Mapping the DACH Pre-Seed VC Landscape
By: Christopher Algier
Tags: VC, Seed Investment, Germany, Startup, Investors

Mapping the DACH Pre-Seed VC Landscape

🏃‍♂ Take this shortcut to access the DACH Pre-Seed investor database in Notion 🏃‍♂️

Over the past years, the startup ecosystem in DACH has considerably matured and has become more and more differentiated. One major trend: The establishment of Pre-Seed. While still representing relatively new terrain in DACH, we at signals Pre-Seed observe the accelerating dynamics of this exciting stage on a daily basis. In this post, we give an overview of the Pre-Seed investor scene in DACH and share our take on Pre-Seed as the new Seed.

Pre-Seed is the new Seed

The ubiquitous “Seed is the new Series A” has turned from a gut feeling into a hard fact of the VC fundraising process. As found in Wing VC’s 2020 analysis of US VC investment, the median seed round size has almost doubled within four years, rising from $2MM in 2015 to $3.9MM in 2019. Traveling back further in time to 2010, we observe a whopping growth multiple of nearly 4x for seed rounds within one decade. In Wing VC’s comparison of these new Seed round sizes with the similarly growing size of Series A rounds, it becomes evident that a “2019 Seed looks like a 2011 Series A”. The story continues when moving to later stages in the VC financing process. In 2019, Series A took over the volume of what was considered a Series B in 2010.

The shift from Seed to Series A is not only reflected in the sheer round sizes. Valuations have also almost quadrupled within the past 10 years. Another obvious hint for this “continental drift” in VC financing stages is expressed by the maturity of startups in this stage. Companies have already raised a substantial round prior to Seed. As a result of these ballooning Seed rounds, expectations from investors to startups at this stage have heightened too. While it used to be normal some years ago to raise a Seed round pre-revenue, in 2019, two-thirds of Seed stage startups already generated traction.

Data Source: Seed is the new Series A, but what’s next? (Wing VC, 2020)

While the above data reflects the fundraising landscape for the US pre-Covid-19, the overall trend of continuously shifting round dynamics can also be observed in Europe, despite the economic impact of the pandemic (see KPMG’s Venture Pulse Q2 2020).

One of the reasons for the shifting round dynamics could be higher valuations through a concentration on fewer, yet bigger Seed deals. This might have been intensified by the Corona crisis. In the Acquired LP Podcast, Precursor Ventures’ Charles Hudson further makes the point of rising fund volumes as a reason for the growing Seed rounds. Since funds get bigger, too many “classic” Seed rounds of $300k would need to be invested in order to deploy the managed capital in the market. Another more obvious driver for the development is stated by Gaurav Jain from Afore Capital in the Twenty Minute VC podcast. Since in most cases, staff is the biggest cost driver in startups and labor costs naturally evolve, the need for capital rises and rounds naturally get bigger.

But what does that mean for the lower end of the spectrum? As outlined in Pear VC’s report on this new seed landscape, the needs of startups at the very early stage haven’t changed. Prior to demonstrating traction through hard sales KPIs, scalable processes and overall product-market-fit, founders are still heavily involved in ideation, product design and user testing. The below figure by Pear VC perfectly visualizes this “drunken walk” along the fundraising timeline. As one can see from the below graph, over time “Pre-Seed” has sneaked into the fundraising process.

Navigating the New Seed Landscape (Pear VC, 2019)

So when Seed rounds blow up and expectations rise, who is financing founders at their earliest stage? While the “classics” of bootstrapping, FFF (Friends, Family, Fools) and the traditional angel investor still exist, a new class of institutional investors have emerged to fill this gap: Pre-Seed VCs.

After diving deeper into the theory behind Pre-Seed rounds, we reveal the findings of our mapping of the DACH Pre-Seed VC landscape below.