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Summary:

Individual seed investors have been an increasingly powerful force in Silicon Valley’s startup funding landscape. But some venture capital heavyweights say that while the VC industry has been shaken up by the increase of seed backers, the current environment will likely lead to a fall.

Jonathan Marino of peHUB.com, Maha Ibrahim of Canaan Partners, and Matt Murphy of KPCB at Mobilize 2011.

Jonathan Marino of peHUB.com, Maha Ibrahim of Canaan Partners, and Matt Murphy of KPCB at Mobilize 2011.Individual seed investors have been an increasingly powerful force in Silicon Valley’s startup funding landscape. But in an onstage conversation at GigaOM’s Mobilize conference in San Francisco Tuesday, two venture capital heavyweights said that while the VC industry has been shaken up by the increase of seed backers, the current environment will likely lead to a fall.

“There will be a day of reckoning, certainly. There are way too many companies getting seed funding,” said Maha Ibrahim, a partner at Canaan Partners. That’s because many of the companies receiving seed funding now are likely to have trouble raising larger amounts of money down the line, she said, since they’ve become used to the kind of terms that only seed investors can offer.

Nevertheless, at the early stages it’s hard for traditional venture capital firms to compete with groups of individual seed investors with a “willingness to put together a relatively large syndicate [of investors who invest in startups] at very favorable terms,” Kleiner Perkins partner Matt Murphy said.

In addition, Ibrahim said the fact that so many startups are content with seed funding may indicate a larger problem: A lack of the kind of ambition needed to really make a big impact on the tech world. “I’ve been disappointed most in the lack of companies coming in raising classic series A rounds,” she said. “The lack of entrepreneurs who want to go in and go big.”

Even if there is a day of reckoning on the horizon for some startups, both Ibrahim and Murphy said they generally expect the amount of mergers and acquisitions in the tech world to heat up in the months ahead. “We’re going to see a very rich M&A environment,” Murphy said. That’s something that will be good news for seed investors and traditional VCs alike.

Watch live streaming video from mobilize2011 at livestream.com
  1. Annoyed entrepreneur Wednesday, September 28, 2011

    Said VCs followed up the conference by going to their office, rejecting a dozen or so companies seeking traditional series A funding, then called it a day.

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  2. I think VCs want to scare startups. It seems unlikely to me that any VC would pass on a solid deal regardless of the terms from the seed stage.

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  3. hmm. the commentary above is both 1) necessarily true, but also 2) not a big problem, and 3) a bit self-serving & short-sighted.

    1) of course many startups won’t survive / make it to next round. however, this has always been the case… except that now failure can occur for only $25-100k instead of wasting an entire Series A $3-5M round to find out some ideas stink.

    2) what’s diff now is that costs are lower than ever, and the industry can tolerate quite a bit of failure w/o really causing systemic issues or unsustainable behavior. just because many low-cost startup experiments fail isn’t really a bad thing, and arguably could even be helpful learning & discovery for founders & investors.

    3) lastly, stating there are “too many startups” or “not enough ambition” is just really disappointing & biased commentary from folks who are perhaps having a tough time competing in changing market conditions — especially where large fund goals & incentives may end up misaligned with founders running capital-efficient businesses that simply don’t need hundreds of millions in funding nor require billion-dollar exits. not every business needs to ve a Facebook or Groupon to provide substantial economic benefit for founders, investors, employees & customers.

    perhaps what is actually unsustainable and lacking ambition is current VCs unwillingness to modify their decades-old business models to adapt to changing realities of internet startups that have dramatically different needs & opportunities than what they are used to. perhaps it’s actually the traditional VC models that are likely to disappear (especially given industry performance over the past decade), even more so than the capital-efficient startups for which they appear to have such distaste.

    physician: heal thyself.

    DMC

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    1. Thanks for weighing in, Dave. Good to hear some solid counterpoints!

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  4. Day of reckoning coming for seed funded startups – but they see a very rich M&A environment. What’s wrong with this picture? I think startup founders are pretty savvy and financially rational. If they conclude that angel funding and smaller exits are better than big VC dollars and shoot-for-the-moon efforts, they’re probably right.

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  5. Great response by Dave McClure. Maha Ibrahim can take her “exit strategy” crap and shove it. Not every entrepreneur wants or needs an exit strategy. Some people want to build businesses that persist for decades (long view) and create legacy (when by that time these 20th century thinking VCs will have exited and vanished from the world)!

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  6. The old business model of “If you build it, they will come” has, at least in web -related IT, changed to a new one: “If they come, you will build it.” Today, many startups with very little capital are simply trying to get as much traction and as many users as possible, and when/if that pans out, they will figure out what the monetization model will be (witness Twitter, Facebook and the like.) As long as you have a good idea, you can run pretty far without angels or VC’s money — it doesn’t take much capital to cobble up a website and spin up a business around it. As it has always been the case, though, a good idea is the critical foundation of a good business. Unfortunately, however, the easier it is to find funding for a startup, the less original/inventive thinking is necessary, and that’s what we are seeing today: The ratio of followers/leaders is too hig and the ratio of innovation/easy money is too low. I see a bubble about to burst…

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    1. (We’re gonna party like its 1999…)

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