Post Seed Startup Financing = Chaos
Q: what happens to all these entrepreneurs after Demo Day ?
Full of opportunity, but chaos nonetheless.
In the days of old, people with cred or tech would raise some seed funding, get a team together and do some product development, then promptly proceed to raise a $4–8 Series A from a couple of reputable venture firms for a measly 40% of their company (who cares about dilution when you’re building a billion dollar business, right ?).
Then, of course, all hell broke lose. Enter YC and the Do More with Less mentality. Lean is In. What can you prove on $500K ? Five years on, we have Techstars, Seedcamp, TheFamily and a plethora of incubators of variable quality. We have Angellist and it’s hyper transparency engine for seed investing and the “Great Unshackling of the Angel Investor”. We have Micros VC’s galore and corporate VC’s back in the game. We’re awash with Demo Days.
In the meantime of course, the top of the VC pyramid is shrinking. FLAG, based on its own research, indicated an estimate of only 100 active full lifecycle venture firms in the US (there are over 800 on the NVCA website). You don’t need to be a genius to build a theme called Series A Crunch (complete with cereal packet).
So here’s what’s happening on the funding side:
- Seed rounds are generally larger and companies are thriftier, so they “do more with less” … with quite a bit more cash.
- Seed rounds are followed by a bunch of hybrid rounds, usually called Seed Extensions
- … combined with a number of alternative methods (a filler round on Angellist, a Kickstarter campaign, or getting a mix of money and investments from strategic investors struck by FOMO)
The old and convenient distinction between Seed and Series A has gone out the window. The current market overhang is partly cyclical, partly structural (we’re breaking new ground with the likes of Angellist) and it’s hard to determine which is which when markets are evolving this fast.
What does it mean for startups ?
Incubator X Demo Day is a glorious celebration, which is as it should be. Everyone is high fiving the great pitches , basking in the glory of their two line coverage on Techcrunch and generally feeling like the world is their oyster. As we all know, all a seed funding or a run inside Techstars can do is give you a shot at getting that MVP out in decent conditions. No more, no less.
The reality is as follows:
- The competition for Series A money is ever more intense, and the bar gets raised all the time. What was acceptable traction two years ago is dwarfed by traction today.
- Entrepreneurs are in a race with 1,000 other entrepreneurs to get far ahead of the pack and demonstrate what they can do.
- Getting Seed does not mean you are on a long-term venture capital track. Have a plan B, C and D. You may not see venture money ever again, so make that seed round count and look for funding alternatives early.
The bar has been raised: better entrepreneurs, businesses that scale faster. It’s a brutal race. With super high capital efficiency, transparent markets, standardized investment terms, the rise of platforms, post seed chaos is the “new normal” in startup life. Better get used to it.
Originally published at freddestin.com.