Seed funded startups ripe for shakeout, VCs say

Individual seed investors have been an increasingly powerful force in Silicon Valleys startup funding landscape. But in an onstage conversation at GigaOMs Mobilize conference in San Francisco Tuesday, two venture capital heavyweights said that while the VC industry has been shaken up by the increase of seed backers, the current environment will likely lead to a fall.

There will be a day of reckoning, certainly. There are way too many companies getting seed funding, said Maha Ibrahim, a partner at Canaan Partners. Thats because many of the companies receiving seed funding now are likely to have trouble raising larger amounts of money down the line, she said, since theyve become used to the kind of terms that only seed investors can offer.

Nevertheless, at the early stages its hard for traditional venture capital firms to compete with groups of individual seed investors with a willingness to put together a relatively large syndicate [of investors who invest in startups] at very favorable terms, Kleiner Perkins partner Matt Murphy said.

In addition, Ibrahim said the fact that so many startups are content with seed funding may indicate a larger problem: A lack of the kind of ambition needed to really make a big impact on the tech world. Ive been disappointed most in the lack of companies coming in raising classic series A rounds, she said. The lack of entrepreneurs who want to go in and go big.

Even if there is a day of reckoning on the horizon for some startups, both Ibrahim and Murphy said they generally expect! the amo unt of mergers and acquisitions in the tech world to heat up in the months ahead. Were going to see a very rich M&A environment, Murphy said. Thats something that will be good news for seed investors and traditional VCs alike.

Watch live streaming video from mobilize2011 at livestream.com

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.