What’s happening to the ‘seed’ round?

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Essays

Lately, a growing number of people have claimed the current seed round, which I take to be between $600K and $2M, is falling out of favor, and I can’t quite wrap my head around what this means. Last year, all the fervor was about the Series A Crunch, and then Jeff Jordan at Andreessen Horowitz made waves by calling “Series A the new Series B”, which has borne out in my experience, with plenty of companies raising really big, $10M to $12M A rounds. But I’ve also seen a number of the very best venture investors lately making small, sub $3M Series A investments into early-stage businesses that have found some magic, but aren’t quite yet ready to turn on the gas. So what’s going on here?

Is it because seed investors are fatigued at having to bridge to increasingly-hard-to-get A’s? Or is it because Series A rounds themselves are bifurcating into “super small $2M or super huge $10M”? Or is it because of something else?

My guess is that this is on some level semantics, but the semantics matter. By calling a $2M round a “seed round”, you are less likely to set a 409A valuation, the likelihood of a board seat goes down, and in the case of a convertible note, the investors don’t get pro rata rights, so the type of vested interest changes. All of these things benefit the entrepreneur in the short term, and in some cases, but not most, they benefit the entrepreneur in general. And the ability to raise a huge seed round is a result, of course, a result of the incredible proliferation of angel investors and micro VC funds, the increasingly organized startups who create support networks and new labor unions to concentrate talent, resources, and access to ever-improving information about the ecosystem. But what happens next?

Perhaps, for most companies, we will go back to a world where a “seed” round is very early and small (under $750K), and an A round is likewise early, high-risk, and also smaller (back to $2M or 3.5M). And for the high-growth, or extremely hot companies, they will raise very big seed rounds (over $1.5M) so their A rounds will be similarly huge, and more like growth ($7-10M). And if you’re stuck in the middle, there’ll probably be a squeeze.

If I were an entrepreneur, I’m not sure which category I’d rather be in. But it seems like there isn’t going to be much in-between.

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