Editor’s note: This is the second in a two-part series on the state of seed startup investing at the start of 2024. Read Part 1, which looked at seed funding trends over the past decade and the median time period between seed and Series A funding, here.

Seed funding to startups has grown into its own asset class over the past decade, with round sizes trending larger, and a bigger pool of investors backing these nascent startups. But in the aftermath of 2021’s venture funding heyday and subsequent pullback, investors say that while seed funding has held up better than other startup investment stages, these very young startups will see lower valuations and must now clear a much higher bar to get backing.

More companies raised seed funding above $1 million in 2021. Those companies — which raised during a record-smashing year for venture funding — are saddled with valuations that could be too high for this current market — even at seed. Many of those startups have been forced to cut costs to extend their runways, and face a tougher sales environment.

“You could then be sacrificing growth, which is one of the main levers that Series A investors are looking for,” said Michael Cardamone of New York-based seed investor Forum Ventures.

2021 aftereffects

In 2021 it was “grow, grow, grow, grow,” said Jenny Lefcourt, a general partner at Bay Area-based seed investor Freestyle Capital. “It’s embarrassing to look back on, but that was the game being played.”

Investors got sloppy during the boom times, she said. “I think a lot of VCs were thrilled to back you, and then say, ‘we’ll figure it out.’ ”

“The reality is that almost anything that was done then — call it 2021 — was the wrong price,” she said.

This led to down rounds, even at seed, though those are generally not viewed negatively like they were in the past, she said.

In fact, “when our companies get their down rounds done, it’s a sign of it’s a good business. It just had the wrong price on it,” she said.

While the bar is higher to raise funding these days, “I think it’s so much better for a company who gets to start in this environment,” Lefcourt said.

Down rounds can actually be a sign of conviction, she said. “None of us would do all the heavy lifting to not only give the company more capital, but recap it, which takes a lot. It’s a heavy lift — none of us would do that if we weren’t super jazzed about the company. The lazier approach, the easier approach, is to just put it on the note, keep it flat, and be done,” she said.

Renata Quintini, co-founder of Renegade Partners, a Bay Area-based investment firm that focuses on Series A companies, is hearing of “more ‘pay-to-play’ these days and it’s starting to get ugly.” This happens when new investors wipe out the prior investors, and anyone seeking equity needs to pony up into the new funding round.

Median and averages climb

Nonetheless, “seed round valuations haven’t dropped a ton from even the peak,” according to Forum Ventures’ Cardamone. But, “the bar to raise a seed [round] is a lot higher.”

“Most first-time founders especially, and the vast majority of founders generally — they have to get significant traction to be able to raise that same round they used to be able to raise. And a lot fewer of those rounds are happening,” he said.

“A priced seed round of $3 million at $15 million [pre-money] is still happening, but you might have to be at $500,000 ARR, to raise that round now. Whereas in 2021, it was the norm to raise that round pre-revenue,” he said.

Series A fundings have gotten harder as “companies are going out and raising three seed rounds,” said Cardamone.

Based on an analysis of Crunchbase data, median and average seed round sizes in the U.S. have climbed through the past decade.

In 2023, median and average raises are not far from the peak of 2022, Crunchbase data shows, and were well above pre-pandemic levels. (However, this will shift downward somewhat as the long tail of seed fundings are retroactively added to the Crunchbase database.)

Seed rounds got larger

“If I have conviction, we may need them to have more money, cause we know it’s going to take them longer to reach the milestones that are now higher,” said Lefcourt.

Per an analysis of Crunchbase data, larger seed rounds — those $1 million and above — have increased through the decade.

The amount of funding to seed-stage companies below $1 million hasn’t budged much, and is a fraction of what it was earlier in the decade.

Seed below $1 million in 2014 represented around 25% of all seed funding.

That has come down as a proportion every year since then.

And as of 2021 that proportion has dipped below 10% for the first time, ranging from 5% to 7% of all seed dollars invested in the U.S. since then.

Earlier in the past decade, the number of seed deals in rounds below $1 million outpaced those rounds at $1 million and above significantly.

But 2021 was once again a pivotal year. That’s when $1 million and above seed rounds outpaced smaller seed for the first time.

In 2023, they are neck and neck in count. (That might shift as the long tail of seed rounds are added to the Crunchbase database long after they close.)

What this all shows is that seed has become an increasingly significant and elongated phase in a company’s early life cycle, where companies are raising multiple million-dollar seed rounds. And as of late, more companies than ever before are wading in the seed pool.

What does this mean for the seed funding market in 2024?

“I would expect Series A to start picking up, because if the premise is more and better companies are being funded this [past] year, they’re going to have to come back next year,” said Quintini.

Methodology

For U.S. seed funding we include angel, pre-seed, seed as well as equity crowdfunding  and convertible notes at or below $3 million. For this analysis, we excluded seed funding of $100 million and above.

Related reading:

• US Seed Investment Actually Held Up Pretty Well For The Past 2 Years. Here’s What That Means For 2024
• Global Venture Funding And Unicorn Creation In 2021 Shattered All Records 
• These 3 Charts Show It’s Not Easy Being A Seed Startup These Days