Seed Safes: Are They Hiding the True Volume?

Seed Funding Data: A Year of Conflicting Signals

Over a year ago, in our analysis of the 2019 venture capital landscape, we observed a decrease in angel and seed deals within the United States.

Our subsequent reporting on the first quarter of 2020 echoed this sentiment, highlighting that domestic seed rounds had been steadily declining since their peak in 2017, with a sharp drop occurring from the third quarter of 2019 onwards.

The Trend Continues

This downward trend persisted into the second quarter of the year. Expanding our scope to encompass global seed data, we reported that the number of global seed and angel deals fell from 4,256 rounds valued at $3.7 billion in Q2 2019, to 1,791 rounds totaling just $2.3 billion in Q2 2020.

The Exchange provides insights into startups, markets, and financial matters. It is published daily on Extra Crunch, and a newsletter is available every Saturday.

Naturally, the second quarter of 2020 coincided with a period of reduced confidence in the venture capital market. However, what about the third quarter?

As we noted at the time, one source indicated that the proportion of U.S. venture capital deals valued at $5 million or less was the lowest it had been since at least 2010.

Another data source revealed a slight recovery in domestic seed rounds, though this remained an isolated positive indicator.

A Surprising Turn in Q4

The data released for the fourth quarter of 2020, along with a full-year market overview, presented a contrasting picture.

According to the data available at the time, the U.S. saw a relatively high number of seed deals in 2020, totaling approximately 5,227.

This discrepancy is quite perplexing.

The Exchange relies on data from PitchBook, CB Insights, the NVCA, Silicon Valley Bank, and Crunchbase, alongside other specialized sources.

I am intentionally avoiding specific citations to prevent the appearance of bias towards any particular provider; that is not the intention here.

The Disconnect Between Data and Reality

Instead, the core question is how such divergent seed data signals can coexist within the same year.

This has been a long-standing concern, as investors frequently expressed that reported seed deal volume – particularly in regions like Europe – did not align with their direct experiences.

Investors consistently described a robust seed market, while data often indicated a stagnant or declining one.

Therefore, the central inquiry remains: what is causing this inconsistency?

SAFEs: A Potential Source of Data Discrepancies

Angel investor and Twitter personality Trace Cohen has offered a compelling explanation for the inconsistencies observed between reported data and actual activity in seed and early-stage funding. Could SAFEs be the underlying cause of these discrepancies?

SAFEs, or Simple Agreements for Future Equity, represent a streamlined and cost-effective method for startups to secure funding. Introduced by Y Combinator in 2013, their popularity has steadily increased within the seed investment landscape.

The accelerator promotes these agreements as enabling young companies to finalize funding with individual investors, circumventing the need for synchronized closing with all investors simultaneously. Their standardized terms also contribute to widespread understanding.

Typically, these agreements incorporate either a valuation cap – defining the maximum price for SAFE conversion to shares – a discount on a future valuation, or a combination of both. While variations exist, these are the core components to understand.

Unlike traditional funding rounds, such as a Series B, SAFEs are not priced based on a pre-money valuation and lead investor commitment. Instead, a valuation and check size are established in later rounds, with pro-rata rights extended to other investors, ultimately determining the startup’s post-money valuation.

These conventional deals create a public record, notably through Form D filings, and are frequently announced publicly, leading to their inclusion in startup databases. However, SAFEs operate differently; they lack a defined price and don’t generate the same level of required documentation.

Information regarding a SAFE raise remains largely undisclosed unless the startup proactively announces it, or an investor divulges details. This lack of transparency, as Cohen suggests, contributes to the divergence between investor perceptions and aggregated data reports.

Effectively, SAFEs have driven a significant portion of seed and smaller round funding activity below the radar of public reporting.

This situation isn’t attributable to any wrongdoing, but rather a natural consequence of the current system. Nevertheless, improvements can be made. Startups could proactively share data earlier in the process, and venture capital firms could enhance their reporting to startup databases. Opportunities for improved data contribution already exist.

Startups are often advised to maintain confidentiality, as if their early-stage ventures held paramount importance. While caution may be warranted in certain instances, experience suggests that the most transparent CEOs are often those with the greatest insight and achieving the most significant progress. Openness, in my observation, is a strong predictor of future success.

Therefore, openly communicating about your activities is encouraged. Share your progress and plans.

Data accuracy in the private market generally improves with larger, later-stage rounds. Identifying a $100 million deal is considerably easier than tracking a $1 million investment, and nine-figure rounds are almost always publicly announced. Seed-stage deals, however, frequently remain confidential, which is unusual and often unnecessary.

We will continue to analyze seed data, refining our approach as much as possible. We will also incorporate additional reporting to ensure a comprehensive consideration of various perspectives.

Further insights from investors on this topic can be found in this discussion thread.