The 2018 Seed Stage Reset
This post is about the Bay Area startup and venture ecosystem. I believe the local ecosystem just completed an entire “reset” with respect to the earliest stages of company formation. (I need to state upfront that this isn’t about the seed landscape nationwide — I’ll address that in a different post this year.)
When I began investing nearly five years ago in 2013, there were clear delineations between investment rounds — a founding team would raise from friends and family (and eventually, through scouts and Syndicates), progress to seed funds (established ones institutionalizing while new ones sprouted up), and then reach the promised land of the institutional Series A round, typically led by an established VC firm with a history of joining boards, maintaining ownership, and needing to drive large outcomes over many years to make their fund vehicles profitable. There was little cross-stage investing and many folks became cognizant of potential signaling risks when taking money from firms who would make an offer outside their known sweet spot.
Now with 2018 under full swing, those once-clear delineations are at best muddled. Nearly every VC, seed fund, and angel investor in the Bay Area is investing earlier and earlier to the point where “pre-seed” as an investment category has been normalized in our lexicon. With the exception of a few of the most focused funds — think: Benchmark focusing on Series A and Bs, or firms like IVP or Meritech which focus on post-traction growth rounds) — the Bay Area is now in a free-for-all, no-rules-barred competition to identify and partner with entrepreneurial talent before traction, before product-market fit, and before a team can demonstrate the evidentiary proof once required to initiate multi-million dollar wires.
VC heavyweights agree. A few weeks ago, USV’s Fred Wilson wrote in “The Early Stage Slump” that for VCs, “it means seed rounds are going to be the place to be.” Earlier this week, Sequoia Capital formally announced a new $180M seed fund (note: USV’s fund size is $175M), citing its long, storied history of investing very early in a laundry list of the Internet’s seminal companies, often right at what would be considered the seed round and “first money in.”
When the leadership of firms like USV and Sequoia publicly state that seed rounds are important to them, we have to step back and parse what it means. Let’s also not forget Sequoia’s pioneering work at creating deal funnels with their scout program and also by helping Y Combinator get off the ground. A few years ago now, a16z recruited Chris Dixon and Khosla Ventures recruited Keith Rabois, notable hires as both Dixon and Rabois were highly-visible, proven angel and seed investors. Since then, both have gone on to continue to make incredible seed investments with their new VC checkbooks (while also investing in more traditional VC style rounds).
During these past five years as I’ve tried to learn to become an investor, we’ve witnessed unprecedented, orthogonal changes to the ecosystem: AngelList Syndicates are now mostly private and increasingly responsible for early-stage financings; “pre-seed” funds market themselves as “first check in” and “pre-product” backed by institutional capital; the more established seed funds which began in the previous decade have “bulked up” to become nearly the size of USV, or even larger; the established VC funds have launched discovery funds keep their pulse on the early-stage market; hundreds of new investment firms across the spectrum (seed to growth) have sprouted, seemingly out of nowhere, eager to find the next Uber; and mega-VC funds like Softbank’s $100B Vision Fund and Mubadala, a $50B+ sovereign wealth fund headquartered in Abu Dhabi, which has opened a new office in San Francisco.
And, there you have it… an entire new seed ecosystem and “seed stage reset” in the Bay Area. As I tweeted out a few months ago, nearly every seed fund and larger VC may end colliding around a $3M round at $12-15M post-money. Call them mango seeds or call them small Series As. Whatever label you choose, it is clear professional investors are trying to invest much earlier than they have before. Founders now in the Bay Area (theoretically) have more capital sources to pitch to, but will also have to be able to decipher “option” seed checks versus concentrated seed checks from large VCs; traditional seed funds and micro funds will face a new type of competition; larger VC firms will need to manage more investments across their GP ranks, which may force them to hire more or stress-test bandwidth, a small price to pay for the luxury of turning over more cards; and larger VC funds will be able to see talented teams earlier, track them, get to know them, and see more evidence before committing more money to a particular company — this is of critical importance right now in the Bay Area given the local cost inflation and how much of VC $ are plunked right into high-priced office rents and salaries, which largely go into sky high residential rents.
A lot of good money was followed by bad money in recent years, especially in 2014-15. The Bay Area is trying to learn from that and reset the system, which effectively starts now at seed — or the small Series A, or whatever term you’d like to use. There’s no more signaling risk. There’s no more stage focus. There’s no more stigma around party rounds with VCs or taking money from a successful crypto project that ICO’d. The old rules of seed are now history and will eventually be rewritten. Buckle up and enjoy the ride!