Fundraising · Venture capital

How has seed become the new series A?

Nate Holbrook Founder / CEO at Lilac

July 8th, 2015

The phrase “seed in the new A” has been rolling around the startup scene for a while now. There are multiple opinions about the cause of this prolonged seed stage, but most include the idea that founders can now get further with less cash, seed rounds are getting bigger, and series As have also gotten bigger. What other factors have contributed to the seed-is-the-new-A concept?

Nicole PhD Author at Myth of Stability: Why safety is like a donut

July 8th, 2015

Fund size is a big factor of the evolution of equity investment and a pressure leading to the shift from A round to Seed round. Historically, a large fund invested in a few companies after the companies overcame most of their startup hurdles. Stereotypically a $200M+ Fund had 3-10 companies in a portfolio over ten years. Imagine you have 3 high-school aged children to take care of. That's not so hard. More people are getting into the VC investing game. It's easier to raise $20M than $200M. Smaller funds cannot afford to invest in later stage companies that have de-risked. They have to invest early, when equity is cheap. However, there is much more risk in early stage (seed stage) investing. So, they have to invest in 10-100 companies per fund to balance risk. Imagine you have 100 toddlers to take care of. Impossible to do on your own. What happens with smaller funds is that they tend to invest in a lot of small seed deals, then they get out of the way. This leaves room for a second seed round and sometimes a third seed round before the company is ready for an A round. The investors invest small cash and little time. There is more risk, but by investing small amounts and "doubling down" in later (seed or A) rounds on companies that are doing well, the risk is somewhat hedged.

Peter Stone Attorney at Hopkins & Carley

July 8th, 2015

Some great points being made here. I’m seeing a lot of seed stage companies really struggling to get attention from either the established/sophisticated angel community or the early stage VC community. In fact, from an entrepreneur point of view, the hurdles with each group aren’t all that different. I think it’s primarily a function of supply and demand. There’s an explosion of startup activity, at least in the Bay Area. The funding available to early stage ventures, while growing, is not growing as fast as the number of startups trying to get funded. Therefore, the investors become more selective. That late stage seed round with the higher end angels ends up feeling a lot like a Series A. Companies have to accomplish more to get on investors’ radar. What do they do? Embrace lean startup. Stretch their cash longer than they thought they'd have to. Redouble efforts with friends and family investors. Work with incubators. Be ready to make a well-considered pivot (see Market Timing point by Edwin). And focus, focus, focus on hitting key proof  points. If you think you’re ready for high end angels, it wouldn’t hurt to target early stage VCs in parallel, since the investment criteria are so similar.

Edwin Miller 4x CEO | Founder/CEO at 9Lenses | Board Member | Author | Angel Investor

July 8th, 2015

I started 9Lenses in 2011.  We leveraged Seed / Angels due to the market timing effect.  If the market is very large and the venture firms know / understand the disruption, A rounds are not difficult.  When the market is a bit more distant and not as well understood (the real buyer, value prop, sales motion, delivery cycle, etc), then yes - Seed / Angel replace the A round. 

Having been hired four times by venture / private equity to turn / grow companies where two or more rounds of capital had been invested, had not found the break out move (even over 14M of NR) it really is about Market Timing.  I have seen really poor teams simply kill it due to being in the right place at the right time.  I have also seen really incredible people fail due to not having / or being willing / to allow the Market Timing effect to work in their favor.

Great question / post!

David Levine Software Development, Marketing & Analytics

July 9th, 2015

I'm a firm believer that the entrepreneur is built to withstand different phases of the the startup lifecycle.  Survival of the fittest, the fittest being the best at making the most of any situation.  Funding timing is definitely a decision by the original team and it tends to hinge on whether an opportunity exists for the company to create their own seed capital, or look for startup cash.  No matter what business someone is participating in, there is always a more custom model that can be offered for a more custom price.  This often suits a small team environment when the early adopters (clients) need more help implementing a new idea and since the team is still shifting with the newly found market demands, they can use the feedback as they build.  This gives a lot more data and opportunity for trial and error as well.  With the higher prices commanded for a custom model, seed funding can wait until a company is making money first and put off funding until Series A.  The seed money at a lesser valuation will still be there.  I think the decision is whether to raise money to "get it built" or "throw fuel on the fire."  Market timing as the few others (Nicole, Neil, Edwin and Peter) that have commented on this post is very important too.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

July 8th, 2015

In some sense, it's just the terms that have changed. Angels are now organized into funds and acting more like VCs. Venture funds have moved up the food chain. At the same time, a first institutional round that might have been Series A Preferred (the so-called A round), is more likely to be in the form of convertible notes, and the second round becomes the A round.

I'm sure that other factors abound, but don't discount the impact of semantics.