A few weeks ago, Manu Kumar wrote an excellent post detailing the current state of the seed financing landscape. Read it – it’s excellent.
I agree with most of the things that Manu wrote, and I’ve been thinking about the topic quite a bit over the last several days. One very common meme these days is that “seed is the new A.” I kind of agree, but I also kind of think that the whole phrase is confusing people.
The cliff notes behind the idea is that what used to be considered a series A is now actually a seed round because…
- Capital efficiency allows founders to get further with less
- Institutional seed rounds are getting bigger
- Some seed funds are investing later
- Some funds (and angels) are explicitly trying to invest before seed rounds, which suggests there is a stage before seed
- Series As have gotten bigger on average and very divergent overall
1. The categories (pre-seed, seed, A) are pretty meaningless.
All this talk about nomenclature is pretty meaningless and confusing. I think it’s much better to think of things in terms of company milestones, which are:
Inception –> Early Product-Market Fit –> Strong PMF –> Scaling Growth
Almost all VCs actually invest across this spectrum. As a founder, I think it’s easier to talk to potential investors about where they invest across the lifecycle of a company (whether it’s truly early-stage/early lifecycle, for instance), versus round stages like seed, series A, etc.
I think it’s also very instructive to know how often the investor leads early rounds and how large those rounds typically are. FWIW, at NextView, we invest from inception to strong PMF. Over a third of our investments happen pre-product (so by definition, before PMF), and two-thirds are pre-revenue. We’ve led rounds that are hundreds of thousands of dollars to rounds that are $3M in size.
Does that mean we are invest “pre-seed”? Yes.
Does this mean we are an “institutional seed fund”? Yes.
2. The Series A bar is high.
Lifecycle VC funds (the ones that lead series As and Bs and invest along the life of a company) have been investing later. There are still exceptions to this, but I find that most funds get a lot more excited about companies that are in the growth phase versus the early or strong PMF stage.
I also think that there is a bit of a spectrum too. Very experienced founders and founders working on really audacious companies can get funded earlier. Solid founders or those working on less obviously audacious companies get funded later. For a SaaS software company, you better have several hundred thousand in MRR and 9 months or more of good cohort data to get a great round done. For a marketplace or ecommerce business, you need to be doing well north of $5M in annual revenue or GMV to get an A round done. For consumer social, you need amazing virality, engagement, and hundreds of thousands of DAUs.
For all of these, the metrics and growth need to be the result of legitimate PMF and execution, not tricks.
(If I’ve gotten these milestones wrong, it’s because they are too low, not too high.)
Rounds do happen earlier than this, but it’s usually because of excellent team building, telling a really compelling story about your company and/or the market to investors, and building a relationship of trust with a few investors really well-suited for your company.
Oh, and remember that some of the companies that end up being the most exciting aren’t necessarily that obviously audacious from the start. Fitbit is a good example — I highly doubt that the majority of VCs they spoke to for the series A thought, “Yes, this is obviously a moonshot. Where do I send the check?”
For founders, you have to know that this is what you are up against. So build something great. If you aren’t on a path towards something like this, you may have a business that is off to a solid start but isn’t quite ready for lifecycle investors at this point. Maybe that’s okay, and it’s just a matter of time and persistence. But maybe you should think about doing something radically different to change the trajectory of your company.
3. Getting to Series A is a varied path.
If seed is the new series A, then series A is kind of like the new series B. Series Bs used to be called the “sucker round.” They were also wildly varied in nature. I think this is true for series As today.
The textbook path for series A companies looked something like:
Inception — (6 months of hard work) –> early PMF and seed funding — (12 months of hard work) –> Series A
But today, I think there are many more paths to series A rounds. Some still happen fast. But some take a windy road. Getting to strong PMF and into scaling growth is tough, and so sometimes, it just takes time. Or maybe your market hasn’t quite developed as quickly as you’d hoped. Or maybe you are just a bit off on your product, or else you needed more experimentation to get to the right strategy for distribution.
I’d encourage founders not to be too discouraged by this but also to be really smart about how they use their capital at this stage. You may actually need to raise a few financing rounds just to get to a series A, so think about the syndicate you are constructing (will they be loyal to you?), think about terms (you may get more dilution later, but you don’t want to create valuation overhang either), and think about your pace of capital deployment (slow until you have strong PMF).
4. We’re not at normal yet.
I neither think that we are in a complete bubble nor do I think we are in a steady state I think things are still in flux.
Over time, the frenzy around momentum and growth stage financing will calm down. The exits won’t be there, and a lot of investors will be embarrassed. A lot of founders will regret taking way too much capital way ahead of what was right for their company. You’ll see lifecycle investors peeking earlier again and more realizations that being truth seekers and investing earlier may be a better way for them to get great returns. I’m already noticing very smart investors doing this — I think Sequoia has been doing this all along.
Ultimately, seed investors will continue to evolve and converge upon models that make sense for them.
A lot of investors have started seed funds because it’s a bit easier to do (requires less capital) and is kind of cool to do right now. But some are doing it as a means to just get into business then raise as much as possible. Some investors will actually be really good at the seed stage and can help founders in the pre-PMF stage — we are obsessed with trying to be one of them. But some will realize that they are just better at post-PMF investing, despite still wanting to stay small.
Bottom line: I think we’ll continue to have a number of strategies within seed investing, but firms will have more of a true-north and be more clear about what is and isn’t a great fit for them. This is only a good thing for founders and for innovation as a whole.