Proptech Seed Rounds Shift in Frequency and Amount

Mega-early rounds are history, but VC enthusiasm for startup funding deals remains strong

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In the realm of risky business propositions, investing in proptech startup seed rounds might be compared to playing roulette. The odds of success are low, but the payoff on a winning bet can be too enticing to pass up.

Despite the odds, as well as the current macroeconomic instability caused by high inflation and interest rates combined with a confusing jobs market, proptech-focused venture capitalists are not shying away from placing their bets on seed rounds — albeit with more stringent rules attached, experts say.

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“Seed rounds overall had been holding pretty steady through 2022 and 2023,” said Zak Schwarzman, general partner at MetaProp, a Manhattan-based, early-stage proptech venture capital firm. “Median rounds were just under the $3 million mark. While median round sizes have stayed pretty consistent, there are two notable differences in the seed funding climate compared to the more frenzied period we recently exited.

“First, there are fewer jumbo outlier seed deals being done that skew up the mean average. Second, founders are being asked to do more with the dollars that they’re raising in seed rounds. They’re being asked to operate more efficiently, to extract longer runways out of the same proceeds, and hit elevated milestones to unlock a series [A].”

The number of venture rounds, along with the median amount raised in any particular round, has generally been coming down [since 2022], a cascading effect that can take several quarters to work its way from the public markets down to the private markets, said Schwarzman.

“Seed is generally the least disturbed of all the funding stages, but it’s not immune,” he said. “So I’d anticipate generally fewer seed rounds in 2023. We certainly did in 2020 and 2021.”

In a report last Friday, CRETI, a proptech research firm, noted that year-to-date in 2023, funding was down “across all rounds, except for seed rounds. In fact, year-to-date, seed rounds represent 39.6 percent of all deal volume, compared to 38 percent in 2022 and 33.6 percent in 2021.”

However, mega seed rounds are a thing of the past, said Dan Wenhold, partner and co-head of the real estate technology investment team at Fifth Wall, a Los Angeles-based, advanced-stage proptech venture capital firm that has invested in 18 early-stage startups since it began investing in seed rounds in January 2022.

“I don’t think we’re going to see the $10 to $20 million-type seed rounds that some companies would try to advertise in 2021 and earlier,” said Wenhold. “Instead, I think we’re going to see seed rounds more in the traditional several million to mid-single-digit millions-type range. I think that the days of excess at the early stage are behind us and that companies really need to prove-out a lot more on the KPI [key performance indicator] and metrics side before they’re able to raise a Series A, and prove they can do it on less capital.

“So, I don’t think that the larger seed rounds are frankly going to be options for many companies at this stage, which I think is a healthy thing for the ecosystem.”

Calling such early-stage investment discipline a “return to normalcy,” Wenhold added that seed rounds now are a way for startups to prove their mettle in the marketplace. He said a company founder must “be able to prove that you as an entrepreneur could recruit, hire the team around you to bring a product to market, so that money would be put into research and development, into engineering talent, as well as potentially prove and test out some of your go-to market channels as well.”

Another view of the criteria proptech VCs use to judge seed round value came from Nima Wedlake, principal at Thomvest Ventures, a San Francisco-based, cross-stage venture capital firm that invests in proptech startups.

“In general, the size of seed rounds is largely a function of the resources needed to test a business hypothesis or reach a meaningful milestone,” Wedlake said in a statement. “For instance, $1 million ARR [annual recurring revenue] and the pre-money valuation of the business, as well as the total dilution founders are willing to take as part of a seed financing. These rounds are more art than science, but investors tend to prioritize backing exceptional teams at the seed stage, and preserving sufficient upside should the company realize its goals.

“It’s important that founders and the seed investor align around the specific milestones the company aspires to hit as part of their seed financing and the expected time and capital required to reach those milestones.”

As for startups that spent their seed money in excess in an effort to supercharge growth toward a larger-than-justified Series A round — those days are over for at least 2023, Fifth Wall’s Wenhold and others said.

“The burn multiples for those businesses when they go out to raise the next round probably look pretty high,” he said. “The metrics themselves look poor. That is a large inhibitor to allowing those companies to be successful in raising their next round.”

Yet new proptech startups seeking seed round funding continue to fill VC pipelines.

“I think that the evolution has been the types of companies and the types of rounds, the general quality of deals, as well as the expected pricing on those deals that has evolved over the course of 2022 and into early 2023,” said MetaProp’s Schwarzman. “We are seeing both greater volume today in our pipeline and also higher quality than we would have seen in Q2 last year.

“Companies were hesitant to raise capital last year unless they really needed to,” he said. “It was such a not only sour capital-raising environment, but there was so much uncertainty in the market that many folks were not actively, or certainly not aggressively, investing at a regular pace. That led entrepreneurs to, if they could, avoid fundraising until there was a bit more stability in the market. We’re still not in a totally settled place, but we have more stability in the market than we did nine to 12 months ago.”

Kunal Lunawat, co-founder and managing partner at Agya Ventures, a real estate technology fund based out of San Francisco and Manhattan, agrees that current proptech seed rounds are ranging from $3 million to $5 million per deal. Still, he said the relative number of deals to date, “has not decreased from last year, and we expect it to remain the same [throughout] this year.”

Agya Ventures “made close to 25 investments in pre-seed, seed and Series A stage companies over the last year and a half, and we anticipate doing close to seven to 10 investments this year at seed stage,” said Lunawat.

As to what types of proptech startups are most likely to get any seed funding, Fifth Wall’s Wenhold said, “We’re seeing a lot of really interesting capital-light, software-centric companies that are still raising seed rounds. Given the market backdrop, that is of high interest to us, more capital-light models that can prove out product market fit on less dollars upfront.

“Ultimately, I think for the entrepreneurs, sometimes they’ll offer less dilution and the valuation may be lower initially, but it also makes expectations for the Series A round much more realistic in terms of wanting to be able to raise at a higher valuation, or an up round, for your first kind of real institutional round of capital.”

Philip Russo can be reached at prusso@commercialobserver.com.