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Why Fewer Seed Deals in Q3 Does not Suggest Fewer Investable Companies

Last week, Crunchbase reported Q3 deal numbers across venture capital. The headline was largely the same for anyone who has been watching this space the last 12 months: in Q3 $79.6B was invested across all stages which was just barely down from the $80B in Q2 of 2021. This was the second largest amount invested in a quarter in history.

But if you dig into the data, something else is happening at the early stage that gets overshadowed by the headline.

Deal count at the seed stage is down 36% year over year, but funding is up slightly - $2.4B in Q3 2020 compared to $2.8B in Q3 2021. The average dollar amount invested per seed deal is up roughly 100% - from $1M in Q3 2020 to $2M in Q3 2021.

Crunchbase source here

This chart generated good discussion in our firm:

  • Are fewer companies seeking funding?

  • Did early stage companies that were teetering on the edge pause or shut down during COVID?

  • Is there a concentration of more dollars behind winners?

  • Is more capital going after fewer deals - the classic supply/demand problem - where entrepreneurs have more leverage to raise larger rounds at the start?

  • Are companies skipping the seed as defined by Crunchbase (<$3M) and raising rounds in excess of $3M?

  • Are more convertible rounds being raised through notes or SAFEs which are harder to track?

Within our firm, we are curious about where the changes are taking place across categories, technologies and geographies. All we've seen in Q3 is more of what we've seen in the past 12 months which is fabulous deal flow in quality companies. Our limited resource is time. We wish we could meet them all!

As a vertical fund solely focused on commerce tech, we have seen our inbound deal flow only grow in Q3 both from inbound referrals and outreach.

The story continues as has been advertised: increasing deal count, increasing dollar amount in the system, and increasingly sophisticated founders. All in all, this is without doubt the golden age of venture capital and we are honored to be part of this seminal moment in private equity investing and innovation.

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