Scutinizing a Seed Investment Bubble

A few days ago, the Center for Venture Research released its Q1Q2 2010 Angel Market Analysis Report.  This study was subsequently covered by a number of media outlets (including The New York Times, The Wall Street Journal, and VentureBeat).  The report’s subtitle asks “where have all the seed investors gone?” and goes on to assert that the total dollar amount of angel investments in the first half of 2010 decreased by 6.5% over the same time in the prior year.  Additionally, the report claims there was only a 3% increase in the number of deals during the same period.  I’m not going to argue the seed/angel/super-angel sector isn’t potentially overheated, but this single report at first seemed to contradict sentiment in the market as well as a few other sources.

Contradicting CVR's 3%: seed deals (<$1mm) as reported by CrunchBase

Specifically, CrunchBase, the database maintained by TechCrunch (Silicon Valley’s most widely read technology and investing site), tells a slightly different story.  Sure, CrunchBase has some shortcomings because the data is user-reported, relies heavily on SEC Form D filings, and contains other systemic errors, but this source still tends to be directionally significant for what is happening within the investment community.

Unlike the CVR study which shows a 3% gain from 1H09 to 1H10, CrunchBase indicates an increase of a whopping 135%.  Additionally, the number of deals cataloged in CB climbed by 44% from 2H09 to 1H10.  Some of this discrepancy is explained by reporting biases, but this difference is so substantial that there are likely much deeper problems with one – or both – of the sources.  CrunchBase seems more consistent with the conventional “gut feeling” of those actively investing in technology startups, but the methodology employed by the Center for Venture Research is more statistically sound.

Maybe the bubble has indeed burst: seed deals (<$1mm) by quarter as reported by CrunchBase. Note that 3Q10 is -58% from 1Q10

Nonetheless, looking at more granular CrunchBase data seems to suggest that the overall theme of a slowing/contracting seed investing environment articulated in the CVR report is in fact accurate.  It’s difficult to measure this precisely (namely because of the issues mentioned above), but the chart to the right shows seed deals by quarter – as opposed to half – in CrunchBase.  Although Q1 of this year was particularly strong,  the fervor has seemingly died down and returned to near the historic average.

I’m confident strong founders with good ideas will always be able to find angels willing to back them in the most nascent stages of company formation.  However, the bubble-like environment of the past several quarters appears to have subsided even if disparate sources don’t agree on the timing and extent of the decline.

Note:  CrunchBase data is as of October 31, 2010 at 12:39pm EDT.  The analyzed portion of this database includes: (1) only U.S. based companies, (2) deals where investment amounts for the entire round were less than $1 million, and (3) companies with data for geographic location, investment date, and round size.  Black and orange colors are in support of the Giants trying to win their third game of the World Series later today (oh, and I guess for Halloween too).