Seed Funding Slows in Silicon Valley (reuters.com)

The bloom is off seed funding, the business of providing money to brand-new startups, as investors take a more measured approach to financing emerging U.S. technology companies. From a report: Seed-stage financing has been sliding for the last two years, with the number of transactions down about 40 percent since the peak in mid-2015, data show. Dollar investments in fledgling companies have also declined, although less dramatically, dropping more than 24 percent over the same period. The slowdown comes despite an explosion of interest by wealthy individuals and foreign investors looking to park money in the next big thing. And it has potentially big implications for Silicon Valley. Early-stage funding is the lifeblood of a technology ecosystem built on risk-taking. Denied critical resources in infancy, companies can't hope to scale quickly enough to unseat incumbent industries and grow into the next Uber Technologies Inc or Airbnb. "The reason why startups are disrupting companies in the 21st Century is not because they are smarter. It's because they have capital to do so," said Steve Blank, a serial entrepreneur, startup mentor and adjunct professor at Stanford University. [...] The zeal that prevailed just two years ago has faded. Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data. The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That's just shy of the $1.75 billion for the same time period of 2016 and down significantly from 2015, which saw $2.19 billion invested into fledgling startups.

Comments

Look outside of Silicon Valley.

[jellomizer]

Like a lot of business incubator locations. There is a point where it is no longer the home of fancy startups and the home of the boring business. The cost of living is so high in Silicon Valley, it is too expensive to start a company there. However you can start a company in the newer business incubators say in Upstate NY, or in a rural town trying to attract technology firms.
The investors are following the new businesses, so a small business that can pay the rent for their business and their living for less than a $2000 a month. While selling products at the same price as the more expensive locations.

Also the 1990 New Economy that sparked Silicon Valley, had been proven a great failure. So while technology is hot again, it is far more reserved, and will not classify a pet food store as a tech company because it sells its product on the internet at a loss.

Re:Look outside of Silicon Valley.

[jeff4747]

However you can start a company in the newer business incubators say in Upstate NY, or in a rural town trying to attract technology firms.

And then you get to find out what "massive staffing problems" are.

You can't just declare "We have an incubator and are cheap!". Companies are going to need skilled workers to hire, and rural towns as well as Upstate NY do not have a large supply of those. Skilled workers are moving away from rural towns and out of the rust belt in general.

"But we're cheap" will not reverse that. Because you're cheap. They want a nice place to live and raise a family, and that requires spending money on schools an infrastructure that you can not do while fighting to be the cheapest place.

Finally, the people running the business are going to have to want to live there. If you don't have a super-rich part of town for them to live in, they're not coming.

Re:Look outside of Silicon Valley.

[ErichTheRed]

I'm not so sure about that. Unless you're building a company out in the middle of nowhere, it seems like it'd be a perfect opportunity for the right people to ditch SV and live somewhere less hectic. Let's say you start up in a semi-fancy suburb of a lower-tier Northeast city. Compared to California, real estate is so cheap and plentiful that anyone owning or renting in CA would immediately experience a quality-of-life bump. California housing starts at $1 million or more in desirable areas like LA and SF/SV. Taking the example of upstate NY, even though NY has high taxes, anyone relocating from CA would pay less for housing, most would have shorter or less traffic-choked commutes, and even if you paid above market rate to get smarter people, you'd still pay them less.

This would be comparable to domestic outsourcing, which typically locates workers in cheaper places to live. Back before they shipped everything to India, IBM was doing outsourcing work in Iowa, West Virginia and Georgia as examples. As long as you can convince workers that it's not worth the massive premium to live near San Francisco, it could definitely work.

Re:Look outside of Silicon Valley.

[DerekLyons]

I'm not so sure about that. Unless you're building a company out in the middle of nowhere, it seems like it'd be a perfect opportunity for the right people to ditch SV and live somewhere less hectic

You're missing the key thing that makes and keeps SV so attractive despite it's disadvantages - if the startup you're working for folds, there's ten others hiring tomorrow. You don't have to move, you just change your commute. If the startup you're working for in Bumfuck, NY folds... it's going to be much harder to find comparable work without pulling up stakes. (And much harder to jump a sinking ship.)
 
This also works to the disadvantage of the employer. You're no longer competing to hire the best currently available, but the much smaller pool of the best currently available willing to re-locate to Bumfuck, NY. It's also harder to attract capital because of the same density issues that make SV attractive to employees.

Re:Look outside of Silicon Valley.

[Comrade Ogilvy]

The cost of living is so high in Silicon Valley, it is too expensive to start a company there. However you can start a company in the newer business incubators say in Upstate NY, or in a rural town trying to attract technology firms.

No. It is too expensive for startups with certain kinds of business plans. To varying degrees, that has been true since the 90s, when there were some people here on /. declaring that $350k houses were pricing everyone out, and surely everyone with a family would rush to Nowhere, USA for the higher standard of living. Not every business benefits from being in or near the Valley. That has always been true.

One important advantage of the Valley is it is possible to hire up (relatively) quickly, and get experienced talent for key positions. That just will not happen if you set yourself up in a cornfield, and rely on coaxing graduates from University of Illinois at Urbana-Champaign.

Slow organic growth by hiring a fresh grad or three can make for a fine business. But VCs are not interested in you, and you would be foolish to even ask for their money.

Re:All of you are wrong

[jellomizer]

There are still a lot of good startup opportunities. The problem is starting a business from nothing is harder now. It is more complex then living off noodles for a year, but trying to make enough with your second job to survive while having enough time to make your own business is difficult. Partially due to Minimum wage not matching what is needed to survive in given areas. Then there is the fact college students are under heavy debt, that they are now asked to pay back, until their credit is good enough for a business loan.

It isn't the opportunities, but the barrier of entry has gotten higher... Unless you are just going to write apps, and post them on the device store, and hope it will be a hit.

The bubble is running out of air finally?

[ErichTheRed]

Every week, I see stories that make me check whether it's 2017 or 1999/2000. I'm honestly glad to see that fewer crazy startups with dubious chances of profitability are getting money. There's legitimate investment and then there's chasing an IPO fueled by stupid peoples' money.

The thing that's different about this bubble is how slowly it inflated and how slowly it's deflation will likely be. I think most of this is due to the public cloud. Back in the 90s it took a massive purchase of datacenter space, hardware and network connectivity to "get big fast" like everyone was trying to do. Now, the VCs just have to pay the AWS, GCP or Azure bill every month instead of putting up millions in up front infrastructure costs. It leaves a lot more capital free for expensive offices and employee perks...er...I mean, strategic R&D investment.

Re:THE UNICORNS ARE DISAPPEARING...

[bluefoxlucid]

April 2015. Look at the unemployment numbers. Down, down, down, ... still down, but not as quickly. Inflection. I've been saying that such an inflection indicates the recovery is over, and that the long historical trend is to enter a new recession about 2 years later.

This is actually a large part of my justification for a Universal Social Security: to diminish the strength of recessions, to reduce their duration, to speed their recovery, and to protect the working-class American from the loss of life and livelihood through no personal fault. Make those peeks smaller, make recovery come sooner, make the jobs return faster, and help the people of this country weather the storm until it passes.

I've been looking for the second inflection point that says the recession is starting, but it takes like four months to confirm, and even then it could be a localized disturbance. Pretty much everything--even the 100% reliable, absolutely-repeatable trends--is just probability; there will be a new recession, and the likelihood that it's starting increases continuously, and these indicators are increasingly-likely to signal the start the longer they go on.

Pretty much, it's unlikely that a new recession is starting until 2 years after the indicator of recovery; it's likely a new recession is about to take off when the unemployment figure has shown continuous inability to hold a downward trend for a few months at the likely time of new recession. The further out you get from recovery and the longer the unemployment figure struggles to show a continued reduction, the more-likely you are to plunge suddenly into recession in the immediate future.

That implies that folks crying that the recession was coming in 2012 or 2014 were fantastically-wrong for reasons visible in 2012 and 2014; folks claiming a new recession was just about to land on our heads in 2015 were also demonstrably probably-wrong in 2015; and folks claiming it's coming today might be wrong, but are more-likely to be right. If the economy goes level for an unusually-long time and doesn't show any indication of changing its behavior, we're back to "we just don't know and we have no case for why we're more-likely to be right right now, so how 'bout we all just shut up?"

But yes, a lot of people have been crying that a new recession is right around the corner for a long, long time. People are noisy like that.