VCs Advancing Into Seed Money Deals

Series A funding has been a term applied to the financing stage occurring after seed money. The round where venture capital firms are involved is Series A. The earlier deals were reserved for angel investors only.

Lately, venture capital firms are increasingly involved in seed money arrangements. In fact, recent VC funding for seed money and Series A has increased while amounts going to mid-stage and later-level deals is shrinking.

Series A funding by venture capital firms in 2010 averaged around one-third of all VC investments—similar to the 30 percent figure of the prior year. However, seed money deals by VCs in 2010 increased to over 10 percent of all funding compared to less than 1 percent previously.

Entrepreneurs have traditionally relied upon angel investors for seed capital. This provided optimal flexibility for future financing rounds. When a large VC provided early stage capital, an entrepreneur effectively provided that VC with an option for the next round. If that VC was not interested in the next round, then other VCs tended to believe there was something specific to the company that did not merit investment.

These days, building a successful internet business requires less capital than past years. This leads to VCs participating in early stages in order to have enough invested in a deal.

Another trend is emerging from internet companies requiring fewer dollars. Reported VC activity in 2010 indicates a rising percentage of seed money for companies that are not in the internet industry. One area attracting venture capitalists is custom clothing firms.

VCs are pouring funds into companies that supply tailored clothes and accessories, usually marketed over the internet. Six custom apparel and accessory firms have recently received over $100,00,000 from groups composed of venture capitalists and angel investors. This compares to about the same amount for technology companies developing iPhone applications and $23,270,000 to developers of Twitter apps.

Hype still surrounds the companies in hot technologies. But lower capital requirements for those companies is resulting in greater VC interest for other industries and seed money stages.