Seed Rounds Should Be More Expensive Than They Used To Be
When I first started investing in startups (in 2012-2014ish) seed rounds used to be $500k-$1M at ~$5M pre. Sometimes lower, sometimes higher if it was a YC company or a well known founder.
I can’t remember what Square’s seed round was done at, but I remember it being in the ~$20M range, and everyone thought that was crazy even though Jack had already co-founded Twitter.
Now, most seed deals we see are in the $10M+ range. It’s not uncommon for a round to be $3M on $12M pre, $15M post.
But I think I’m OK with that.
Seed stage companies used to have the following risks:
Founder risk: most founders used to be first-timers, but now we’re seeing a lot more repeat founders (simply because more people have exited startups now), or a lot more “big resume founders” who came out of VC, or who were employee #1 at some success story. These experienced founders have a bit less execution risk, and are easier to back. They’re also better at fundraising, de-risking future funding rounds.
Market Size: The Internet economy is simply bigger now than it was then. Multiple companies are worth $1T+ - the TAM has gotten bigger, so valuations went higher
Business Model Risk: “on-demand marketplaces” or the “Uber of everything” used to be a new business model. SaaS at one point was a new business model, etc. And on top of that, we didn’t know how those models would price. Now we do – and so there isn’t as much “business model” risk as their used to be.
Tech risk: It’s hard to find a lot of companies taking true technology risk these days. Building apps used to be hard. Building cloud-based stuff used to be hard. Now, tech risk isn’t much of a concern. Backing non-technical founders is less of a concern than it used to be (although having in-house dev still matters).
The point is, seed rounds used to be cheaper because: the market was smaller, the founders were less experienced, investors were paying for business model risk, and they were paying for technical risk. Now, we don’t have either of those.
So the fact that valuations are higher than they used to be doesn’t bother me much. So too are the exits.
—
Subscribe to future posts here:
—
This is a personal blog collaboration. All views and opinions expressed are those of the authors, and do not reflect the views or opinions of any organizations the authors may be affiliated with. This website and the information contained herein is not intended to be a source of advice with respect to the material presented, and the information contained in this website does not constitute investment, tax, or legal advice. We make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on this site.