3 Early-stage enterprise fundraising trends to watch, according to New York VCs
The enterprise technology landscape is in flux. From ever-changing nomenclature around fundraising stages (pre-seed, mango seed, seed extensions, etc.) and large venture capital funds raising even larger investment vehicles, it can be difficult for founders to parse out a plan of action for raising and pitching to investors.
Last night, more than 100 founders and funders in the New York tech and VC community gathered at Work-Bench to discuss this very topic. In a conversation moderated by Fortune’s Polina Marinova, three investors weighed in on fundraising trends for enterprise technology companies: Crissy Costa, Principal at Primary Venture Partners, Vipin Chamakkala, Principal at Work-Bench, and our own Graham Brown, Partner here at Lerer Hippeau.
Here are our three main takeaways from the discussion.
Market over metrics
Though metrics matter more over time, at the seed stage they’re not always available or even the best indicator of traction for enterprise technology companies. In the very early days, the panelists agreed, customers prove to be a vital resource for going deep with a particular company and understanding the addressable need in the market.
“The number one thing we look for is customers,” said Chamakkala. “It’s where you fit in the problem that you’re solving for and how you can segment it into a variety of different industries.” Understanding that need, he explained, comes from not only reviewing the customer list and pipeline, but also hearing people in the space talk about that problem.
Knowing how to drum up support among potential customers is also a function of understanding the broader market. Early-stage enterprise founders who can get users excited about their product and meet a clear appetite in their sector will have a leg up as they make their pitch to investors.
“When I say market, I think about, ‘Can the founder tell me why now is the best time to invest?’” said Costa. “Not only is the market big enough, but what is happening in this point in time that makes this a unique opportunity?” The more painful the problem, she noted, the quicker the founder should be able to sell into the market and win early customers.
Tying the three pieces together (customers, market, and metrics) is an ability to sell. The necessary skill is important on day one, but it really drives the metrics that matter most as a company matures and seeks later funding rounds.
“In some of the later stage seeds we see we get an early indication of metrics, but it’s not much more than that,” said Brown. “You can get some early ideas around product-market fit, sales velocity, how good the team is at creating urgency around getting customers, and then you can talk to customers and look at the data around engagement.”
There’s a big opportunity to go earlier
It’s hard to ignore SoftBank, but what do megafunds have to do with early-stage startups? Founders and investors see an opening for new types of early-stage rounds that can help prove out metrics necessary for more substantial fundraising efforts later.
Chamakkala noted the increasing use of a round type he calls Seed II — an additional $2.5 to $3 million of funding after a seed round that can provide another 12+ months of runway — as a way to prove out metrics ahead of a larger Series A raise. “It’s a very rich period of time where you have a live product, you have some early traction, and where you can do some go-to-market experimentation,” he said.
But, early-stage investing has also gotten more crowded. “I run into multi-stage firms more at seed than I ever have before,” said Costa. For founders, navigating this trend means more potential partners, but also it calls for an understanding of which firms may or may not lead rounds, or follow on later.
“I think the most attractive opportunity now is to go slightly earlier, because of this multi-stage fund effect where everyone is getting squeezed by someone slightly larger than them,” said Brown. Partnering with a larger fund at the seed, he explained, is not going to net out in the same kind of close relationship because that investment is going to be a smaller piece of the pie.
Early-stage investing will always be a bet on the founder
The panelists agreed that enterprise seed investing is very much a bet on the team. And that, early on in a potential partnership, it’s important to invest in building that relationship.
“It’s spending time and getting different perspectives,” said Brown. A couple rounds of meetings across the firm can lock in and grow that initial feeling of excitement about the idea, especially if the company has a tight turnaround time on closing their round.
Top early-stage founders, Costa pointed out, are deeply keyed into the market but also know what they don’t know and are willing to put in the work to learn. “I don’t expect them to know the answer [for everything], it’s so early,” said Costa. “I really want to hear how they think about things.”
Are you an enterprise technology company looking to raise early-stage funding? Shoot us a note.