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If pink is the new black, is seed financing the new pink?

About two weeks ago one of my friends called me for some advice on raising a seed round for his startup. There’s nothing about that call that’s unusual. It was the subsequent calls by five other entrepreneurs looking for a seed round in less than a week that perked my ears up. Is this the start of a trend? Smells like one. I started to think about the economy aftershock from December: six months have passed, more than enough time to erode the savings account and start to think that a startup stands as much chance as any established business. December was the great equalizer of risk. New York is overflowing with unemployed Wall Street alums, California is flat broke, and Barack Obama has brought sexy back to government jobs. A fleeting thought passes through my head about starting a bank or a car company. Less competition. Back to reality and the revelation that software built on the web is cheap. Becoming an iPhoneAppionaire without leaving my living room is so tangible I can taste it. Labor to develop, sell, and just about do anything, is cheap. Sprinkle a little seed capital and voilà.

After the calls and some wandering thoughts, I poured over the reported data from several sources on companies receiving institutional venture capital from January, 2006 through June, 2009. I decided to narrow the field to geographies receiving the majority of venture capital: New England, Silicon Valley, New York, and Washington DC Metro (inclusive of Virginia and Maryland). In the first half of 2009, venture capital firms poured $1.71 billion dollars into companies in these four regions, a drop of 56% when compared to the first half of 2008. No big surprise. Seed capital is down from $56.2 million during the first half of 2008 to $14.8 million, a 73.6% drop through the same period in 2009. Again, not a big shocker. Firms are choosing to deploy small amounts of capital, if at all, in order to mitigate the massive market risk. In general, there are fewer investment opportunities by quantity after the meltdown in December. But, the big question remains is how much of that $1.71 billion is increasingly going into seed/early-stage companies versus continuing to fuel larger and proven revenue producing companies?

If we look broadly across all sectors in the four regions combined, the data suggest there hasn’t been much of a change in the allocation of capital. However, when we drill down into each geography we start seeing significant shifts in capital allocation toward seed capital, which I define as amounts less than $1 million. The region hardest hit for seed financing was Silicon Valley, who’s companies received $8.7 million in the first half of 2009, down a whopping 80.2% from $44.1 million in 2008. The region faring the best: Washington, DC Metro. The District, Virginia and Maryland received $2 million in known institutional seed financing in 2009, dropping 13.7% from $2.3 million the previous year. Nearly 86% of all the capital invested in the DC Metro area went into seed rounds. The biggest mover: New York City which saw its allocation of seed capital sw ell to 28%, an increase of 11% from the previous year.

Where’s the money going? Into larger funding rounds. New England shifted 19% of capital to funding rounds greater than $5 million, investing $206.1 million in 2009, while Silicon Valley increased their allocation 6.4% to $1.2 billion, almost six fold what New England deployed. Silicon Valley spent $2.77 billion on larger deals in the first half of 2008.

So, is seed the new pink? If you are starting your company in New York or in the Washington, DC Metro area, you are smack dab in the middle of an uptick in seed activity. Even if you aren’t in NYC or the DC area, its business as usual here at NAV. We aren’t standing on the sidelines watching an empty batter’s box. We are one of the few with our checkbook out investing out of freshly loaded fund we closed this year. Proof is in the pudding: half of our eight deals closed in the past six months, three closed in the last three months, and we have several more closing as this is written.