On Saturday VC Paul Kedrosky wrote about “The Coming Super-Seed Crash,” sparking a debate across several blogs and Twitter about the state of VC and angel investment. Kedrosky’s post describes the changing landscape for startup financing with the rise in “super-seed” firms, those that deal with about $20 million in investments and “specialize in seeding a bazillion companies.”
Kedrosky contends that “the super-seed crash is coming” because of the both increasing number of super-seed firms and the excessive number of companies being seeded this way. This overfunding of startups upsets valuations, returns, and potential follow-on investment, argues Kedrosky – all in a market catering to a “financially anaerobic U.S. consumer who is shopped out and indebted to death.”
Many investors disagreed with Kedrosky’s arguments, in both the blog’s comments and on Twitter, arguing that they had not experienced the overblown valuations or funding competitions that Kedrosky described.
Chris Sacca, who launched his Lowercase Capital investment firm last week with a creed about startup financing, wrote in the comments on Kedrosky’s blog, that while there may be an “abundance of undisciplined angels who are tossing money at startups,” super-seed firms do not cause investment prices and returns to be out-of-whack. Furthermore, Sacca suggested, Kedrosky’s analysis missed the point: super-seed funds don’t need the same “extraordinary” exits that VCs do and that lower business costs allow startups to have a slow burn rate, to be able to pivot, and to not have to scramble for Series A funding.
VC Albert Wenger wrote on Continuations this morning that he agrees with some of Kedrosky’s predictions about a pending “super-seed crash.” Wenger writes, “From a social perspective I believe that overfunding of startups (which is what Paul argues is happening) is actually a good thing. Even if a bunch of super angels wind up not succeeding, there will be a lasting benefit to society from training many more entrepreneurs and people who know how to work at a startup.”
Wenger believes it’s not the “authentic super-angel innovators” who are likely to be impacted by a bursting super seed stage investment bubble. Rather, says Wenger, it’s the “folks who are coming late to this party” – unknown funds and corporate incubators, for example.
In response to some of the feedback, Kedrosky did update his original post, adding some more details to his argument but reiterating “incumbent VCs” along with the “super-angels” may be in peril. But many of the investors who responded to his ideas remain bullish.
Photo credits: Flickr user Woodley
