Seed Stage Is Faster, Pricier and More Crowded

The seed-funding environment for digital media and software startups has gotten faster, pricier, and more crowded.

That’s the takeaway from a survey released today by law firm Fenwick & West, which found that the increasing diversity of funding sources is enabling startups to raise larger sums with more generally favorable terms than in previous cycles.

The survey, which delved into terms for just over 50 seed-stage transactions, found that pre-money valuation averaged $4 million for preferred stock financings of Internet and digital media companies in 2011, up from $3.4 million a year earlier. Pre-money valuations for software deals, meanwhile, rose to $3.5 million, up from $2.7 million a year earlier.

The vast majority of these transactions were for companies based in Silicon Valley, with some from the Seattle and Los Angeles regions.

What’s behind the rise in valuations? The Fenwick report pointed to a number of possible factors, including the ability of startups to tap a broader pool of investors as new incubators proliferate, professional angels scale their activities, and sites like AngelList enable founders to connect with more potential backers. Legislation enabling startups to pursue crowdfunding legislation, which passed the Senate today, would open up yet another avenue.

It’s not just a seed-stage phenomenon either. The firm’s recent study of  venture capital financings found that later-stage rounds for companies in the Internet, digital media and software spaces were also being done at significantly higher year-over-year valuations in 2011.

Deals are also getting done faster, surveyors found, due to a combination of faster decision-making by investors and in some cases guaranteed funding for participants in incubator and startup accelerator programs.

As for the question of whether all the companies raising seed funding will secure venture rounds down the road, the early indicators seem to say: It depends. Looking at the first pool of seed-stage companies surveyed in 2010, Fenwick found that, after an average of 18 months, 45% had raised venture financing. Another 12% had raised additional seed financing, 21% were still operating but had raised no more capital, 12% were acquired, and 4% had shut down. (There was no data available for the remaining 6%.)