It has been a fast ride for Mexico City-based startup Grin Inc., which wants to bring shared electric scooters to market throughout Latin America.

Grin incorporated in April and launched its operations in July while at the Silicon Valley startup boot camp Y Combinator, where investors swooped in to give it a $20 million check. By October, it had raised $25 million more.

The rapid fundraising has been “amazing, as a founder,” says Grin co-founder Sergio Romo, who says the investments valued the company at $182 million. “We knew if we wanted to be competitive in the space and move fast, we needed to raise a big round.”

The investment frenzy that propelled Uber Technologies Inc., WeWork Cos. and other giant startups’ valuations to new heights has trickled down to companies at their infancy. But unlike the dot-com boom, when seemingly any 20-something with an idea was handed a check, investors are concentrating more money into fewer deals, leading to ballooning valuations.

The median size of seed investments—usually the first money invested in a startup—in the first nine months of this year in the U.S. stood at $2 million, nearly four times the $550,000 average in 2013, while the median valuation at the seed stage rose to $7 million from $4.7 million, according to data firm PitchBook. Startups in hot sectors or those run by more experienced entrepreneurs are taking on $30 million or $40 million before they’ve even launched their operations.

Higher stakes

Within the past two months, one autonomous-trucking startup, Kodiak Robotics Inc., announced a $40 million first round of investment, while another, Ike Robotics Inc., is in talks with venture capitalists for an investment of more than $40 million of its own, according to people familiar with the discussions. A financial-tech company called Figure Technologies Inc., founded by Michael Cagney, the former chief executive of online lender Social Finance Inc., raised $50 million in its first announced fundraising.

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At the same time, the number of U.S. startups receiving an initial round of financing fell 40% in the first nine months of this year from the same period in 2015, to 1,594, according to PitchBook, as investors say there are fewer entrepreneurs who have viable ideas.

This price inflation for new startups is raising the stakes for investors, since companies are at their riskiest when the business isn’t proven, or is only an idea.

Michael Seibel, chief executive of Y Combinator, says companies coming out of its incubator typically are valued between $6 million and $12 million. Grin was an extreme case, he says, coming at the height of a broader scooter frenzy among investors. Still, valuations and terms typically get bid up for the hottest 5% to 10% of companies in the incubator’s batches, he says. That can sometimes mean raising too much money, leading to wasteful spending decisions, he says. “Sometimes founders can get carried away when they’re one of the hot companies.”

More investors

The emergence of small venture-capital shops is helping to propel startup valuations. While new entrants in venture capital were once rare, at least 223 U.S. firms have raised their first venture fund since 2012, according to PitchBook, bringing in more than $15 billion in new money.

These early-stage funds are popping up in increasingly esoteric areas. There are cannabis funds, artificial-intelligence funds and at least nine new real-estate-focused venture funds. Athletes like basketball star Kevin Durant and retired baseball great Derek Jeter are investing in early startups; football legend Joe Montana has a fund that invested in Grin.

Cumulative total of new venture-capital funds formed in the U.S. since 2006

Median size of seed funding deals in the U.S.

Median size of seed funding deals in the U.S.

Cumulative total of new venture-capital funds formed in the U.S. since 2006

Median size of seed funding deals in the U.S.

Cumulative total of new venture-capital funds formed in the U.S. since 2006

For those looking for less competition, investors have—not ironically—coined a new term: pre-seed investing. It’s essentially seed funding, in that it’s the first money put into a company by outside investors, but it tends to involve smaller checks and to come even earlier in a company’s life than seed funding traditionally has.

Meanwhile, some venture firms that typically invest at later stages are investing earlier to avoid colliding with

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$92 billion Vision Fund and a number of other record-size growth funds being raised to back companies closer to their initial public offerings of shares.

“These megafunds have an impact that trickles down to the earlier stages,” says Joe Horowitz, managing general partner at Icon Ventures, who says he finds the large checks and increased valuations concerning. Excess money is easily wasted, he says, through advertising or sales staff in an attempt to grow.

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“Some markets can only grow at a certain pace no matter how much money you throw at them,” he says.

Mr. Brown is a Wall Street Journal reporter in San Francisco. Email: eliot.brown@wsj.com.



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