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The blog post by David Beisel discusses the evolution of the venture market, specifically how the seed round has become the new Series A. Biesel explains that the seed round has been broken down into smaller parts and customized for each company.
The venture market has shifted, with the Seed round becoming the new Series A.
The Seed round has been fragmented into smaller parts tailored to each company's needs.
This trend is driven by increased startup capital efficiency and the post-traction nature of Series A investments.
Entrepreneurs can achieve milestones with less capital but need to raise more capital to meet Series A investor expectations.
Founders are raising incremental stages of seed capital, including pre-seed rounds and second seeds, before reaching Series A.
The atomization of the seed stage offers benefits such as attracting sophisticated investors earlier and minimizing dilution.
It also creates challenges and a more complex path toward Series A funding.
The landscape is shifting, presenting opportunities for founders and investors to navigate these changes effectively.
The venture market has evolved into “seed is the new series A.” However, not only has the Seed round established itself as the first round of institutional capital before product-market fit, but recently, it’s been broken into little atoms, the sizes and shapes of which each look and feel different from the other. In this extended post, I plan to explain why this atomization is happening, share a roadmap for entrepreneurs and VCs to navigate this landscape in flux, and identify where I believe there are currently unique opportunities for founders and other VCs.
The seed round has been fractured into smaller parts and re-assembled in a bespoke fashion for each company, and the cause of this trend sits at the intersection of two seemingly divergent factors:
Increased startup capital efficiency means that founders can achieve early milestones — even important incremental ones — with small amounts of capital. It used to be that each step to increasing a startup’s value was a large one: a series of elephant-sized customer wins, a monumental product shipment, or a substantial new partnership. But now, these value steps have become more graduated: SaaS revenue building over time, progression along an iterative product roadmap, or a string of API integrations. This series of small, successive wins propel a startup continuously forward. Rather than a staircase for building value, the startup milestones have become an escalator.
Series A is nearly all post-traction: Series A financings were more about team, market, and product vision and often came before product-market fit. Since then, an influx of capital dedicated to the seed stage has entered the market from angels, super angels, seed funds, crowdfunding, etc. This situation has increased the number of seed-stage startups in the ecosystem, empowering traditional Series A firms to become more selective and require more proven traction before investing (along with a commensurately higher price for that de-risking). Today, almost all series A companies are post-product-market-fit and post-traction, intending to use that capital to fuel growth.
Here is what happens at the intersection of these two realities: At the same time, entrepreneurs can do more with less capital but are also required to do more to raise it.
This confluence has resulted in entrepreneurs choosing (and sometimes being forced) to raise incremental stages of seed capital to cross the Series A threshold successfully. Raise a pre-seed round, then a second-seed game, and submit an institutional seed round. A seed extension raises a series of incremental notes at higher implied valuations or entirely follows another path.
The result is that founders should potentially think of “seed” not as one round but as a stage that can encompass a couple of financings. Specifically, what we’ve seen emerge beyond the classic seed round are both "pre-seeds" at the earliest in a company’s life and “second seeds” after an initial seed round has already been raised.
For founders, raising a pre-seed round can attract more sophisticated investors earlier in the company, minimize the net dilution vis-à-vis raising a large seed round immediately, and set the stage for a successive larger round of financing if things begin to work quickly. On the other end of the spectrum are seed extensions, post-seed, the second seed, or the recently dubbed runway seeds.
The best entrepreneurs have observed the same phenomenon, of course, and they realize that the best time to raise large amounts of capital isn’t when it’s expensive but rather when it’s cheap, and vice versa. Simple economic math says entrepreneurs should raise big rounds of money when capital is plentiful and inexpensive and instead raise milestone-driven money when fortune comes with higher costs.
Whether in conjunction with early pre-seed or later second-seed round financing, the atomization of seed round capital means the previous stigma surrounding another seed round financing is significantly diminished or even gone. The real questions for startups remain the same: how much money should the company raise now to prove additional value-inflexion milestones (regardless of the label)?
In many cases, the atomization of the seed stage landscape has muddied the path toward Series A for startups. However, it has also created a situation where the excesses of overcapitalization seen in the later stages aren’t nearly as prevalent. Atomization means that incremental capital with incremental milestones further aligns entrepreneurs and investors to concentrate on the critical items that need to be accomplished, without putting significant time and money at risk. The landscape is undoubtedly shifting, but those changes create opportunities for everyone to pay attention.