Seed funded startups ripe for shakeout, VCs say

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.

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