The VC Landscape has change remarkably since 2009. The traditional VCs have consolidated into fewer, more powerful funds. A whole new breed of seed funds has emerged, building on top of accelerators, super-angels, and crowd-funding. And recently, in view of the Series A Crunch, the seed ecosystem has begun maturing. On of the most exciting developments is the increasing of funding options to entrepreneurs post the seed round.
The Wired article and book aptly describe a journey that is all too familiar to entrepreneurs today seeking seed money. They find that they are constantly fund-raising. The CEO’s job is to fund-raise, not code; they need to grasp this essential truth to the role of the leader to successfully navigate the VC waters.
We all still have a mental model of a little fluffy money (friends & family, seed) followed by the $5m A Round, a legacy of the 1990s.
The $5m A was required to fit the funding needs back then – it just took that much money to buy servers, build down into the stack, hire bag-carrying sales dudes, and all the other requirements for a proto-dot-com.
Beginning around 2005, the widespread adoption of open source got us past the requirement to pay for expensive databases and other core software; and by around 2010 the ability to rent the servers from Amazon radically reduced the cost of launching a software company – by an astounding 2 orders of magnitude. This created the Era of Cheap. Accelerators, seed funds and super-angels emerged at scale. They needed an instrument that would lower the legal cost and complexity by the same two orders of magnitude
It is not widely recognized that the financial community is every bit as creative as the tech community in coming up with new financial instruments to match and drive the needs of an era of finance. The characters behind these are every bit as fascinating as the instruments themselves. John Mitchell invented the Moral Obligation Bond that led Mayor John Lindsay to bankrupt NYC. Mitchell later served time for Watergate. Michael Milken recognized that Junk Bonds were mispriced, and his firm later created the Highly Confident Letter to fund huge takeovers with junk bonds. Milken later went to jail, but has emerged a tremendous figure and leader for improving LA. And we all just experienced the CDO - collateralized debt obligation - the packaging of subprime mortgages that drove the 2007 housing bubble. Not sure anyone has gone to jail for those things yet!
Whether they turn out for the best or not, these instruments drive the booms and busts of finance. What needed to be invented this time around is the capped convert note.
Paul Graham of YC is the great innovator of this era. Besides redefining an incubator into an accelerator model, he invented the capped convert note. It spread like wildfire. It caused huge confusion at first among the legal community, and I saw a lot of A rounds improperly convert the capped converts. But it fit the Era of Cheap, made it simple and fast to get angel investors, and fit the agility/flexibility of the lean startup to pivot without the handcuffs of a round. Like all good things, it came with a downside – the ease to raise turned seed from an one-time event to a series of events, a continuous process of fund-raising
Seed is now thought of by people within it as having three distinct phases: the pre-seed fluffy money, the institutional seed round, and then the post-seed option before seeking an A. At the same time as seed became popular (vs going fast to an A), the A round moved to later and larger. This was driven by the VC funds consolidating into fewer and larger funds who had to deploy more money per deal. Today the better goal is not the old $5m A but a $10m+ “Super Sized” A, the Big Mac of A’s.
We have all heard of the Series A Crunch. Bullpen first prepared this analysis two years ago, and then tracked how well the prediction worked. The key is to shift the seed round one year out – when they seek VC funding. Then the gap is dramatic, as shown. Half the seedlings at risk …
Not all should get funding, and many get acqui-hired, but this is a larger drop-off (50%) than A to B or B to C.
The post seed round emerged by Bullpen and a few other pioneers to fill the need.
The more recent data shows a peak in seed and a steady increase in A – largely due to putting the post seed a small A round. The crunch is abating.
We see a clear shift to larger seed rounds. The median seed round (for all three stages combined) was $800k three years ago, $1m the last two years, and is now $1.2 to 1.5m
Partly what is driving this is the rapid increase of post-seed fundings, which tend to be $2m+ following the $1m seed round
These are sometimes called “small A rounds” – and the data gets blurred between seed or A.
What to do? The bridge to an A is almost always a mistake and we avoid those like the plague. Trying seed to A depends on where you are – and you will suffer excess dilution for the privilege. We see a category where post seed is perfect – confident CEOs, beginning to hit their stride, needing help building a sustainable business
Duncan davidson vator - post seed (bullpen presentation)
The Hero’s Journey
Seed is a process,
not an event
The CEO’s job
Era of Cheap
R a ising $500k no t $5m need $5k leg a l no t $50k
source: Mark Suster, Upfront Capital
Cost of a Startup
Ever y Boom Comes With a New
Financial Flim-Flam Invention
Moral Obligation Bond
High P/E Conglomerates
Highly Confident Letter
Broke ‘Em Up
“Barbarians at the Gates”
AOL buys Time-Warner!?
Seed as a process!
Seed Needed a New Instrument:
The Capped Convert
Simple, cheap, fast
Can be stacked – higher caps in later notes
Does not re-price employee options
Socializes the downside
Privatizes the upside
Its simplicity enabled seed as a continuous process
Seed is Now a Complex Process
< $250k < $2m < $5m > $10mCumulative:
Easy Seed Series A Crunch
Source: CBinsight as reported by Dan Primack
2009 2010 2011 2012 2013
Seed Seeking Funding
Series A Rounds
Seed Shifted Forward A Year ..
When They Seek Funding
Post-Seed Funding is Increasing
O v er half of seed d o lla r s no w flo w t o “ p o st -seed ”
Post Seed Options
① Not ready for A?
② Need to De-Risk?
③ Confident of
① Bridge to A
– bridges turn into ‘piers”
– halfway there you fall in!
② Go right to A
– Dilution vs. De-risk
– Star founders do this
③ Post-Seed first
– Less dilution, more control
– Build a sustainable model
– Super-Sized A next!
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