The ‘Series A Gap’ in VC is real and widening. Here’s why…
March 15 marks the unofficial one-year anniversary of the pandemic. In the year that’s followed, we’ve all read plenty of stories on ‘how our lives have changed’ and so forth. While true enough, there has also been no shortage of things that have clearly not changed over the past year. Moreover, there is now compelling evidence that many trends that were in evidence prior to March 2020 have only been exacerbated by the pandemic. The growing gap of Series A funding is another one of them. Here is our take:
1. A surge in new VC funds now crowd the Seed space
As chronicled in my recent post, Traditional Late Stage VC Is Being Disrupted, there has been a 20x increase in the number of Seed Stage venture funds since 2009. This influx of new Seed stage GPs and the fresh capital they are deploying is having an effect that’s now becoming clear in the data.
The surge in Seed stage valuations, especially in established tech hubs like Silicon Valley, is one clear consequence of the boomlet in Seed stage funds. As we all experienced, the pandemic fueled an exodus of tech talent (and some notable investors) from San Francisco, NYC and other established hubs. It also caused rents for apartments and office space to drop precipitously — as much as 33% in San Francisco alone. Finally, there was also evidence that labor rates for tech talent dipped somewhat in sympathy with layoffs and the attendant freeing up of talent that that caused across the technology landscape.
But the collapse that in Seed stage valuations that some market observers predicted never materialized. Indeed, Seed Stage valuations surged throughout 2020 across all established tech hubs. While there are many reasons for this, a cause that cannot be discounted has been the record amount of Seed stage capital being deployed throughout the venture ecosystem.
Innovation in VC is long overdue, but not without consequences
To be clear, we are encouraged by the emergence of new players onto the venture landscape and we welcome much of the recent innovations in the venture capital asset class — from structural and organizational innovations (i.e., “Nano funds”, rolling funds…