What is happening with seed funds?

The landscape of seed funds is evolving rapidly, with several key trends and dynamics shaping the current state:

1. Increase in Seed Funds:

   • There has been a significant increase in the number of seed funds over the past decade. Michael Kim noted that while there were just 15-20 institutional quality seed funds in the US initially, today there are over 2000 seed funds, many of which are small and often run by part-time operators or founders 1 2.

2. Competitive Market and Higher Valuations:

   • The proliferation of seed funds has made the market highly competitive, leading to higher valuations. Multistage firms that have moved into the seed investment space have contributed to this increased competition and higher pricing 1.

3. Geographical Flexibility:

   • With the cost of living and operating a business skyrocketing in areas like the Bay Area, there's a trend towards companies building teams across different locations to manage expenses. This approach has been effectively employed by startups like Intercom and Pipedrive 3.

     The Changing Landscape

     Michael Kim

     Michael discusses the evolution of smaller funds and the rise of side funds in the venture capital industry. He highlights the impact of these changes on portfolio construction and pricing, shedding light on the growing number of seed funds and their influence on early stage venture.

     

     The Limited Partner

     E10: Michael Kim | Founder of Cendana Capital on How Small VC Funds Can Return 200X+

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4. Innovative Approaches and Programs:

   • To address the needs of smaller funds and micro-investments, programs like the Nano program have been introduced, targeting sub-$20 million funds which might not attract institutional LPs 1.

5. Focus on Liquidity:

   • Liquidity remains a critical challenge. Seed funds, despite being well-positioned for secondaries, often grapple with long exit horizons. Some strategies being considered include taking money off the table during large oversubscribed rounds to ensure liquidity 2.

6. Impact of Multistage Firms:

   • Multistage firms writing small checks in seed rounds often see these investments as options for future investments. This can affect the dynamics and perceived value of seed funds, requiring them to innovate to stay relevant 4.

These trends indicate that while the seed funding environment is becoming more complex and competitive, there are also new opportunities and strategies being developed to adapt to these changes.