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Seed deals are being driven down by unicorns staying private longer

Lazaro Gamio / Axios

There has been a bunch of talk lately about the decrease in seed-stage funding, particularly in terms of number of deals. Here was Fred Wilson's take:

"When I talk to my friends who do a lot of angel investing, I hear that they are being more selective, licking some wounds, and waiting for liquidity on their better investments. When I talk to my friends who started seed funds in the past decade, I hear them thinking about moving up market into larger funds and Series A rounds. You can see that in the data. Less deals and bigger deals."

Fred's point about liquidity cannot be overstated, but should be expanded upon.

Buyside: The angel pool should be teeming right now with new entrants, given the public stock market boom. But the reality is that the big angel money doesn't usually come from St. Louis orthopedists so much as it does from newly-minted Silicon Valley millionaires. And the "stay private longer" trend means that latter group hasn't been refreshed to the same extent as it has in prior cycles. Instead, most early "unicorn" employees are still sitting on paper returns, rather than using it to buy angel halos.

Sell-side: Unicorns staying private longer also has caused many of their employees to stick around longer, unless they have some independent wealth to cover the tax bill on vested options. This has reduced the number of engineers who spin out to launch their own startups, thus also contributing to the angel deal swoon. For example, where is the Airbnb or Uber Mafia?

It is unclear if this liquidity crunch will abate in 2018. We've heard rumblings about a unicorn IPO boom, but we heard the same thing at this time last year. One thing that could help on the sell-side, at least, is part of the GOP tax bill that would prevent stock options from being taxed until there actually is a liquid market. Well, assuming the tax bill gets passed.

Update: Sarah Cone, an investor with Social Impact Capital, added another plausible explanation for the seed-deal decline:

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