Why Seed Scaled

I can’t recall who was on the thread, but I can distinctly remember the subject. It was 2005 or 2006 and there was an issue brewing in the emerging market of a new niche of early-stage investing.

The issue?

What do we call this thing?

At the time, the two leading contenders (super angels and micro VCs) rang hollow for the 4 or 5 of us on the thread working to help this model emerge. After a hearty back and forth, we settled on the Seed moniker. In talking to the press, to founders and other VCs, we agreed we’d use Seed as the standard we’d rally around.

But, the branding of Seed and the standardizing of it as a “series” of financing was only one of the many factors that allowed this new form of finance to have an outsized impact on the startup world.

There were many other factors that contributed to Seed scaling from the 4 or 5 of us on that thread nearly 12–13 years ago to the 500+ established seed funds in the market today.

I’m reflecting on this as we find ourselves at the very beginning of a similar swell around the ideas we’ve been advocating with Indie.vc. From the recent Billionaire Bootstrapper profile to the Born Again Bootstrappers, to new funds and programs popping up to support founders on a path to profitability. We’re entering a new phase of this thing, and one I feel can either make or break, the movement.

With that as the backdrop, I wanted to outline a few of the critical components that allowed Seed to Scale and what lessons this movement around Real Businesses can learn from them.

Existing Ecosystem

First, and foremost, Seed slotted into a well established ecosystem. It filled a funding gap that sat between two known players: Angel investors writing $10k to $100k checks and VCs who were used to writing $5M Series A checks. Seed emerged at a time when, as Mike Maples famously said “$500k is the new $5M”. There was already a natural progression from Angels to VCs that Seed was able to enter without ruffling too many feathers.

In fact, in those early days, not only were established VC firms our largest source of deal flow, many became LPs in Seed funds. We offered them an outlet for opportunities that were often “too early” for them. We would write small checks that not only validated the ideas and entrepreneurs as “fundable” but we worked closely with them as board members and mentors to answer the questions follow on capital needed answered. Because of this symbiotic relationship with Sand Hill Road, there became a strong quid pro quo- if we funded something they referred, they were all but guaranteed a first look once that company had hit their next series of fundable milestones.

Indie.vc fills a similar gap that sits squarely between lifestyle businesses and monopolies in the making; yet, the ecosystem around supporting these kinds of companies is not nearly as well established with the venture community at the time Seed emerged. VCs don’t seem to see the same “too early” opportunity in the “too small” opportunities (i.e. not obviously a billion dollar business today). Though it is improving by the day, the funding landscape for these Real Businesses remains a mish-mash of lenders, Angels, and private equity firms with far less overlap in their methods and models for deploying capital and supporting founders than that of the traditional VC community.


In an addition to slotting into an existing ecosystem, early Seed funds had another advantage- we needed each other!

Back then, all of our funds were small enough that we needed to work with each other to fill out a $1M Seed round. So, we shared a lot of deal flow and actively collaborated to bring each other into investments we were leading.

This kind of camaraderie extended well beyond deal flow too. As we each began to see success and attract institutional investors, we freely shared intros to LPs with interest in “emerging managers”. When Josh Kopelman was looking to institutionalize Midas Capital into First Round, we introduced him to one of our favorite LPs. When Josh had to start turning away investors, he started referring LPs to us, helping us land several of our largest investors.

This kind of collaboration created a “rising tide lifts all boats” environment. When one of our Seed investments exited or attracted follow-on capital from Tier One VCs, there were bound to be others that benefited- either directly as co-investors or more broadly as Seed was seen as a new and powerful force in the startup world that VCs, LPs, and the media should be tracking closely. One of us succeeding didn’t require all the others to fail. In fact, quite the opposite was true.

Though improving, we don’t see this kind of collaboration in supporting founders on the path to profitability today. It still feels like we’re wrestling with a scarcity mindset and small silos of activity.

Candidly, we have not been great at this.

That stems largely from just how unproven the model we’re exploring is. That said, we have enough positive data that we’ll be making some public, and not so public, changes to our style of collaborating over the coming months.

Standard Terms

When Seed began to take root ;-), there were two primary investment instruments to fund startups.

The first was to purchase preferred equity. This was the default, as it was the same way VCs funded startups. The different was we were often funding startups with a tenth of the cash a traditional VC would, but we were shouldering the full legal cost of tweaking and tuning each round of financing and often took weeks, and sometimes months, to draft. This led to financing docs that often ate up 10% to 20% of a financing round.

The second instrument was called Convertible Notes, or as we called them at the time, Bridge Loans. These were primarily used to “bridge” already funded companies to their next round of funding their progress was just short of what the next set of investors wanted to see. Though Bridge Notes were simple and cheaper than Preferred Equity docs, they weren’t standardized in any real way.

In 2013, Y Combinator publicly release their SAFE documents. This gave founders a free template for convertible notes that quickly became the standard for non-equity Seed Investments.

The launch of SAFE’s was quickly followed by a standard template for equity investments called Series Seed that were designed in partnership with Fenwick and West and top Seed funds in the Valley.

To be clear, neither of these docs were perfect. Everyone made compromises, but the end goal was much larger than any one firm’s pet preference. That, combined with their public availability and ease of executing, removed a massive barrier for both Seed investors and the founders they funded.

Today’s docs for funding founders to profitability are all over the place. Redemptions, PICs, Revenue Shares, Equity Options or downright predatory terms are the only option we can see. As the category has emerged, there have been attempts to standardize and publish terms. To date, most are still quite bespoke and add to the siloed nature of where we find ourselves.

For our part, we’ve hosted our terms (drafted by top Silicon Valley law firms) on Github from day one in an effort to make them both available and editable for those wanting to invest in a similar style. We don’t know how many people have used our terms for their own investing, but we hear from founders or investors on a near weekly basis using them with a high degree of success.

Standard Performance Metrics

VCs have reported their returns in the same way since the dawn of time and it maps directly to their business model. When a startup they fund closes their next round of funding, they mark up (or down) their investment to the new valuation. These “up (or down) rounds” create an IRR (Internal Rate of Return) for their initial investment.

The larger the up round, the better the IRR. The less time between their initial investment and the up round the better the IRR.

(note- there are other standard measures and acronyms investors use but for our purposes lets keep things simple).

VC returns are driven by exits and IRRs and it creates a standard environment for measuring performance metics. When a Seed investment closes their Series A, that Seed investor gets to “write up” that investment to the new round price (also why there is such strong incentives for VCs to find outside investors to lead and price rounds for their companies vs. leading an inside round themselves). And, with all funds evaluated on the same metrics it creates a strong alignment of interests- everyone wants their IRRs to go up!

But, what happens when a company isn’t planning to raise on the standard (and IRR friendly) 12–18mo cadence?

Or, doesn’t plan to raise again?

There’s no standard way to measure that performance in the world of startups.

We have companies within our Indie.vc portfolio that have grown revenues 10x, 20x, 30x+ since we began working with them. We have companies with millions of cash profits on their balance sheet. These are across stages, sectors, and industries.

Their shared attribute?

Each of them boasts a negative IRR.

This is a solved problem in many corners of Private Equity, but is uncharted territory in the world of early stage startups. There is a solution, but it will take work from all of us to design a set of performance metrics we can all agree, and report, on.

We are still in the earliest days of this movement to support and fund founders on their path to profitability, but many road blocks remain.

There is a “Seed” sized opportunity in front of us.

We have the playbook.

And, we’re excited to work closely with those who share our vision for this movement to help make it a reality.