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The legal firm of Fenwick & West, LLC recently published a seed finance survey. This is the 3rd survey this firm has published on the subject. According to the firm, “In addition to providing information for 2012, this survey also offers comparative information with 2011 and 2010 to facilitate the identification of trends. … [The] survey is based on 61 transactions in 2012, 56 transactions in 2011 and 52 in 2010. The vast majority of these transactions were for companies based in Silicon Valley, with some from the Seattle, Los Angeles and New York regions.”

Below are some of their findings:

Overview of 2012 Seed Financing Survey Results

We saw the following trends in our 2012 survey:

  • Of the companies funded in 2011, 27% had raised a Series A financing by the end of the following year (2012), while 45% of the companies funded in 2010 had raised a Series A financing by the end of the following year (2011).
  • Conversely, 23% of the companies funded in 2011 raised follow-on seed financing by the end of the following year, while 12% of the companies funded in 2010 had raised a follow on seed by the end of the following year.
  • The percentage of companies in our survey receiving seed funding that were software companies increased from 25% in 2011 to 34% in 2012, while the percentage of such companies that were internet/digital media companies declined from 75% to 66%.
  • The percentage of seed financings led by venture capital investors increased from 27% in 2011 to 34% in 2012.
  • The use of a preferred stock structure increased from 59% in 2011 to 67% in 2012.
  • The average investment size increased for preferred stock deals from 2011 to 2012, and declined for convertible note deals over the same period.
  • …  Click to read the full report

Overview of Seed Financing Environment

The seed financing environment has become very dynamic, and has undergone significant changes, in the past few years.  Some of the trends that we are seeing are:

    • The Increasing Institutionalization of Seed Financing.

This is evidenced by the increasing participation of venture capitalists in seed financings, the growth of accelerators and “matchmaker” platforms, and the use of venture capital-like structures in seed financings.

    1. The increased involvement of venture capital funds in seed investing.  Dow Jones VentureSource reported that U.S. seed financings by venture capital firms increased from 173 in 2009 to 388 in 2012, and the amounts invested in such financings increased from $119 million to $287 million during that period.  Similarly, CB Insights reported that venture capital investment in seed deals increased from 143 deals in 2009 to 617 deals in 2012, and that the percentage of all seed deals in which venture capitalists invested increased from 30% in 2009 to 35% in 2012.  This trend is supported by the results of our Survey, which found that the percentage of seed deals that were led by venture capitalists increased from 26% in 2010 to 27% in 2011 to 34% in 2012.
    2. The growth of accelerators.  Accelerators provide structure to the formation of seed companies by providing formalized mentoring, a network of contacts and in some cases small amounts of financing.  This is unlike the prior generations of early stage companies that were more likely to have less formal guidance and structure during their pre-seed and seed period.  Since Y Combinator, the first of the current generation of accelerators, was founded in 2005, the number of accelerators has grown to over 130 in 33 countries, per research by Jed Christiansen, founder of Seed-DB, as reported in AllThingsDigital. And accelerators tracked by Seed-DB that provide funding to their companies have increased the number of companies they have funded from 243 in 2010 to 1137 in 2012.
    3. The growth of platforms that match entrepreneurs and investors.  Matchmaking platforms are becomingly increasingly important in seed financing, and with the passage of the JOBS Act are likely to continue to grow in importance.…  Click to read the full report
  • Increase in Seed Financings and the Series A Crunch.
  1. Rapid growth in seed financings compared to Series A.  The number of seed financings increased from 472 in 2009 to 1749 in 2012, while the number of Series A rounds only increased from 418 to 692 during the same period, as reported by CB Insights.  Additionally, Xconomyreported that the number of seed investments has grown from 15% to 31% of the total number of venture capital deals.  This has caused many to question whether too many seed deals are being funded, and opine that many of the seed funded companies will be unable to raise a Series A financing. …  Click to read the full report
  2. Follow-on seed financings.  Further evidence of this trend is what appears to be a growth in follow-on seed financings, which provide a company with a longer runway to hopefully demonstrate the traction necessary to obtain Series A financing.  This is supported by our survey results which found that while only 12% of our 2010 class of seed funded companies received a follow-on seed financing by the end of 2011, 23% of our 2011 class have already received such financing. …  
  3. Click to read the full report

This an excellent report, and should be read by anyone involved in the startup community.

Click To Download the Seed Finance Survey 2012 as a PDF