Building the Best Seed VC Syndicate in 2020: Navigating “Leaders” & “Fillers”

Topics: Fundraising

In previous blog posts I’ve written about the two main approaches to building a seed round syndicate – the subscription method (where an entrepreneur presets a structure with a convertible note or SAFE and recruits investors who subscribe to the round, all without a term-driving lead investor) and a term-driving lead investor approach.  The former is most common post-accelerators (typically YC), but is much more rare in attracting intuitional seed investors in other contexts (though it can be productive in pre-seed for angels).

Since we started NextView, though, given a number of factors a lot has changed in the past decade for entrepreneurs on how to best put together an institutional seed round with the second approach.  The first reason is that seed round sizes have gotten larger, doubling over the past ten years with the average growing from $1.1 to $2.4M, now the upper bounds of seed round size we’ve seen as large as $5M+!  That trend has been coupled with a proliferation of institutional seed venture capital firms.

Although there is in theory more dollars of capacity in rounds now given that they’re larger, the leading seed VC firms have been raising increasingly larger funds and thus require larger checks to implement their strategy as they drive for specific ownership % targets.  The result is that seed rounds have become more competitive, in particular for the ability of larger firms to lead the round with meaningful $1M+ checks.

Whereas it used to be commonplace for up to 3 or even more firms to fairly evenly split a seed round with all parties being fairly content, now there is a much more interest in taking half or even more of the round by a lead, crowding out the others that would take a parity role.

The result of this context is a strong bifurcation of seed players in the ecosystem: those larger “Leader” seed funds which have a bias or even requirement to lead rounds.  What then remains is the “Fillers” whose explicit desire is NOT to lead rounds, but rather slip into a syndicate once the lead, structure, and terms have all been established.

There is often room for these filler investors even in a competitive round because the other lead firms who vied for but didn’t win the pole position slot often won’t want to participate at a lower dollar level because an investment with this profile doesn’t fit their ownership or board seat model.   But more importantly, very often the filler syndicate partners can bring something very distinct to the table: domain expertise, specific relationships, diverse perspectives, and/or specific value-add services that the lead.

This bifurcation of seed syndicate roles affects how Founders should approach fundraising strategy.  My partner Rob likes to talk about “big rocks first.”  In other words, a seed VC fundraising pipeline should be sorted into two waves, the first of whom are firms who will drive with conviction to lead, and then the second comprised who will fill in capital later.  Sometimes It can be often challenging to discern from a VC firm’s website their approach to leading/not-leading and their actual typical check size.  But a Founder’s best source of fundraising information is peer Founder/CEOs who have recently gone through a similar process.

Once a lead firm has been established, then it becomes a process of assembling puzzle pieces.  There are a broad set of considerations to take into account including check size, involvement post-financing, geography, sector focus, follow-on capital, prestige, fund structure, and of course interpersonal dynamics… all of these I discussed previously in an older post.

The goal here is to be deliberate about who else to include (assuming the Founder has the luxury of multiple options) – each seed syndicate player should bring something strong and very specific to the table.  Especially beyond the lead VC, the syndicate should be a well-rounded composition of firms, not a composition of well-rounded firms.

Fundraising is still challenging for most seed founders… I don’t know why it begins with “fun.”  But the dynamics of today’s seed market require that prior to embarking on a fundraising journey Founders should research & prioritize the first wave of outreach to firms only to those who can get in front of the parade & lead the round.  It goes slowly until it goes fast, as once a lead is in place the rest of the syndicate can be rounded out with additional groups with complementary strengths.