can't beat them, join them."
Corporate VCs have not only expanded their footprint in venture capital but have also diversified the sizes of their investments in startups. The lion's share of new capital has been directed toward smaller deals in recent years. In 2022, more than half of all CVC investments were less than $5 million, a fitting size for seed or early-stage funding (if CVCs acted independently).
In terms of equity, you might find yourself parting with 5% of your startup's equity in exchange for $1 million in pre-seed funding, or 7% of your equity for $3 million in early-stage funding. This appears to be a more enticing proposition compared to the offerings of most startup accelerators. This is an opportunity worth considering!
However, a word of caution: corporate VCs typically invest with "strategic" motives, safeguarding their long-term corporate interests. Failing to align your growth and equity objectives with the preservation goals of the corporate entity could prove costly in the long run.

The startup funding landscape is changing rapidly, offering new opportunities. Angel investors may not be as generous as before, but the seed stage is promising with substantial funding and potential valuations. Additionally, corporate venture capital is on the rise, providing diverse investment sizes. However, be cautious, as their motives may differ from yours.

For entrepreneurs, it's essential to:
  1. Consider seed funding as a viable option.
  2. Understand the potential equity trade-offs.
  3. Approach corporate VCs strategically, aligning your goals.
In this dynamic environment, make informed choices to secure the funding needed for your startup's success.