Some Points on the Current State of Seed VC Investing

Clay Norris
Nov 5 · 3 min read

Michael Dempsey recently wrote a really interesting piece highlighting some of his views on the current seed VC landscape and outlook. After surveying the environment, his thoughts are charted below:

1) The explosion of seed capital has created larger and larger seed funds that are often generalist in their investment strategy.

2) This new dynamic creates an atmosphere in which these seed funds need to tell founders that it is best for their business to only have them and no other meaningful checks in the round, so they can write $1.5mm+ and get 15-20% ownership.

3) But unless you’re a top tier firm (and there really are only a small handful of top tier firms), your capital could be viewed as a commodity. Thus, it does not make sense for these generalist new era seed funds as they cannot act as strategic capital and thus you are at massive risk of being pushed down in ownership and allocation.

4) Then, in order to make the math work you’re reliant on multiple $1B+ outcomes, despite a large % of VC-backed M&A transactions happening below $300M.

5) So we now have some seed VCs telling investors that they will be able to increase ownership from seed to A/B or at worse do full pro-rata to maintain. The problem is that in reality, pro rata allocations from Series A+ remain increasingly difficult to maintain, as those $1B+ funds, that have infrastructure (and fees) to in theory actually be everything for everyone, need to put more money to work in their rounds. So you don’t get to defend ownership nearly as efficiently as even 5 years ago. And often any pre-empted offer for a pre-series A round could just turn into a pre-empted full series A process.

All of these things boil down to the core truth that most Seed stage firms today have to be small (either ridealong checks or non-hyper competitive leads), early, and/or different enough to be one top-priority thing for a subset of founders.

His thoughts align with mine, and I completely agree. As I have noted in the past, it is increasingly difficult to distinguish yourself from other forms of capital. Especially at the early stages, strategic capital can make or break a business, and generalist funds (especially those with limited human capital) run into bandwidth issues when trying to act as strategics.

The fifth point Michael mentions is interesting an one that I had not thought about until recently. The inflow of seed capital has allowed for more and more early stage deals to close which has allowed for industry reports to suggest that deal counts remain on the rise (a closed round counts even if it is only for $20,000). Many of the seed funds and angel investors writing these checks do not have the means to follow on pro rata, and as these funded companies move downstream they enter into a much smaller funnel with nobody on their cap table able to follow on. Not only can this be construed as a negative signal for Series A investors, but it also forces companies to spend significantly more of their valuable time and resources towards fundraising. Savvy founders should begin to understand this pattern, and moving forward I expect seed companies to try to connect with Series A investors earlier on in their lifecycle so that they can have more touch points and progress to showcase once they are actually ready to raise their Series A.

That being said, despite this expansion at the top, the rest of the funnel has been largely unchanged. Looking ahead, this should allow outsized returns in the growth and later stages as they are now allowed to be much pickier with their bets.

Clay’s Thoughts

Personal thoughts and observations based on the findings and sayings of people smarter than me

Clay Norris

Written by

Middle of three brothers. Investment associate at CFV. I like differentiated ideas supported by numbers.

Clay’s Thoughts

Personal thoughts and observations based on the findings and sayings of people smarter than me

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