Stories about seed funding often contain sappy metaphors about planting seedlings and nurturing them to maturity. In reality, it’s a brutally Darwinian business: most companies fail, successful ones get diluted and exits commonly take a decade or more.
That said, seed also has the highest potential returns of any investment stage. Unlike most VCs, seed and angel investors can do a lot of deals with a few million dollars. And no one complains it’s boring.
So far this year, the relative turn-offs of seed-stage investing seem to be outweighing the draws. Fewer North American seed funds launched in 2017 compared to year-ago levels, according to an analysis of Crunchbase data. Total investment and round counts are also down sharply over the past 12 months from the year-ago period for seed and angel deals, even as late-stage investment is on the rise.
So who are the brave souls venturing out with first-time seed funds? Crunchbase Newsculled through this year’s new fund data to unearth more than 30 interesting new U.S. and Canada-based funds. We identified some areas particularly in vogue with seed-stage newcomers, most of whom share a sense that the window for backing early movers in select areas will only be open a short time.
Some of the fashionable seed investment sectors should come as no surprise to anyone familiar with the buzz around artificial intelligence and virtual reality. Other trends were less predictable, including rising funding for some geographies long considered underserved by venture and angel investors.
Here are some trends we observed.
Invest in the Midwest
There’s nothing new about venture and angel investors talking up the merits of the Great Lakes region, given the rich technical talent and less-rich startup valuations that can be found there. However, there’s a difference between talk and action. What we’re seeing recently is new Midwest-based seed firms actually raising capital in the area, not just saying nice things about founders there.
So far this year, Crunchbase identified several Chicago-based seed funds. Purple Arch Ventures backs startups affiliated with alumni of Northwestern University. Germin8 Ventures, as the name would imply, invests in agtech. Nameless Ventures, meanwhile, is seeking accredited investors who want to invest in Chicago-area startups.
It’d be incorrect to classify interest in Chicago as solely a 2017 phenomenon, as it’s something that’s been percolating for the past few years. Crunchbase detailed at least 10 Chicago-based seed investors that have cropped up in the past year or two. Their geographic focus areas vary, with several concentrating on the Chicago area, others on the Midwest and still others looking at deals nationwide.
Some of the fashionable seed investment sectors should come as no surprise to anyone familiar with the buzz around artificial intelligence and virtual reality.
Other Midwest-focused funds founded this year include Grand Ventures, a Grand Rapids, Mich.-based fund that invests in Midwestern technology startups, and Loup Ventures, a tech seed investor with offices in Minneapolis and New York.
“Being in Minneapolis and working to establish our network among other VCs, there’s no question that there’s a lot of excitement about the Midwest,” Andrew Murphy, a partner at Loup, told Crunchbase News. Compared to coastal tech hubs, the Midwest “is underinvested, prices are better, and the opportunities are fewer in volume but no different or better in quality.”
Hearty appetite for hard tech
Start cheap and build fast has long been a popular mantra for seed-stage startups and their investors. Lately, however, there seems to be a pendulum swing back to more seed investment in so-called hard tech, targeting companies working on complex technical problems with lengthy development time horizons.
Probably the poster child for this approach is MIT’s The Engine, which closed a $200 million debut fund in September. The fund’s stated mission is to help founders develop, commercialize and scale scientific discoveries in “tough technologies,” with a focus on Boston-area startups. So far it’s backed startups working on satellite communications, a digital approach to sensing smells and technology to deliver drugs more effectively to the GI tract.
Hard tech isn’t something that seed and angels have exactly shied away from in the past. Life sciences startups, which are well-known for their long development cycles, have traditionally snagged a good-sized share of seed-stage dollars. Hardware, medical devices, space tech and other areas known for long exit timelines have also been popular with the angel crowd.
Yet a rising profile for hard tech may indicate investors’ interest diminishing in quick-to-market, consumer-facing startups that proliferated amid the rise of the app economy.
It’s a brutally Darwinian business: most companies fail, successful ones get diluted and exits commonly take a decade or more.
“I sense we’re nearing a saturation point when it comes to startups with mass consumer appeal, like social sharing apps, ride sharing, as well as fintech and adtech,” Cahill told Crunchbase News. “Yet in industries such as transportation, clean-tech, waste collection, and even publishing, I’m extremely excited by what I’m seeing and by the volume of opportunities.”
The Engine and McCune are two out of several seed investors that have raised a first-time fund in the past year. We put together a list of several here.
AI is under-hyped
Seed investors don’t seem to think AI is over-hyped. A lot of new seed funds list artificial intelligence as a core focus area. We counted at least a half-dozen North American ones this year. There are probably more.
“There’s definitely a timing element,” Loup’s Murphy says of AI investing. For Loup’s partners, the decision to start a seed fund now stemmed in large part from founders following Apple and other large-cap technology companies in their prior gig as analysts at Piper Jaffray. The big tech companies have been investing heavily in AI (as well as robotics and VR), and it’s reasonable to expect them to continue along these lines. That’s a sign of confidence in the sector and also means there are plenty of deep-pocketed acquirers.
Yet while seed investors are excited about the potential of artificial intelligence, they’re also skeptical about a lot of the self-described AI startups out seeking funding.
Founders, after all, have caught on that AI is an area that attracts more funding, says Eric Bahn, founding partner at Hustle Fund, a seed investor launched this year to focus on fast-moving, very early-stage startups. That’s led a number of companies to “attempt to backfill some sort of AI story, when they are actually not an AI company.”
It remains to be seen, of course, whether the currently sprouting crop of Midwestern, AI-enabled, hard technology startups will bear fruit for investors. As previously noted, most seedlings don’t make it. However, the ones that do could bring some game-changing technologies to the forefront, not just another app to make your shopping more convenient.