Seed deals level out while Series A continues downward spiral

Seed deals level out while Series A continues downward spiral

Author: Adam Lewis
Read time:  3 minutes
Published date:  June 12, 2023
VCs backed away from Series A deals in Q1, but the seed market stayed resilient, signaling a divergence in how investors are approaching these stages.

The median size of Series A rounds fell for the fourth straight quarter, but seed deals have not experienced a similar dip, signaling a divergence in how VC investors are thinking about these two early stages amid a broader VC slowdown.

Let’s take a closer look at the discrepancy: 

  • Cash raised: In Q1, median cash raised for a Series A round on Carta dropped 20% to $6.4 million, down from $8 million the previous quarter. Meanwhile, the median cash raised for a seed round on Carta saw a 3% bump to $3.1 million, up from $3 million in Q4 2022.

  • Declines from 2022 peaks: The Q1 median cash raised for a Series A round was down 47% from the highs reached in Q1 2022, when it peaked at $12 million. In contrast, the Q1 median cash raised for a seed round was down only 11% off the peak of $3.7 million reached in Q2 2022.

  • Capital invested still way down:In Q1, the capital invested in seed deals totaled roughly $1.3 billion, down 63% from some $3.5 billion in the same period a year earlier. Capital invested in Series A deals took a similar dive, dropping 62% from $8.2 billion in Q1 2022 to $3.4 billion this past quarter.

Median cash raised by seed and Series A companies by quarter, Q1 2020-Q1 2023

The drop in Series A deal size is part of a broader slump in the venture ecosystem. Capital invested for late-stage VC deals has cratered since the Federal Reserve began raising interest rates in early 2022: The median cash raised for a Series D deal dropped 67% YoY in Q1 and Series E+ dropped 77% during the same timeframe, according to Carta data. The pullback has had a cascading effect, with Series C, then Series B, and finally Series A feeling the impact of a cautious investing environment characterized by longer due diligence cycles and less capital invested.  

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Nate Leung, a partner at Sapphire Partners who specializes in early-stage venture fund investments, witnessed the recent Series A dip across the board as a limited partner. He attributes part of the decline to VC firms slowing their deal pace and looking for Series A companies with higher ARR (annual recurring revenue), a closely watched metric that helps determine valuations for startups. 

“The bar for Series A deals has gone back to pre-Covid norms,” Leung says. “Now startups need at least $1 million in ARR.”

Leung says that some VCs have simply opted to execute a SAFE or convertible note instead of going through with a Series A, with only the most sought-after Series A startups drawing elevated valuations. Many VCs have opted to raise a bridge round rather than a traditional Series A deal. In Q1, roughly 40% of investments in Series A companies were bridge rounds

The turbulence at Series A has caused some VCs to think differently about the seed stage—and it’s changing the character of seed investment. 

VCs have traditionally viewed seed deals as a high-risk, high-reward investment strategy. A majority of seed investments fail, but a fund only needs one or two seed companies to succeed to make the fund a success. 

Seed investors also focus less on a startup’s revenue and unit economics, and more on providing capital and getting the product to market. Seed-stage startups don’t experience the same volatility in investment size and valuations experienced by late-stage counterparts that are vulnerable to macroeconomic conditions like rising interest rates and geopolitical risks. As a result, seed deals have become a way to hedge against the current private market slowdown.

Leung says upmarket funds raised in 2021 and 2022 that invest at multiple stages have shifted some focus away from Series B and growth deals and increasingly directed that capital toward seed deals. The influx of new capital has made seed deals more competitive than Series A investments, Leung says. That trend won’t subside until investors get more comfortable in a less favorable investing environment.

As Leung says, “Seed remains the safest place to invest.”

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Adam Lewis
Author: Adam Lewis
Adam Lewis is a former writer at Carta who covered the private markets. Prior to Carta, he spent five years as a reporter at PitchBook writing about dealmaking, fundraising, and industry trends within the wide world of private equity.
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