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  • Joe Magyer

Founder Insights: Ad Prices and Venture Fundraising

I've decided to start a monthly note with a tight focus on fresh data and insights geared towards early stage tech founders.

This month's note will focus on 2 main themes: The state of play in venture funding and the latest with ad pricing data at Google, Meta, and Amazon.

Venture Fundraising Is (And Is Not) Changing

The venture market is struggling. Crunchbase says that global seed stage funding was down 44% year-on-year while Aumni reports that the median check size for series seed round lead investments shrunk by 20% from Q1 to Q4.

I expect the venture market to continue to tighten because new commitments to venture funds are plummeting. The number of venture funds that raised capital in 2022 was down 45%, the lowest count since 2013, and the amount of new capital committed to venture funds in Q1 plunged 73% year-on-year.

The glass half-empty is that businesses with mediocre traction or middling unit economics are unable to raise fresh capital in this environment. Startups without breakout growth or impressive unit economics should reduce their burn if they haven't already and reorient around demonstrating attractive unit economics because those are table stakes to get funded in this environment.

The glass half-full is that plenty of deals are still being done. Startups with strong founders, traction, and good unit economics are still able to get funding, including the one that we just closed on at Seaplane this weekend. Also, less capital injected into startups means less competition for customers and talent for those who are able to get funded.

What I'm hearing is that investors at the Series A are tolerating lower revenue growth rates given the cooling off of the tech sector. That said, Series A investors still want to see year-on-year revenue growth at 100% or more in addition to the strong founders, traction, and good unit economics already mentioned.

Something else notable is a comment from the CEO of AngelList, Avlok Kohli, who had an excellent conversation with Harry Stebbings on Harry's 20VC podcast. Avlok noted that the trend of multi-stage firms moving earlier in the startup funding lifecycle is still ongoing but that the proportion of round without a lead (party rounds) is roughly the same. I actually take that as promising as it means the market structure at seed hasn't gone sideways even if the pace of investment has slowed.

Fresh Data on Ad Prices

Alphabet, Meta, and Amazon all reported last week to mixed results. I'm going to ignore the market's reaction to the numbers and instead focus on the fundamentals as they impact founders.

Alphabet's Google advertising revenue grew ≈3% year-on-year in constant currency terms while Meta's ad revenue (Facebook + Instagram) had constant currency growth of ≈6%. Neither of those marks were impressive considering US ecommerce grew 13% year-on-year according to MasterCard in March. I think the soft ad revenue growth at Google and Meta says more about flagging efficacy for digital ads on their platforms than it does about the overall health of ecommerce. That said, the confluence of softer ad prices and a firming ecommerce market could make for an attractive time to boost online ad spending, particularly for those with attractive unit economics.

An ongoing trend at Meta is that impressions across the family of apps were up 26% year-on-year and the average price per ad decreased by 17% year-on-year. What's driving the gap is that stories ads currently have lower pricing than the existing ad frameworks -- now might be a good time to capitalize on stories ads being cheap as that pricing gap will will close over time as advertisers iron out how to best navigate the format -- while stories and Reels take off. Instagram saw a 24% increase in overall time on the app since Reels launched.

All that looks pretty weak sauce compared to growth at the advertising business at Amazon during the quarter, though, which grew 23% year-on-year in constant currency terms. Seller unit volumes were up ≈16% year-on-year, which Amazon doesn't break out, but I was able to back into. I figure that Amazon's ad revenue per unit increased by ≈6% year-on-year in constant currency terms, seriously bucking the trend of that 17% drop over at Meta.

Amazon's ad business has a lot of headroom for growth even though it clocked in at $9.5B in revenue during the quarter. Consider that Amazon has self-reinforcing scale advantages, has eclipsed Netflix in market share, and has more than half of US ecommerce sales by some estimates but that Meta and Alphabet did $28.1B and $54.6B in advertising revenue during the latest quarter. All that's to say, we think advertising on Amazon today is probably among the better returns merchants will find in this market and that ad prices on Amazon are likely to go up by a great deal over time.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by Seaplane Ventures. Joe Magyer and his family own shares of Amazon, Alphabet, Netflix, and Meta. An offering to invest in the Seaplane Venture Fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.


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