Seed-Stage VC in 2023

The venture capital market of 2023 is fundamentally different from the environment that prevailed in 2020 and 2021. The correction that began in the second half of 2022 — driven by rising interest rates, contracting public market multiples, and a sharp recalibration of risk appetite among institutional investors — has worked its way through the venture ecosystem with varying speed and severity at different stages. For seed-stage investors focused on enterprise software, this recalibration creates genuine opportunity alongside genuine challenge, and understanding both clearly is essential for deploying capital intelligently in the current environment.

The Changed Landscape: What Correction Actually Means for Seed

The venture correction has not been uniform across stages. Late-stage and growth equity have experienced the most dramatic repricing, with the collapse in public market SaaS multiples flowing directly into the valuation expectations for pre-IPO growth rounds. Companies that raised at 40x or 50x ARR in 2021 have found their subsequent financing options sharply constrained, either because follow-on investors require substantially lower valuations or because the growth assumptions that justified earlier valuations have proved difficult to sustain in a more cautious enterprise spending environment.

At the seed stage, the correction has been less dramatic in absolute terms but still meaningful. Seed valuations that were clearly inflated in 2021 — driven by an abundance of capital chasing a limited supply of compelling founding teams — have moderated to levels that are more consistent with historical norms for pre-revenue or early-revenue businesses. This is actually good news for investors deploying new capital at seed: entry prices that are more rational mean more favorable return potential for the same fundamental quality of company.

What has changed more consequentially at the seed stage is the funding environment for companies that will need to raise subsequent rounds. The compression in growth and late-stage valuations creates uncertainty for seed-stage founders about the conditions they will encounter when they come to market for their next institutional round. This uncertainty shapes how we think about the companies we back at seed and what characteristics are most important in a market where the path to follow-on financing is less certain than it was eighteen months ago.

Durability First: Resetting Investment Criteria

In the 2020-2021 environment, growth velocity was the dominant variable in venture evaluation. Companies that could demonstrate rapid top-line growth — often at the expense of unit economics, gross margins, or burn efficiency — attracted capital and commanded premium valuations. The implicit assumption was that growth would eventually be monetized, that the path to profitability was a deliberate choice rather than an existential question, and that the abundant capital environment would persist long enough for every well-funded company to find its footing.

The current environment has reasserted the primacy of durability as an investment criterion. Durability means, at its core, a business that can survive and grow on the basis of its own economics without depending on continuous external capital infusions. For a seed-stage company, full durability is not expected — seed capital is explicitly intended to fund the period of pre-profitability that precedes sustainable growth. But the trajectory toward durability, the credibility of the path to unit economics that support continued growth, has become far more important in our evaluation framework than it was during the exuberant period.

Gross margin is the first dimension of durability we examine carefully. Enterprise SaaS businesses with software gross margins above seventy percent — ideally above eighty percent — have fundamentally different economic structures than businesses with lower margins. High gross margins create the operating leverage that can eventually convert revenue growth into profitability. Businesses with structurally low gross margins, often due to heavy services components, expensive third-party costs, or hardware elements, require much larger scale to achieve profitability and are therefore more dependent on favorable external capital conditions throughout their growth phase.

Net revenue retention — the percentage of revenue from existing customers that a company retains and grows year over year — is the second most important durability indicator at the seed stage, even though for many pre-scale businesses it is too early to measure with statistical confidence. We look for early indicators of NRR potential: the stickiness of the product in the customer's workflow, the presence of natural expansion vectors, customer satisfaction scores, and qualitative evidence of customers who are increasing their reliance on the product over time.

The Efficient Frontier: Capital Deployment in a Constrained Environment

One of the most important conversations we are having with founders in the current environment is about capital efficiency and the appropriate scale of seed rounds relative to the milestones those rounds need to achieve. In 2021, it was common to see seed rounds of $10M to $20M or more, with founders rationally taking advantage of the available capital to extend their runway and reduce the frequency of fundraising. In 2023, the appropriate seed round size is a more complex calculation.

Raising more capital than needed creates its own risks in the current environment. Larger rounds come with larger valuations, and larger valuations make subsequent financing more challenging if the intervening growth does not fully justify them. We counsel founders to think carefully about the specific milestones that will make their next institutional round at an improved valuation achievable, to size their seed round to reach those milestones with sufficient buffer, and to resist the temptation to raise more simply because it is available.

For enterprise software companies, the canonical milestone set that justifies moving from seed to the next stage typically includes: evidence of repeatable product-market fit through three to five independent customer wins with clear ROI metrics, early NRR data showing customers are expanding rather than churning, a go-to-market model that converts pipeline at a predictable rate, and a core founding team that has demonstrated the ability to attract and retain strong subsequent hires.

The AI Opportunity: Real vs. Rushed

It would be impossible to discuss the 2023 investment landscape without acknowledging the enormous wave of excitement and capital flowing into companies building with artificial intelligence — particularly large language models and generative AI capabilities. The launch of ChatGPT in late 2022 created a genuine inflection point in public awareness of AI capabilities, and the venture capital response has been swift and substantial.

Our view at Lucidean Capital is that the genuine AI opportunity in enterprise software is real and large, but that distinguishing between companies that are genuinely leveraging AI to build durable, differentiated capabilities versus companies that have added an AI veneer to otherwise undifferentiated products requires careful analysis. The questions we ask are practical: Does the AI capability provide a step-change improvement in the user's output that is not achievable with existing tools? Is the AI integration deep enough that it would be genuinely difficult for a competitor to replicate quickly? Is the company building proprietary data assets or fine-tuning capabilities that create differentiation beyond what is available from foundation model providers?

Companies that can answer these questions compellingly are accessing a genuine transformation moment. Companies that cannot are at risk of being caught in a hype cycle that fades as the initial excitement normalizes and buyers develop more sophisticated evaluation criteria for AI-enabled products.