Startup Seed Funding is back in 2019

Why seed funding fell off a cliff in 2017 and why its back now

After a three year hiatus, early stage seed funding is finally making a resurgence. Between 2017 and 2018 seed funding fell by more than a billion dollars. To better understand why startup seed funding is recovering it is important to understand why it declined so precipitously.

By 2016 ‘everyone and their brother’ was investing in early stage companies in Silicon Valley. 500 Startups, Techstars, Elevate, First Round, Lowercase and SOSV were on a tear investing in scores of companies — but they weren’t alone — more than a hundred other investors you’ve never heard of were making investments in hundreds of other companies you’ll never hear of again. ‘Seed’ was cool and if you wanted to be cool you were doing early stage. That all changed on November 8th, 2016.

Reason One: The Election

Devastated Hillary Clinton Supporters

By around 7PM on election day it was clear Donald Trump had defeated Hillary Clinton. Half of the country may have been celebrating, but everyone in Silicon Valley was in utter shock. According to CrowdPac 99% of all Silicon Valley campaign donations went to Hillary Clinton with 1% split among Trump and the Green Party. Most Silicon Valley investors will tell you that they had never even met anyone who supported Donald Trump. The assumption was that Hillary Clinton was going to win in a landslide — when she lost everyone in the Valley was in a state of shock. This video of Dave McClure (IMHO the most PROLIFIC early stage investor in the Valley) on the heels of the election really captures the feelings of most Silicon Valley investors.

Dave McClure Freaking Out at Web Summit Shortly After Election

Of course, the investment process has a certain inertia and investors kept doing early stage deals for a time, but that all changed in January 2017.

Reason Two: The Inauguration

On January 20th 2017 the largest audience of Americans in history witnessed (primarily due to Silicon Valley’s efforts at promoting online video) Donald Trump take the oath of office becoming the 45th president of the United States. Silicon Valley investors like Shervin Pishevar, the managing director of Sherpa Ventures, were genuinely concerned about the future of the Republic tweeting, “We are in extremely dangerous times. Hatred emboldened by absolute power that if unchecked will shake the very firmaments of America.” Most investors had calmed down by the inauguration, but they were keeping their powder dry — supporting their existing startups instead of making new investments.

Reason Three: The Investigation

Katie Benner of the NYT and the women who exposed Silicon Valley’s Culture of Harassment.

Soon after many early stage investors had gone through the five stages of grief related to the election, rumors started swirling that a New York Times reporter by the name of Katie Benner was conducting an in depth investigation into as many as a hundred Silicon Valley investors. The reporter eventually focused her investigation on ten particular investors — some of the most prolific and successful early stage investors in Silicon Valley history. The New York Times managed to get more than 24 women to discuss how these ten investors had sexually harassed and abused them. If investors were upset about Trump’s election they were apoplectic about being investigated en masse by the New York Times. Silicon Valley VCs are rockstars and they’re used to constant adulation and obsequious flattery — the idea that investigative reporters were digging up dirt about their behavior was unimaginable. The direct fallout of her story titled, “Women in Tech Speak Frankly on Culture of Harassment” were resignations from Dave McClure, Chris Sacca, and Justin Caldbeck — three of the most prolific early stage investors in the Valley.

The fear of being ‘outed’ as a sexual harasser in the Valley was palpable. Would-be early stage investors were reluctant to take meetings with entrepreneurs (especially female entrepreneurs). The reality is that entrepreneurs are generally crazy (they have to be) and they’re generally not happy when an investor rejects them and/or their idea — when rejected they can and do share their frustration in unflattering ways. Add in the risk of being outed in the newspaper of record for the United States and most weren’t willing to take the risk. Investors were focused on their existing deals to the detriment of new deals.

Take Away

Both issues — Donald Trump’s election and Silicon Valley’s Culture of Sexual Harassment are a result of the area’s diversity problem. Investors in the Valley are too insular. The fact that 99% of the Silicon Valley investors are Democrats and 92% of senior investment teams are men means that more than half of the country’s views aren’t represented, understood, or addressed. Take for example, James Damore who was fired for attempting to discuss Google’s failure to achieve their own diversity goals from a politically conservative viewpoint. He lost his career because he sent a thoughtfully prepared thesis to four of his colleagues at Google.

What Changed

First and foremost the dire predictions related to President Trump’s administration have failed to materialize. Trump has been fully exonerated and is now the most popular president among Republicans — even more popular than Reagan was during his term. Trump’s economy is roaring — wage growth is up, GDP is strong, unemployment is at record lows, and the stock market is soaring. The investigation into Silicon Valley’s sexual harassment culture seems to have ended — the shoes have all dropped and everyone seems to be on their best behavior. Early stage investors are jumping back into the market in droves realizing that there are scores of great companies that have been cut off from capital for the past two years. It is time for YOU to jump back in the market before you miss out!

About The Author

Alexander Muse

Alexander Muse is a serial entrepreneur, author of the StartupMuse, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.