I lifted this from Fortune’s Term Sheet.
|FIRM NEWS: Term Sheet has learned that Arena Ventures, the Los Angeles-based early-stage venture capital firm, is pausing seed investing “until the seed market corrects.” Arena managing partner Paige Craig sent out a private letter to LPs laying out concerns about the seed market — overvalued seed companies, excessive capital supply, and imbalanced market forces.|
|In other words, the seed stage has become increasingly crowded, competitive, and expensive. VCs are raising larger funds, writing bigger checks, and inflating already-inflated startup valuations. Put simply, it’s getting expensive to invest in companies whose seed rounds are really the equivalent of Series A rounds.|
|It’s unclear if this is the sole reason for the pause or just how long it will last considering that the two principals (Frank Shih and TJ Hennessy) at the four-person firm have left. Shih’s LinkedIn page lists him as a partner at Arc Labs, and Hennessy is said to be looking for a new opportunity.|
|Asked whether he would be working on something else during the hiatus, Craig said “No, we’re full time on Arena.” The firm will continue to invest in its existing portfolio companies and plans to launch a new fund with a new early stage strategy. (A pivot to crypto perhaps?)|
|Arena had closed $37 million to invest in software-focused businesses based in Los Angeles, San Francisco, and New York City. Investments ranged from $500,000 to $1 million. Arena’s portfolio includes companies such as ClassPass, Plated, Reserve, and Laurel & Wolf.|
This is very interesting to me given what Fred Wilson said on his blog. “For investors, it means seed rounds are going to be the place to be. When others leave the market, it is time to get in.”
If seed investors are leaving the market, the 411 to entrepreneurs is valuations are going to come down. That includes existing investments. I feel like the gap between Seed and Series A just got wider. I am hearing from Series A investors they want top-line revenue of $120k or more with 40% growth. They want to write large checks. That means the seed deal that got funded at $8M post and currently feels like it’s doing well with 20-30% growth and top-line revenue of $60k a month has a ways to go to raise a Series A. This is why we have seen a proliferation of post-Seed rounds. Entrepreneurs should be prepared to extend the terms of the last round, or face a down round on post-Seed.
However, even though Seed is the place to be, don’t jump in willy-nilly. If you don’t have a lot of discipline, you will lose money. We remain committed seed investors because we see huge opportunities. However, we remain super disciplined on valuation. The reason is risk/reward. If there is one thing a trader knows what to do it’s to manage risk and how to make hay out of losers. I’d also caution you that if you are going to invest here and you aren’t going to be active, you will make your odds of success longer.