The winter edition of the Eniac Seed Sentiment Survey

By Dan Jaeck

What’s next for seed deals? While seed firms like Eniac are part of the larger VC ecosystem, we also represent a unique asset class that isn’t fully captured by reports and data that focus on the industry as a whole. That’s why we launched the Seed Sentiment Survey which we are conducting bi-annually. By reaching out to our counterparts who are actively deploying capital, we hope to provide insight into what’s actually happening in the earliest stage of investing.

For our second survey, we heard back from over 50 investors, which we believe represents a significant portion of the (U.S.) seed ecosystem. Our questions covered everything from hot sectors, to the macro funding market, and valuations.

Here’s what stood out to us in the results, along with select quotes from participants (all quotes are anonymous unless stated otherwise):

AI remains top of mind for seed investors, but skepticism of investing in the category is prevalent. The vast majority of our survey respondents (82%) believe AI is the hottest category for seed rounds, which is unchanged from our last survey this summer. Within AI, 41% of respondents believe the app layer is the hottest category in venture while another 41% believe that AI infra is the hottest category, although deal volume appears to be greater in the app layer (45% of respondents) vs infra (13%). It’s possible this greater volume of deal flow can be partly attributed to the lower technical barrier to entry to build AI applications. Here at Eniac, we saw an influx of deal volume in AI infrastructure this fall which created some cause for concern that the infra market is becoming increasingly crowded.

Despite the buzz around AI, investors remain skeptical. When asked about current confidence levels in investing in AI startups, over half of respondents said they are somewhat skeptical, 25% are somewhat confident, while 20% describe themselves as very skeptical; leaving only 4% who are very confident investing in AI. Supporting this, less than half of respondents say that their firm’s main focus is AI. Moreover, when asked what the most overhyped sector is, 45% of respondents said AI applications and another 33% said AI infrastructure. This skepticism is quite ironic given the increase in the amount of dollars invested in AI start-ups; PitchBook data compiled for Bloomberg showed that the value of funding for AI companies increased 27% year-over-year globally in 3Q23 even as overall deals for startups fell 31% in the same period. Our survey showed that despite the skepticism, 86% of respondents say their firms are actively looking at investing in AI start-ups.

We received a broad range of written responses from investors about the current state of AI:

“Technical advancements are still moving so quickly that investing in infrastructure is difficult without strong confidence in the team. Application layers are increasingly commoditized and a lot of what investors seem to be searching for is the magic middle (e.g., workflow) that sits agnostic to the underlying, fast-paced innovation but is structurally sticky enough to avoid the fate of most AI applications.”

“AI cannibalizing other AI is my biggest hesitancy in these deals. The speed of innovation is so great here. Learning that you have to expect a lot of active pivoting from these early stage teams, even after a series a.”

“AI is like mobile. It will be encapsulated into everything so chasing AI right now will look as silly as launching the iFund once did. Or changing one’s avatar to an NFT.”

“Anything above the infra and data layer will be obsolete within a decade as GPTs and personal assistants take over the majority of software use cases”

“Also interesting to look at adjacent markets with second order effects of AI. e.g. If AI does XYZ, what new problems will arise that need solving?”

“AI apps and verticals overlap a lot. A good chunk of the heat is there in particular.”

Interestingly, SaaS is becoming more and more polarized by early stage investors. Only 4% of investors believe vertical SaaS is the hottest sector right now, however 21% of firms surveyed said that vertical SaaS is their firm’s top focus. Anecdotally, there’s been a more risk-off approach to early stage investing (given market downturn + skepticism of AI) which has created increased focus on vertical SaaS. However, this is not a widely held opinion as there’s growing sentiment amongst early stage investors that SaaS will continue to be under pressure on a longer term time horizon (see quote below):

“SaaS is dead on a 10–20 yr horizon but few want to accept that truth”

Crypto remains the most out of favor sector per the majority of respondents, despite the recent resurgence in token prices. Meanwhile, investors viewed hardtech as the most underrated category (although with only 15%), as the sector is likely benefitting from tailwinds from geopolitical instability and a resurgent focus on near-shoring, manufacturing and supply chain control. Also, anecdotally, we are hearing investors are looking at new sectors to hedge against their AI portfolio allocation.

Valuations increase slightly in the back half of 2023, with upward pressure likely coming from multistage investors. On average, our respondents believe that pre-seed deals are being priced at ~$11mn post-money (an increase vs. ~$10mn in our previous survey). Similarly, the average price of a seed deal (using a proxy of $100k of traction) rose slightly as the average of respondents was $14.6mn vs ~$14mn in our previous survey. The valuation data becomes more interesting when broken down by stage invested. The majority of multistage managers surveyed are pricing seed rounds at $20mn+ and on average they believe a seed deal is being priced at $19.4mn. This was well above the rest of our respondents (non-multistage managers) that are seeing seed deals priced at $13.6mn. Perhaps unsurprisingly, when asked who managers are most competing with to win seed deals, 39 out of the 50 respondents said early stage or multistage funds. The marginal price insensitivity noted above is likely a contributing factor (which my colleague Hadley alluded to earlier this year).

Taking a step back and reflecting on 2023 valuations, 80% of respondents believe that seed valuations stayed flat / slightly decreased in 2023. Looking forward, 62% of respondents believe the macro environment will improve in the first half of 2024. Select quotes around valuations can be found below:

“My understanding is deal counts are down, but with a flight to quality, prices have stayed stable”

“Top 10% of startups still command a premium, the next 20% still think they do but will realize they don’t in 3–6 months, and the next 70% will be unable to raise or will need to take massive down rounds to survive”

“Prices didn’t go down much. But the bar is higher for the deals that do get done. Which keeps the average high.”

As always, including the raw stats from our survey below:

What is your current fund size?

At what stage does your fund invest?

What is the industry’s hottest sector this quarter?

What is the industry’s most out-of-favor sector this quarter?

What sector is your firm most focused on this quarter?

In what sector are you seeing the most deals?

What sector is underhyped? What should founders and investors be more focused on?

Is your firm spending more time in AI infrastructure or AI applications?

What is your current confidence in investing in AI startups?

What post-money valuation do you expect on average for a pre-product deal this quarter?

What post-money valuation would you expect on average for a deal with an MVP & $100k ARR this quarter?

Do you think seed investment valuations in 2023…

In what geography are you doing the most deals?

What kinds of firms have you competed with the most to win seed deals?

Do you think the macro market will improve or worsen in the first half of 2024?

What was the buzziest seed deal this quarter?

Texture (twice), Nomos, Earthmover, Keychain, Anon, Expresso, Tofu, Glif, PhysicsX