The venture capital world has always thrived on contradiction. Investors claim to back visionaries who see what others cannot, yet increasingly they demand hard evidence that a market exists before writing cheques. This tension has never been more acute than at the earliest stages of startup funding, where founders face a dilemma: they need money to prove their concept works, but must prove their concept works to get the money.
In the first quarter of 2025, American pre-seed start-ups raised just 737 million US dollars across 5,119 convertible instruments, down from 923 million US dollars in the previous quarter and lagging behind the same period in 2024.
Europe faces similar headwinds: pre-seed and seed funding is on track for an 18 per cent year-on-year decline in 2025, according to PitchBook’s European venture report. More tellingly, the composition of deals has shifted dramatically. Where the first quarter of 2024 saw nearly 2,900 American rounds above one million US dollars, the first quarter of 2025 managed only 1,700. By year’s end in 2024, some 73 per cent of all pre-priced funding rounds in America came in below the one million US dollars mark—the highest rate in more than three years.
This is not a cyclical downturn. Something more fundamental has changed in how early-stage investors evaluate nascent companies. The ‘spray and pray’ approach that characterised the venture exuberance of 2020-21 has given way to what might be called ‘show before we sow’.
Investors who once bet on charismatic founders and compelling narratives now insist on what one venture capitalist delicately terms ‘proof of hustle’—tangible evidence that someone, somewhere, actually wants what the start-up is building.
The traction trap
Seed rounds, it appears, traditionally the stage where companies demonstrated market validation, have become even more selective. Capital deployed at seed stage in America plummeted 37 per cent year-on-year in the first quarter of 2025, hitting the lowest level since 2019. In Europe, the picture barely looks rosier: whilst tech companies raised over 1.1 billion euros in seed funding during 2024, investors have become markedly more discriminating about who receives it.
Bridge rounds now constitute 46 per cent of all seed financings in America, up from under 30 per cent in 2022—a clear signal that companies are struggling to hit the milestones required to raise proper priced rounds.
What investors want has crystallised into a specific set of expectations that go beyond geography. For pre-seed companies on both continents, the bar now sits at basic user engagement, pilot partnerships, or letters of intent from potential customers. A working minimum viable product is no longer sufficient; there must be evidence that real humans have used it and found value. Oliver Hammond of London’s Fuel Ventures puts it bluntly: “For most pre-seed founders, I would say don’t rely on money to start your company; rely on money to grow your company.” This philosophy echoes across European venture firms, from Paris to Berlin.
At the seed stage, expectations have ratcheted up further still. “With seed funding, I would expect the company to have a live product in market that people are willing to pay for,” Hammond notes. Product-market fit, once a nice-to-have for seed investors, has become mandatory. The average American seed deal now ranges from one million to four million US dollars, whilst European seed rounds typically sit between 500,000 and two million euros—but only for companies already showing genuine traction.
In a nutshell, founders are expected to achieve more with less, yet the tools at their disposal have improved dramatically. No-code platforms and AI-assisted development have compressed the time needed to build a functioning prototype from months to weeks. This technological progress has become a double-edged sword: because building demos is cheaper and faster, investors assume founders should have already built them before asking for money. The efficiency gains have simply raised the baseline.
Continental divides
Regulatory complexity adds another layer to European founders’ challenges. The EU AI Act, which took effect in 2024, imposes strict compliance demands on start-ups developing AI systems, particularly those in high-risk domains such as finance, healthcare and surveillance. For AI start-ups seeking pre-seed capital, this creates what might be called a proof of concept trap—they need funding to build compliant systems, but need compliant systems to justify the funding. American founders, whilst not immune to regulatory scrutiny, face a less prescriptive framework at the earliest stages.
Europe’s ecosystem has nevertheless developed its own peculiarities that occasionally favour founders. The median European pre-seed pre-money valuation reached 4.6 million euros in the first quarter if 2024, up from 2.5 million euros the previous year. Seed valuations similarly increased by 17.6 per cent to 5.7 million euros. Whilst deal volume has declined, those companies that do secure funding are commanding better terms. The same phenomenon has emerged in America, where despite falling deal counts, valuation caps have risen for both SAFEs and convertible notes.
Regional dynamics within Europe matter too. France’s AI ambitions, backed by substantial government support, have created pockets of liquidity for certain types of startups. Germany’s deep tech ecosystem, particularly around Berlin, continues to attract specialised investors such as Lunar Ventures, which raised 50 million specifically for pre-seed DeepTech investments. London remains the continent’s largest hub for pre-seed capital, though competition from secondary cities has intensified.
The great winnowing
This environment has created a stark bifurcation in outcomes regardless of location. Companies that can demonstrate clear traction raise quickly and at favourable terms. Those that cannot struggle to secure meetings, let alone term sheets. The top quartile of start-ups swan through the current market with relative ease; the bottom three-quarters face a brutal slog.
Geography compounds these dynamics in America. California still captures 39 per cent of pre-seed capital, but Southern cities have emerged as surprising hotspots. Between 2023 and the first quarter of 2025, Austin, Dallas, Houston, Washington DC, Atlanta and Miami together claimed 18 per cent of all pre-seed funding. The dispersion reflects both the maturation of regional start-up ecosystems and investors’ search for opportunities where competition is less fierce.
A similar pattern is emerging in Europe, where once-peripheral cities—many in Central and Eastern Europe and the Baltics, such as Riga and Tallinn—now punch above their weight.
The new orthodoxy
The shift has profound implications for entrepreneurship itself. Starting a company now requires more upfront capital from founders themselves—whether personal savings, credit cards, or help from friends and family. The pre-seed round, once the first institutional money a start-up would raise, has become something closer to a second or third round, validating progress already made rather than enabling it.
Some argue this represents a healthy correction. The 2020-21 venture boom funded thousands of companies on both sides of the Atlantic that had no business receiving institutional capital. Too many founders confused a PowerPoint presentation with a viable business. The current environment, harsh though it may seem, at least ensures that money flows to companies with demonstrated demand rather than merely plausible stories.
Yet there is also something troubling about a system that increasingly favours those with resources to self-fund their initial validation. Not every talented founder has access to 100,000 euros to bootstrap their way to proof of concept.
In Europe, where personal wealth is on average lower than in America and equity compensation less common, the higher bar for institutional funding may inadvertently narrow the field of who can participate in the startup game at all. This risks calcifying existing advantages rather than disrupting them.
A handful of European funds explicitly push back against the traction orthodoxy. Concept Ventures, the UK’s largest dedicated pre-seed fund, advertises that it doesn’t need traction to believe—founders need only ‘a concept and the conviction to chase it’. Such contrarian investors represent exceptions that prove the rule, however. The vast majority of capital flows to those who can demonstrate early validation.
The venture industry has long prided itself on backing contrarian bets and non-consensus ideas. But demanding market validation before providing funding to seek market validation hardly seems contrarian. It suggests an industry that has become risk-averse at the very stage where risk-taking matters most. The great irony is that many of today’s most valuable companies—from Airbnb to Stripe, from Revolut to Spotify—might have struggled to demonstrate sufficient ‘proof of hustle’ to satisfy current investor expectations when they were merely ideas.
For now, the new orthodoxy prevails. Founders seeking early-stage funding must show, not tell. The pitch deck remains necessary, but it is no longer sufficient. Investors want to see products being used, customers paying money, or at minimum, evidence of genuine demand beyond the founder’s own conviction. The bar has risen on both continents, and it shows no sign of coming back down.
Whether this represents maturity or myopia will only become clear in retrospect, when we see which generation of startups—those funded lavishly on promise alone, or those required to prove themselves first—ultimately created more value. Until then, founders in San Francisco and Tallinn alike must adapt to a world where demonstration precedes investment, hustle trumps hypothesis, and showing always beats telling.
Photo: Dreamstime.
