The pre-seed market’s recovery has given investors an increasing upper hand.

While it’s often held that the early-stage investing market has generally fared better in this funding slowdown of the last 18 months or so, things haven’t actually been very good for pre-seed startups trying to raise money. Thankfully, it appears the pre-seed market is starting to recover, per new data from Carta, which provides cap table management software for startups.

The Good News: Pre-Seed Startups Are Raising More Money

Altogether, pre-seed startups that use Carta raised $972 million in the second quarter, 17% more than they did in the first quarter. That kind of recovery feels material, but the difference is stark when you consider the fact that funding to pre-seed startups remained above the $1.40 billion mark throughout the first half of 2022.

(Note that Carta’s customers are mostly based in the United States, so this data primarily reflects trends in the U.S.)

The Bad News: Fewer Deals and Stricter Terms

However, it seems fewer deals were closed in that period, marking the fourth straight quarter of declines in the number of pre-seed deals. Carta recorded 1,608 pre-seed rounds in the second quarter, down from 2,133 in Q1 2023. This trend suggests that investors are becoming more cautious and selective when it comes to supporting pre-seed startups.

The Onerous Terms: What Founders Can Expect

One of the most significant changes in the pre-seed market is the rise of stricter terms for founders. According to Carta’s data, the median pre-seed SAFE valuation has declined for five of the last six quarters – falling to $10 million in Q2 2023, down from $15 million in Q1 2022.

Moreover, investors are more frequently getting better terms on SAFE deals at lower prices. For example:

• The median discount rate has increased to 25% or higher
• Over 50% of pre-seed SAFE deals have a discount rate of at least 20%
• A few deals have even more extreme measures in favor of investors

The Bottom Line: Founders Will Face Tougher Negotiations

If you’re a founder just starting out, it might feel good to know that there’s more capital flowing in your direction. However, don’t expect it to be easy to raise money. With fewer deals and stricter terms, founders will need to be prepared for tougher negotiations.

Moreover, the increased competition among investors may lead to better terms for those who are willing to take on higher risks. This could result in a "winner-takes-all" scenario, where only the most promising startups secure funding at favorable terms.

Conclusion

The pre-seed market is undergoing significant changes, and founders need to be aware of these trends to navigate the current funding landscape effectively. While there’s more capital available for pre-seed startups, the competition among investors has increased, leading to stricter terms and tougher negotiations.

Founders will need to adapt to this new reality by developing a strong value proposition, building a solid network of advisors and partners, and being prepared to negotiate better terms. By doing so, they can increase their chances of securing funding at favorable conditions and taking their startup to the next level.