More venture capital funds are flowing into start-ups but the money is being concentrated into fewer companies prompting a massive rise in seed stage valuations.
Eliot Brown filed this report in the Wall Street Journal:
The median size of seed investments—usually the first money invested in a startup—in the first nine months of this year in the U.S. stood at $2 million, nearly four times the $550,000 average in 2013, while the median valuation at the seed stage rose to $7 million from $4.7 million, according to data firm PitchBook. Startups in hot sectors or those run by more experienced entrepreneurs are taking on $30 million or $40 million before they’ve even launched their operations.
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At the same time, the number of U.S. startups receiving an initial round of financing fell 40% in the first nine months of this year from the same period in 2015, to 1,594, according to PitchBook, as investors say there are fewer entrepreneurs who have viable ideas. This price inflation for new startups is raising the stakes for investors, since companies are at their riskiest when the business isn’t proven, or is only an idea.
Brown points out a possible reason for the trend: “The emergence of small venture-capital shops is helping to propel startup valuations. While new entrants in venture capital were once rare, at least 223 U.S. firms have raised their first venture fund since 2012, according to PitchBook, bringing in more than $15 billion in new money.”
