What does seed funding look like across the world?

A comparison of startup valuations, round sizes, and deal terms globally

SOSV is going to invest into our 1,000th portfolio company in the coming months.

In the process we have invested in over 60 different countries and backed over 2,000 founders to date with a large portion of these being female-founded startups.

SOSV portfolio companies raised over $800M in funding in 2018, with three of those companies hitting unicorn status: BitMEX (financial trading platform), Formlabs (3D printing), and Getaround (carsharing service).

We had a number of successful exits — including Uber’s acquisition of JUMP (electric bike-share) and Invitae’s acquisition of Jungla (genomic interpretation) and we invested into almost 100 deals at the seed stage alone.

As one of the very few truly global VC funds, this gives us a great perspective on what seed funding looks like across the world and the different valuations, round sizes, and deal terms on offer to seed stage companies globally.

(We have used USD for all figures to make comparison simpler).

Valuation

If you are planning on raising finance at the seed stage, then the US is the place to do it if you want to maximise your valuation.

Asia and China in particular has seen a huge amount of capital investment over the past number of years with valuations rising and round sizes growing. China venture investing reportedly equalled the US for the first time in 2018. However China has began to cool strongly since the Fall of 2018 (from our data) owing to newly minted VC funds underperforming and then being unable to raise second funds, along with a pullback in government investment in venture funds. At the same time SE Asia and India venture has been growing quickly off a low base driven in part by Chinese investor interest, perhaps due to trade tensions and CFIUS restrictions.

European investors have featured consistently in seed deals, but have always displayed a more conservative nature with lower round sizes, lower valuations, and terms that are weighed more favourably towards the investors.

• The US has consistently offered the highest valuation for a seed deal over the past number of years. From our data on SOSV portfolio companies, the average pre-money valuation at seed deals for US is $7.7m. This is in line with other available industry averages and the Pitchbook/NVCA data for 2018.

• Our Europe data records an average valuation of $3.6M. In our experience European investors are a little more conservative at the seed stage with lower valuations, longer deal evaluation, smaller round sizes and often tranched payments based on development milestones of the companies. Many seed deals tend to take longer to close in Europe as well, due to some of the legal requirements and somewhat time consuming paperwork (including the requirement for wet ink signatures), in comparison to the US deals.
• Our Asia seed rounds record an average valuation of $4.5M. We have seen a major cooling of the market in China in late 2018 and 2019, which seems to be backed up by other commentators. Chinese and Asian investors also prefer to price equity rounds at the early stages and do not generally use other investment instruments such as convertible loan notes, which sometimes defer equity seed financing rounds in the US (and Europe). Earlier pricing of seed deals no doubt contributes to the lower valuations on offer.

Amount Raised

Again the US leads the way on the size of the funding rounds. If you want to raise larger funding rounds at higher valuations then the US seems to be the optimal place to do so with almost double the funding round sizes that the other regions offer. There are some indications that the US seed/angel stage activity is starting to drop in 2019 however so this trend might not continue.

• The average amount raised at seed deals in the US from our data is $2M. This is based on 46 US companies, while the median amount raised in this area is $1.8M which is in line with industry averages (according to PWC/CB Insights MoneyTree Report the seed stage median deal size was $1.6M for US). As of Q4 2018 the median had risen to $2M which is double what the US median was in 2015.
• The average amount raised at seed deals in Europe from our data is $1.1M. This is based on 21 European companies which is broadly in line with industry averages (according to PWC/CB Insights MoneyTree Report the seed stage median deal size was $1.2M, with VentureBeat research showing an average seed round being $1.17M in 2018).
• According to PWC/CB Insights MoneyTree Report the seed stage median deal size was $1.2M in Asia. Our average deal size for Asia (predominantly China) and Rest of the World is $1M (based on 25 Asia/China/ROW companies). While we are slightly lower than the industry averages, this would be expected due to our China-Asia portfolio being based mostly on software companies raising somewhat smaller rounds at the seed stage due to less capital being required.

Deal Terms

Deal terms vary across the geographies with Europe and Asia often containing many bespoke terms.

What we have seen as the “standard” deal in the US is as follows:

• Liquidation preference of 1X.
• Weighted average anti-dilution protection.
• Information rights and pro rata rights (sometimes restricted to “major investors”).
• Dividends are normally pro rata with common (if declared).
• Employee stock options pools are always in the 10–15% range (post-money).
• Employee vesting is usually 4 years (often with a 1 year cliff).
• Legal fee provisions range from $10,000- $45,000, with the average provision being $20,000.

These are what we would classify as the main terms to be negotiated in a Series Seed deal (aside from valuation) and I very rarely see terms that differ greatly from these.

Cooley has an excellent blog on the US term sheet clauses. You can also find some great template examples of US term sheets on the Series Seed website.

European deal terms would be weighted more in favour of the Investors at the seed stage from our experience.

What we have seen as the “standard” deal in Europe is as follows:

• Liquidation preference of 1X would be the most common, however there are many instances of participating preferred stock and higher liquidation preferences (>1x), which would be rare in the US at the seed stage.
• Weighted average anti-dilution protection, again this would be the majority but there are instances of full ratchet anti-dilution protection.
• Information rights and pro rata rights would normally be offered to all shareholders.
• Dividends are normally pro rata with common (if declared), sometimes you see accruing dividends on the preferred stock only.
• Employee stock options pools would be smaller than in the US with the maximum on offer being 10% (post-money), this could be due to the less favourable tax treatment in the EU making stock options less attractive for employees.
• Employee vesting is usually four years, you also see the use of good leaver/bad leaver more often in the European deals.
• Legal fee provisions range wildly in Europe from $3,000- $45,000, with the average provision being $15,000. It pays to shop around for legal counsel, specifically seed stage legal counsel, in Europe.
• Something that is often included in European seed deals is the right to appoint a “professional” (investment bank, etc) to sell the company after a specified time frame (normally five years) if it has not been sold already by then (this is very popular in Ireland specifically). This would not be common in the US.
• The requirement for the company to take out keyman insurance (on a founder) and/or directors and officers insurance (for the investor) is common in Europe (again especially in Ireland).
• Allowances for directors fees (management fees and other fees) to be paid by the company to the investor is also very popular in Europe, you very rarely see US investors demanding fees to sit on the board of directors of a portfolio company.
• Oftentimes at the seed/angel stage in some European countries many of the investors can be incentivised by tax schemes such as the EIS/SEIS in the UK that offer large tax breaks to individuals (or crowd funding schemes) that invest into certain qualifying companies. This is subject to certain conditions for the Company which will be included in the term sheet as conditions of the investment.

Seed summit offers some great seed stage term sheet templates for European countries.

Asia, specifically China can be a difficult place to invest (especially as a non-Chinese VC) at the seed stage. This is due to restrictions on international investors holding equity in local startups and it can be expensive and time consuming for the startup companies to restructure in a way to enable foreign investment. Even with these restrictions, investment into Chinese startups surged over the last ten years and in 2018 reportedly drew equal to the US.

The government in China is continuing to loosen these restrictions, and in 2019 SOSV became the very first international VC fund to be awarded an equity investment licence in China for our HAX China fund.

Chinese deal terms are slightly different to the US and Europe as investors buy a percentage of the company as opposed to shares, but investors should be aware that most deals are negotiated based on investment amount and fully diluted ownership as opposed to pre-money valuation, so the more raised the lower the pre-money valuation will fall.

What we have seen as the “standard” deal in Asia/China is as follows:

• Liquidation preference of 1X would be the most common but you can see China often hitting 1.5–2X. Often times there can be an accruing interest (the standard would be 8–12% annually).
• Weighted average anti-dilution protection, again this would be the majority but there are instances of full ratchet anti-dilution protection.
• Information rights & pro rata rights would normally be offered to all shareholders, normally there are no different classes of equity so everyone shares in many of the rights.
• Dividends are very rare.
• Employees receiving share based compensation is quite common although the structure is often different than traditional stock options pools i.e. phantom shares. Employee share plans are expensive to establish and often are reserved for and promised but actually granted in a later funding round. I have seen 10–15% stock pools being created.
• Legal fee provisions can be that everyone covers their own counsel costs, but also the companies can have to reimburse the lead investor for their counsel costs anywhere from $5k to $30k limit.

The documents in China are normally relatively short form at the seed stage but are more investor friendly than the US. Often there are more investor caveats around economics and control.

As the world continues to shrink, the money being invested into startups globally continues to grow in 2019. As founders educate themselves on the investment terms on offer from potential investors, we will hopefully begin to see more standardisation on deal terms to enable more companies to access funding at the seed stage.

SOSV projects that we will invest into 150–200 companies this year while deploying $65M in capital, and by doing so we will continue to grow our investor syndicate (currently at over 4,000 other investors globally). The more seed stage (and later stage) investors that will support startups internationally and help us to create the next wave of world changing companies the better.

Continuing to refine the methods to reach the sweet spot for valuations, deal sizes, and deal terms will no doubt depend upon the climate for investment where many of the startups are located. Educating some of the founders on these terms can help them to decide upon where to fundraise and base themselves to give them the utmost chance of a very positive economic outcome.

However, sometimes taking the larger check sizes at the higher valuations might not be the best long term option for your startup. You need to find an investor who can continue to back you in the future, who aligns strongly with your strategy and vision, and who can help in other ways aside from money. Good luck in your selection and on your journey.

More terms you should know in our VC Lingo Playlist.

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