The Seed Round is Dead

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[Edit: Wow, I totally missed this piece by Jeff Jordan a couple of weeks ago–The Series A Round is the New Series B Round. Different responses to the same underlying phenomenon, but since the title is echoed here–both being cliche references to the “new black” thing–I want to point to it.]

This morning I talked to three experienced early-stage investors I ran into at demo-day and they all said the same thing: the bar for a Series A has been raised substantially. Companies without significant traction–a product in market, real customers paying real money, exponential user growth, something–can’t raise an A. When talking recently about a company I had seeded to a Series A VC the partner said: “We’re only looking at companies that have real revenue; there are a lot to choose from, so we’re being picky.”

“So what?” you say. “That’s as it should be.” Perhaps. But consider this: when I started in this business the Series A was the first money into a company. There was no revenue, there usually wasn’t even a product. When you had revenue you were a Series B company.

This didn’t change overnight. Even last year Series As were being raised for companies that only had a beta. Now, Series A is the new Series B.

So who does Series A now? By process of elimination the seed investors do. There has been a huge increase in the number of Seed-2 deals and seed extensions and bridge rounds, all basically second seed rounds. Companies do these instead of a Series A. And when the original seed investors won’t re-up into the new seed round it’s a red flag, making it very hard to bring new investors into the seed extension.

For entrepreneurs this means you take a lot more dilution. You raise twice as much “seed” money and then raise your A with what used to be Series B traction, but at Series A valuations. Because VCs have backed away from taking risk, valuations have de facto come down drastically even though it doesn’t look like it on paper.

For seed investors this means you need to reserve some money for the Seed-2. At least 1x the original investment. Or you need to have syndicate partners with deep pockets who can fund a bridge. If you don’t, you might be signalling to new investors that the seed extension is not a good bet. That means every dollar you invest in a new company actually requires two dollars. You should manage your cash on hand accordingly.

For the past several years seed investors have been investing enough to get startups to having a beta product being tested by potential customers (plus three months to raise an A.) Now we need to fund these companies to a further place. The Seed Round is now the Series A–Series A money, Series A goals. Accept it, or even your good companies will starve.