Bittersweet tale of two seed markets

Venture funding has been in decline since the first quarter of 2022. But that trend has largely saved the early stages so far. Or already?

Apparently, Q2 was pretty rough for seed deals, according to new data from PitchBook. Startups in the US closed 766 seed deals in Q2, which was 26% lower than the 1,044 deals they had in Q1.

And that drop means the second quarter had the lowest number of seed deals we’ve seen since Q3 2016. If things don’t change, 2023 could be the slowest year for seed activity since 2017.

But despite these numbers, many seed managers told Zero2Billions+ that they are still seeing strong transaction flow. They also have some idea why this metric is dropping.

One of the factors is transaction speed. Leslie Feinzaig, founder and CEO at seed and seed-focused venture firm Graham & Walker, says the current timeline for closing a seed deal is the longest she’s ever seen — not just backtracking to the pre-2021 craze, but across her career. This means that even when deals are done, they happen at a beat that still slows down the entire stage.

“In 2022, it feels like people can still get a certain amount of traction with one spin, go through the process, and close. Now I see entrepreneurs that I never thought in a million years would be struggling, struggling to raise money,” Feinzaig told Zero2Billions+.

No one leads, no one follows

Another hurdle for seed deals appears to be finding people to invest in. While seed companies remain active, funds with a broader focus are starting to back off. Richard Kerby, a partner at seed-focused Equal Ventures, said he’s seen some movement about who wants to support seed-stage startups that aren’t strictly seed-focused. While he’s heard of some storied investors doubling down on his category — some have dedicated seed funds to use — others are definitely backing down.

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