Jan 21, 2016 · 3 minutes

I am still wading through decks and press releases and submitting to embargos and all the usual quarterly venture capital stat dance.

In looking through CB Insights' full deck earlier this week, I was surprised to see one number that was up: The median size of early stage deals. They reached a five-quarter high, in fact.

If you think this is because early stage investors don’t worry about late stage funding and IPO markets until their companies have to, think again.

Every downturn, early stage investors say they don’t think about the NASDAQ because the companies they fund are young enough, any “windows” have changed by the time they reach that point. And yet, every downturn, early stage investors pull back nonetheless.

To wit: In the fourth quarter, the actual number of early stage deals contracted, not only in absolute numbers but as a percentage of total deals.

Put another way: Early stage deals contracted faster than other parts of the market. The dollar amount going to early stage also contracted. The only number up was the median deal size. And there’s only one way of interpreting it: Early stage investors are worried about their companies finding follow on cash, so they are funding fewer of them, and giving them more money and/or building bigger syndications.

While early stage companies don’t have to worry about Doordash or Square-like issues anytime soon, they still have to live and work and hire people in an inflated market for talent and commercial real estate. And with fewer deals being done across the board, there are even fewer Series A deals likely to be done in the next year or so.

Seed investors were already bulking up on deals for this reason. From my article on the new “pre-seed” trend last summer:

As Jeff Clavier said to me at lunch recently, “You can argue we are writing bigger checks because we have bigger funds. Or we have bigger funds because we have to write bigger checks.”

The biggest factor has been the so-called Series A crunch. The worry was that so many companies were getting created thanks to accelerators, seed funds, and a lower cost of starting up. And there weren’t meaningfully more VCs to do Series As. It was musical chairs and something had to give. The math seemed irrefutable….

“Everyone got paranoid about the Series A crunch and instead of funding a company for twelve months, we started funding them for eighteen to 24 months,” Charles Hudson says. When rounds get into the millions, investors need to see a lot more to feel good about that kind of gamble….

And, lastly, Clavier and others have made the point that it’s just more expensiveto build a company in San Francisco than it used to be. “You used to be able to build a company and get it to Series A on $1 million,” he said. “You can’t today.” 

One basket of fears has given way to another for the seed investor. Now it’s less about too many great companies being funded and a need to keep reserves for mega-fund proratas and it’s more about everyone else pulling back so if you want your companies to have a shot at getting funded you have to pull back too.

If you follow this through to the logical conclusion, fewer early stage deals for more money means only two types of founders are getting funded in 2016: Those who have built a company once before or those who are very far along in product. If you are neither, find a pre-seed guy or move to Oakland and bootstrap.