No one can accurately predict the future, but there's no one we would rather have not accurately predict the future than Dave. In this episode Dave brings his research, his insight and a few devices of the ethereal to the table (literally), and we try to figure out what the next few years hold for seed funding.
Dave, it’s a little bit crowded on the desk. You’ve got a crystal ball, tarot cards. The incense smells good, but what is all this? It makes me think we might be talking about the future today.
Yeah. I think I’d like to talk about the future of seed funding. Basically, there is a lot of experts out there that have opinions, as well as myself. I thought, if we could talk about, what do we see happening in the next one to three years in the future of seed funding? It’d be a good way to go.
I know there are lots of opinions out there. But, as I’ve said previously, I trust yours above all others. Let’s talk about the future. What’s your opinion?
Thanks for the credit, but I really can’t predict the future. The best we could do, I think is let’s look at what other experts are saying around the country. And synthesize that into some kind of industry-based standards or consensus of what publications and experts are saying throughout the country. I like to cite other experts and studies in these podcasts. I have done some research on what knowledgeable people are saying. This will be different obviously, from the studies that I’ve cited in the past. Those studies were always analytics of things that happened in the past. What we’re going to talk about today is, what are the opinions of what’s going to happen in the future regarding SeedFunders? In the future, we’re talking five or 10 years. I’ll just talk about the next one to three years.
Let’s dig in. What are you reading? What are you seeing?
Fortunately, I was able to curate a lot of studies or opinions and publications, relatively recently, in the last year or so. I’m going to discuss those from five pretty reliable and respected sources. Those would be Forbes, Crunch Base, MIT, Crowdfund Insider and Oracle.
Let’s get rolling. Let’s start with Forbes.
The most appropriate article I’ve seen on this is from Maren Thomas Bannon which is entitled, Five Predictions for Early-Stage Startups in 2021. I’d like to go through her predictions and see how it’s playing out in Florida. First, she says that pre-seed will become the hardest stage in venture. That’s the difference between seed and pre-seed. As you know, I’ve talked before about things are getting earlier and early. SeedFunders is actually really investing in pre-seed, not even seed. But this covers all seed and pre-seed. She’s saying, pre-seed actually is going to become the harder stage in venture. That’s very important. I mentioned previously, when I started SeedFunders I thought we were in seed. And now, we actually are in pre-seed. It turns out basically, she points out that seed fund started as the first check. But now it’s really, they’re raising bigger rounds. They’re leading three to five million-dollar deals in seed rounds. Pre-seed has now become the first check. Seed round today looks a lot like series A did a decade ago, both in terms of the traction and the size of the deals.
The money is going up. I’m assuming that makes the same true for pre-seed investments.
She points out, in today’s pre-seed round just isn’t one round. It can be a couple of rounds. We’ve seen this actually, at SeedFunders and in Florida. They can be over one to two years. It’s longer and harder now to raise the pre-seed round, because a lot of these entities has really moved into seed, which is almost imitating series A from a decade ago as I said. She also points out that Pitchbook had a study in 2019. And had some statistics that said, “There were 1162 seed funds, but only 126 pre-seed funds. As you can see, as these seed rounds become competitive, because there are so many – 1162 seed rounds. Pre-seed is not yet competitive. It really is becoming more attractive as far as investment. This again is our experience in Florida. The established investors, you look at Florida Funders, New World Angels, DeepWork Capital, Miami Angels, Tamiami Angels. Basically, they rarely – if ever – consider pre-seed investing. They’re either in seed or series A.
Very interesting, what else does Miss Bannon have to say?
She says challenger funds will be their own established category. A challenger fund has basically terms where the investor gets capital returned from revenue or profits before or even without an exit. For example, the terms might be that the investor gets a three or 4x return before converting to equity, or maybe there is no conversion to equity. It can be both or either. This gives the funds capital to re-invest or distribute earlier than normal, because they don’t have to wait for an exit. I don’t see this however, being applicable to pre-seed. Since, in pre-seed there is no revenue to start. And little revenue for maybe years. It’d be difficult to ask the entrepreneur to start returning funds to a pre-seed investment. Plus, you don’t want to take that capital out of the company, when maybe they need that capital to get to the next level or to get to their seed round, or even eventually their series A round. I don’t really see this. She says it’s going to be big in other areas. But I think in the pre-seed area, I don’t see that becoming really prevalent.
Pre-seed and challenger funds that’s two. What else does she have to say?
She talks about the standardizing deal documents and procedures. Deals will be closed actually she says, without lawyers. I totally agree this is coming, even if we in Florida don’t like it. When I say we don’t like it I’m not referring to the lack of lawyers. I’m referring to the fact that she says that the SAFE – the simple agreement for future equity is becoming totally prevalent in pre-seed deals and even seed deals. Previously, we talked about a safe. I won’t go into details on how it works. We discussed that in a previous podcast. But she says, it’s become standard for pre-seed deals in the Bay Area. Again of course she means the San Francisco Bay Area, not the Tampa Bay area. It’s a fast and simple for both investors and founders. It is very quick. You do it without attorneys. We are starting to see deals in Florida led by out of state entities however. Where we said basically a take it or leave SAFE. So, the out of state entities were investing in this deal in Florida. To you SeedFunders who want to be involved. Here it is, it’s a SAFE. And if you want to be involved, that’s the terms. We did do two deals – I’ve mentioned previously with SAFEs in Florida. But I haven’t seen any Florida entities actually leading a deal with the SAFE. I agree it’s coming, but it’s not going to be standard in Florida for quite a while.
Sorry, the incense just made me cough. I think that means the spirits want me to ask you if she has a prediction about COVID.
Yes, actually it’s a pretty safe prediction. You are correct. She does have a prediction about COVID. Again, I totally agree with her observations on this. We have seen this in Florida. It’s now an established fact. You no longer need to physically meet to make investments. This is huge. She calls it the decoupling of geography from financial and human capital. For SeedFunders, we’ve made deals. I’ve not even met the entrepreneurs. We have investors and partners in Florida who I have never met, only on Zoom. I can’t emphasize how important this is. we will never go back to needing physical meetings to make investments. It’s just too costly and inefficient. We heard a quick story actually, when we had a live meeting, we had a hybrid meeting here actually in your office Joe. You weren’t even here, but we used your office anyway. We had a meeting of SeedFunders. We brought in the CEO of one of our portfolio companies. He actually still lives in New York. He’s moving to Florida, but we had him come in from New York to present to our group. We had two investors, two partners show up for that. I looked out the window. When I’m looking through Zoom to see who is on Zoom, I saw five people in Zoom that I could see their buildings, where they lived. Yet, they didn’t come up the street to do a Zoom live meeting. I think this really tells the tale that Zoom is here to stay. And people, if they’re willing to walk up the street to a meeting, they’re certainly not going to fly across the country.
True that. We have challenger funds, pre-seed, SAFEs, virtual connections. That makes four, and one finger left on my hand to make five. What’s the last one?
This one concerns branding, because many deals will be remote – as we just discussed. The brand of the investor is going to play a big part in deal flow. I totally agree with this. Similarly, the brand of the early-stage company – to the extent that there is one – will also be important in attracting investors. I see this quite a bit in Florida. A number of investment groups have referred deals to SeedFunders. In fact, most of our deals come from other investment groups when the deal is too early for them. We come in, in the pre-seed area, the pre-revenue companies. All these entities refer deals to us. That’s our main source of deals. We also get requests to participate in deals led by others, even out of state firms. If you think about it, this wouldn’t be possible without a great brand, without people knowing about us. People who we never even met, that we might have talked to through Zoom. The brand is really important. I totally agree that that is going to be very important moving forward in closing deals.
Wonderful, and I think you said, the next one on the list was Crunchbase which I just found out wasn’t a division of Nestle. Disappointed, but what do they have to say?
No, it’s not a division of Nestle, thanks. Joanna Glasner published an article just last month entitled, What this Year’s Seed Funding tells us about the Startup Future. She starts out by saying that they looked at over 1000 seed or pre-seed rounds of $2 million or more, announced in 2021. This is really recent data. A thousand seed or pre-seed rounds of $2 million or more. They highlighted four investment sectors that indicated investors saw plenty of growth in those four sectors. Those four sectors would be robotics, mental health, alternative protein – of all things, and real estate software.
I’ll let you stitch those together. Let’s start with robotics.
They state the obvious. The world is full of dull, repetitive work. So, there is a need and a rise to automate these tasks. The industries they cite from shipping, farming, food service, and companies getting funds, autonomous tractors, packaging and handling systems, restaurant kitchens, all becoming automated with robotics. In the seed stage, these investors are impressed by the labor shortage potential. They can save the labor. The seed stage investors are really looking at these robotics as the future. Here in Florida, we’re seeing a lot of that out of Orlando, and more than in St. Pete or Miami actually. Because of the technical businesses and technical companies, we’ve seen in Orlando, autonomous cars, certainly space tech. we just had a recent company present to us with a space tech solution, and manufacturing out of Orlando as well. In fact, one SeedFunders, Orlando partner even sold a robotic software company. He started it in Orlando, and sold it in Orlando. Robotics is definitely huge.
After we’ve been terrorized by the robots then, we’re going to need some mental healthcare. How does that look in the future?
Yes, they noted that companies’ mindfulness apps such as Calm and Headspace are now unicorns. Funding for US mental health startups reached an all-time high in 2020 with $900 million invested. This is really a huge area of investments coming up in the future. There is still quite a lot of deal volume and pretty large seed rounds that are taking place. They cite things like Mantra Health which is a digital mental health platform for university students, callback coach, reducing alcohol consumption and Spill – mental health support for employees through Slack that’s actually connected to Slack and administered through Slack.
That’s great. Animal-free protein…
I’m not into this one, but apparently a lot of investors are. They point out again that Beyond Meat is publicly trade. Impossible Foods has a potential IPO at $10 billion. Investors do see plenty of room for more, in the animal-free protein area. We are seeing significant seed stage funding in that area. There actually is even a company making plant-based, chicken substitute.
Property and rental management technology. Crunch Base says it’s big.
Yes, they point out that Google search yields a significant number of software platforms in the space. They do say however, that there are no household names dominating the market like Zillow for real estate or Intuit for taxes. There is a potential growth, and a potential area for someone to really be big in this area. Seed stage investors see a lot of room for new entrants with potential to scale. So far in 2021, over a dozen seed-stage companies offering platforms and tools, to manage investment properties and rentals have raised $2 million or more. That’s over a dozen seed stage companies raising $2 million or more in the area. We have seen many of these in Florida, of course. It is hard to tell who’ll be the big winners out of that, but it is a very hot area for investment at this point.
Dave, I know you said there are three more sources, but all this talk of animal-free proteins made me hungry for lunch. Can we pick up and do the next three next week?
Sure, sounds good to me. Thanks Joe.