Techstars’ Kerty Levy knows a thing or two about where seed funding is, and where it might be going, in the Northeast.
During a presentation at TechCrunch’s Early Stage in Boston last month, Levy took a brief look at deal counts and valuations before exploring in more depth what the obstacles to funding are right now, and what founders are going to have to expand on in order to cut a deal.
From 2021 to 2022, overall deal count in the Northeast was down around 25%. It might not be surprising, but it is quite stark. If you take a look at seed funding specifically, things are even more contracted.
“Even if you extrapolate out past this quarter, even if we have a great second half of the year, I’m afraid that the deal count is looking bad,” she said.
In the first quarter of 2023, most of the investments in New England were in the productivity, business productivity, software, health care, climate, energy and fintech sectors.
But in Levy’s opinion, founders seeking investment are expected to jump through a series of hoops in order to access a pot of money that has decreased in size.
“In 2021, you would go through this list of things to think about,” Levy said. “Traction: check. Founder/market fit: check. That’s the attitude investors were going through at that time. But this time around, what we’re seeing is real, really rigorous, hurdle-jumping to get through the diligence and even through a few meetings with investors. And I think that’s because investors have funds to invest and want to spend it, but they want to spend it on the companies that they feel have the best chance of success.”
While investment might be down overall, there’s still a lot of buzz surrounding the companies that do get through all the hoops.
“Just like always, there is a little bit of FOMO there,” Levy said. “So those companies who are checking those boxes heavily and making it through that diligence, those are the ones that you’re hearing the buzz about the valuations are still up there.”
The hurdles are high.
“I’ve heard of a pre-seed company going into seed, around $1.5 million,” she said. “They were asked to do a ‘Magic 8 Ball’ analysis, which means parsing out the details of their lifetime value and their growth and everything on a level that I’ve never seen it at this stage before. Traction? It used to be, ‘Let me show that I’ve got some traction.’ Now it is, ‘How quickly is that traction accumulating? At what rate? And are we seeing it continuing to go? When I talk to you this week, is it different next week?’ [This is] on a level that I haven’t seen before. So the hurdles are really, really high at this point in time for those deals that are limited.”
There’s also been a significant shift in funding opportunities, and the differences between red ocean — an area with a lot of competitors, but also a lot of substitutes — and blue ocean, which is a great big investment opportunity with few competitors.
“It used to be that if you did really have a fantastic new way of approaching a market that’s already been proven, you’re going to get investment,” Levy said. “It’s much harder today. People will just say, red ocean, I’m not interested in investing. And they’re not listening for: ‘Wait a second, some of these companies aren’t going to survive. And mine is going to be there to take over.’”
So there are openings in the red ocean. What about the blue ocean?
“Blue ocean used to be: Interesting! I want to invest in this first company or these first few companies in this wide blue ocean,” Levy said. But she said that things have shifted on that front, too, with investors asking companies to show that the blue ocean makes sense. “On both ends of the spectrum, founders are getting a lot more rigor in terms of proving themselves.”
With respect to founder-market fit, Levy believes that there are a lot more expectations being placed on founders, with investors looking at founders and asking whether they really understand the problem, along with whether they understand the customers.
And, of course, there’s also the buzzword du jour that needs to be addressed: AI. In the past, using Kubernetes and throwing some algos at the software would tick the box. Things have shifted significantly, with investors looking at how customer onboarding is automated, and how AI can be used to drive down the customer acquisition costs and to move more quickly and efficiently than everyone else.
Levy said that founders need to bring their A-game to the AI discussion table, because they are going to need it. “Founders better be ready to speak about what they’re doing there. And this isn’t, ‘Oh, I’m just going to sign up and use ChatGPT.’ The focus needs to be ‘What am I thinking about for every process of my business in terms of automation and making that really, really seamless for the experience.’ And the user is just going to think that this is ‘incredible, this is so easy.’”
Though most of what Levy said referred to the tougher market, it’s not all doom and gloom in the Northeast. There are many opportunities for founders, like meetups and incubators and accelerators, and investors who are keen to get involved to help build companies that will bring something to founders, investors, customers and maybe society.
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