Davis says that seed rounds are twice as big as they were a couple of years ago — “there are no more $250,000 seed rounds” — and that valuations are up as much as 30 percent over the last year. “A startup says we want an X amount for our valuation, and all it needs is to get a few people to say yes to it. Then it can say to everyone else, ‘Look, this is what the market is supporting.’”
Davis says pricing is being driven in large part by West Coast and Boston-based firms now bathing the city’s fledgling startups in cash. “It’s no longer like one or two guys are qualified to be your seed investors. [Now] it’s like there are dozens of people [who are qualified], so the size of the cap tables is ridiculous.”
So is the quality of the deals, in some cases, suggests Davis. Because “there are a lot of large funds doing seed deals [to create options for themselves later], the bar for investing in seed deals has lowered in many ways,” he says.
Asked if he now rolls his eyes at the announcement of every new firm opening an office in New York, Davis suggests that everyone in New York is just playing the game on the field. They have to.
“Nobody should think, ‘This is our neighborhood. This is our market.’ It’s a free market, and you’ve got to compete. If deals and activity and momentum are in New York, obviously [investors from near and far] have to have a presence. You’re potentially missing a big market otherwise. But the market isn’t big enough to support all of the cash that’s coming in.”
For more on NYC Seed, whose 12-week summer program will award 10 startups with office space and mentoring from corporate partners including Google, AOL, Time Warner, News Corp, and Hearst, visit this site. The program – which also gives startups $20,000 in exchange for a 5% stake — is accepting applications through the end of this month.