Now is a good time to be a Series A investor.
The emergence of the ‘seed round’ combined with the technological advances that allow companies to get further with fewer dollars have created an embarrassment of riches for venture capitalists that focus on companies at the Series A.
Today raising a little bit of seed capital has evolved into raising a “seed round” and while it’s still not a requirement, it is something that the vast majority of companies that receive venture capital do. That was not always the case. Angels have been around since before the first venture firms, but through much of the history of the venture capital industry, traditional venture capital firms were a large source of seed capital for early stage ventures. Yes, angels participated in many deals and at times provided the earliest seed funding absent an institutional venture firm. But, having seed capital from angels prior to raising a venture round wasn’t a necessity. Now it is.
The emergence of the “seed round” as an investment stage prior to venture capital started with the explosion of capital at the seed stage. Three factors have combined to funnel an abundance of seed stage capital to startups.
First, by any measure, there has been a proliferation of angels. Individual angels have always been a part of the technology startup landscape. Historically they were successful entrepreneurs who were seeding the next generation of technology startups often times in the sectors where they had themselves achieved their success. But, starting with the Internet boom and followed quickly by Google, and then later by Facebook and many companies since, the number of angels looking for startups to support has mushroomed.
The second piece of the puzzle has been funneling this abundance of angel appetite into worthy startups. Angels used to be limited by their personal networks, which made angel investing work best for only the most connected people. But then in 2010, Naval Ravikant and Babak Nivi launched AngelList and overnight every angel could find more than enough deals to fill their dance cards.
The third factor helping to drive this abundance of very early capital has been the institutionalization of seed investing. Venture firms have always made seed stage investments, but the bulk of their precious capital and even more precious time has always been spent on the investments they manage from beginning to exit. The “seed round” becoming the norm rather than the exception has created an opening for a new category of venture fund, the seed stage fund. Until Ron Conway launched Adam Ventures in 1996, there was no such thing as a seed stage fund, just individual angel investors and venture investors. Now there are new seed stage funds being started every day. These seed stage funds provide a vital function for many individual angels by providing much-needed signaling on what deals are worthy of support. This combination creates a virtuous cycle, more seed stage funds, leads to more deals seeded by those funds, which creates more quality deals for individual angels to fund. This proliferation of startups receiving a “seed round” creates an embarrassment of riches for Series A venture investors.
In addition to this rich field of vetted companies to select for investment, Series A investors also have the benefit of companies being further along at the time of their Series A.
In my prior life as an entrepreneur, I started three different companies. By the time I got to my third one in 1997, an enterprise software company that I started with a partner, we used seed capital (much of it ours) to build the business plan and then used our Series A investment, from two top-tier venture firms, to get our first product out the door and our first customers signed. We had 6 customers and were out talking to investors about raising a Series B in mid-1999 when we were given an offer we couldn’t refuse to sell the company.
Contrast that with startups today. Most of the startups we’re backing today have raised a “seed round” of $500k - $1m and with that are able to ship a product and get paying customers. It took us over $4m in 1998 to do less than what many companies can do today with only $500k.
Now back to that embarrassment of riches. While “seed round” deals are especially difficult to track, one of the best sources of data, CB Insights, shows a continuously widening gap between the number of companies receiving “seed rounds” and the number of companies receiving Series A rounds.
Truly great teams can achieve meaningful traction with small amounts of capital. When you combine that with the explosion of seed stage funding that is giving so many teams a shot, it’s like throwing a bunch of spaghetti against the wall to see what sticks. And there is a lot that is sticking!
It’s a good time to be Series A venture investor.