Over the past couple years, there has been an emerging bifurcation in the seed investing market. We’ve noticed this both in the industry broadly, as well as in the companies that we have invested in or seriously considered. Essentially, there are 2 flavors of seed rounds that are emerging (EXCLUDING seed extension rounds, which are a whole other story). We’ve come to describe these as “Genesis Rounds” and “Institutional Seed” rounds. Basically, “Genesis Rounds” look like this:
- <$600K, and sometimes, substantially less
- No team aside from founders
- Mostly angels with occassional participation from small/seed funds
- Usually convertible note
- Runway <12 months
“Institutional seed” rounds on the other hand tend to look like this:
- >$750K. More often these days, there are more like $1.5M or even more
- Post-product, early customer data, somtimes real revenue
- Several employees in addition to founders
- Institutional seed investors or larger VC funds
- Often priced equity, but often convertible note
- Runway >12 months
Sometimes, companies only need to do one of these two rounds. But I’m finding that more often than not, companies need to raise both of these sorts of rounds before being able to raise a “traditional” VC-led series A. What I am finding interesting is watching the way valuations and difficulty of raising has changed for these different flavors of seed rounds.
8+ years ago, the “Institutional Seed” rounds didn’t really exist. There were only a handful of funds doing seeds for a living, and thus, cobbling together enough angels to invest $1.5M in a round was very challenging for most. Most seed rounds tended to look like “genesis rounds”. This market gap, coupled with the capital efficiency of software brought on the rise of seed funds. This led to a period of seed stage exuberance, and that led to higher valuations, larger rounds, etc.
Over time, many seed rounds started to look like “institutional seed” rounds, even for companies that were very very raw and frankly, were not deserving of so much capital at such high prices. But ultimately, this has come to roost over the past several years as the series A Crunch has pummeled a bunch of these companies and their investors. As a result, many seed funds have pulled back, started making later stage investments, and even focusing more on mini-Series A’s with a syndicate of seed funds. What I’m seeing now is that “institutional seed rounds” tend to be bigger, and go into companies with much more meat on the bones. These rounds also tend to get done on pretty high valuations (although lower than in the last couple years).
What this means for entrepreneurs today is that the “genesis rounds” are much harder to raise, especially if you are a relatively unproven founding team. Yet, most companies need “genesis” capital to get off the ground, recruit your first couple team members, and start building something interesting. As a seed investor, I think this actually has led to “genesis rounds” becoming more attractive. Valuations are better, there is less competition, and if you knock it out of the park, the potential for a meaningful valuation step-up at the next round is much higher (which leads to less overall dilution for founders). I would say historically, the risk/reward of genesis rounds were not very good. The risks were not commensurate with the valuation relative to institutional seed rounds. But I think these might be coming closer into line, and I’m personally taking a closer look at more earlier and smaller rounds.
On top of all this is just personal preference, because I think the most rewarding part of VC is being part of the genesis of great companies. That’s why I really try to never “pass” on an investment because it’s “too early”. If it’s too early for a seed fund, then who the heck is it NOT too early for?