The Supersized Series A

Grade Inflation in Venture: Why C is the new A

The last four years have seen some of the greatest disruptions in the forty-year history of venture capital. For founders today, all the new seed funds, super-angels, crowdfunding platforms, and institutional financing buzzwords cause noise and confusion. It helps to understand how the financing market is shifting and evolving rather than being influenced by new terminology. Here’s what’s happening in the early-stage financing market right now:

(1) “Seed” is more of a process than an event — a process of raising money from friends, family, coworkers, super-angels, accelerators, seed funds, etc. Seed financings today often have multiple rounds, many of them capped convertible notes with stepped-up values.

(2) People still tend to assume that “Series A” is when the big venture capital firms come in to invest. With the rise of institutional seed funds and micro-VCs (some of which are not so “micro” and have well over $100m in capital), investments named “seed” rounds are in all functional regards “Series A” rounds with a different name. “Series A” meant the first institutionally-led round after non-institutional money from angels, friends, family, and accelerators. Today, seed funds lead the first institutional round, and have gone to great lengths to avoid calling their rounds “Series A”, instead using “Series Seed” or Series AA” or a dozen other creative monikers, in order to preserve the attractiveness of a later round to the once-standard Series A investors.

(3) So where did the traditional Series A funds go? As a legacy of the dot-com bubble, they got super-sized, and have tended to stay that way. They now have too much capital ($250m+) to invest in the smaller seed rounds which are around $1m in size. Instead, they typically sit back and wait until startups mature, de-risk themselves, and show signs of potential breakout status — which is when they can write a bigger check.

One byproduct of all of this is that the old-school, traditional “$5m Series A” round is fading away. The “seed process” (which is really an A round in multiple steps) is increasingly followed by rounds much larger than $5m — typically $10m-$15m at valuations in the $20m+ range. In some cases, the round size has gone up spectacularly, to $25m or more. Together, these are the Supersized Series A. It’s a cute name, yes, but it accurately reflects the trend. These rounds are more like the traditional Series C rounds with respect to the stage and maturity of a company, despite the moniker “A.” This is why the new Supersized Series A you read about in the press is really the Series C. But don’t be fooled — early-stage founders who are thinking ahead about their business can and should find ways to use this to their advantage.