I was at a panel earlier this week, when a question was asked from the audience. “Are we in a seed bubble?”
Well, between the rise of super angels, the proliferation in micro-cap funds, and a shift in some LP interest towards the seed stage or emerging managers with small funds, it does not take a lot before we see significant changes in the available capital for seed. Combine that with how capital efficient companies are, and you get seed stage activity at a level that did not exist before. Admittedly, the fact that these companies can achieve material traction with much less money is a driver for the phenomenon. But divide more dollars in the asset class by fewer dollars required per company and the output is many more companies.
What happens to those seed companies? Typically, if a company does a good job executing on their seed round, by being capital efficient, they can quickly raise a Series A round of capital. Some don’t need it, but generally in an era of easy “me-too”, expanding to all markets in parallel or staffing up quickly to feature differentiate usually necessitates venture capital. The problem is that the venture industry at a macro level is in a not so healthy state. LPs are having their own macro difficulties, and investments in the asset class are coming down materially. Many funds from the prior climate are actively reducing fund sizes, by choice or otherwise. And we in venture believe this actually is a good trend (at least those of us performing!).
What does this all mean? Combine the increasing number of seed companies with decreasing venture capital dollars, and you potentially have a tough situation. Not every seed company that does “well” will have the opportunity to be fully capitalized. There are only so many times a seed investor can tell a VC “no, no, THIS is really a hot deal”. And so the bar will go up dramatically. This is a good thing in that much better companies will get funded beyond the seed. And in many respects the bar for a Series A deal these days will start to resemble a Series B deal. But it also means lots of failure.
For entrepreneurs, a few things to think about. First, think about the composition of your seed round. Take the time to build the best network around you for information flow. Create a good mix. Make sure you have a strong group that can be your advocate and can give you credible advice about how to navigate the market. Second, work actively with your seed investors to define real value creating metrics and what ‘clears the bar’. It used to be 100K uniques was interesting, then it was 500K, six months from now it might be much higher. Having institutional money as part of that syndicate can be helpful as we are actively in the transaction flow of real companies graduating from the seed to A and beyond. Third, make sure you have the capital to achieve those objectives. Don’t just take $1MM because that’s what is “typical”. Map your capital to milestones in a disciplined manner. This is not for investors, it’s to make sure you can grow your company seamlessly, keeping fundraising tasks to a minimum, and emerge owning a huge chunk of your business!