The last few weeks, the same question has surfaced: “What on earth is happening in the seed market?”
My answer: “Everyone is on the hunt for the next DocuSign. And it’s a bloodbath.”
Let’s wind the clock back over two years. In the summer of 2018, I sat down with Harry Stebbings for our third interview. It’s worth a listen – we discussed why, back in 2018, many of the most-talented founders began voting with their feet and selecting to partner with multi-stage VC firms, bypassing the traditional seed market. Invariably when this happens, many industry observers would quickly point out it’s cyclical, that larger firms wade into seed territory when it’s vogue, and then retreat when they realize they have too many companies, are conflicted out of others, or that it takes too much time, etc.
What started in 2018, however, wasn’t cyclical. It’s just been the start of a new cycle. And in 2020, it’s shifted into a new gear where the seed market is in a frenzy like I’ve never seen before. There are angels, operator-angels, new funds, incumbent funds, folks with SPVs, scouts, and much more. What’s driving this behavior: Finding the next DocuSign.
I remember when DocuSign was worth a few hundred million in valuation. “It’s just a feature. Google will copy it.” Then, Mary Meeker invested, and more people noticed. But folks didn’t think it would be a billion dollar company. Then it changed CEOs. Then it began a march to IPO. “Yeah, but someone will just buy it. It’s still a feature.” Then it became a real IPO, and then eventually a $10 billion dollar company. That’s all before the pandemic and lockdown of 2020, where thousands of small to medium businesses who resisted electronic signatures had no choice but to open their wallet and pony up for DocuSign, sending the stock soaring over a $40B valuation.
Perhaps by 2040, it would seem logical, DocuSign could’ve grown to this level — but 2020 pulled forward two decades of digital adoption into two months. All of a sudden, the lock-in properties and predictive economics of software businesses became even more attractive; financial stimulus from the government helped save the economy from free fall, while zero interest rate policies provided a cushion for investors to keep on taking risks.
As a result, every technology startup investment firm, from $10M funds to $10B funds, was on the hunt for their own DocuSign. As founders in 2020 spun up new businesses, the venture capital industry was flush with dry powder to invest. And because companies that achieved product-market fit with real data became too expensive, firms which traditionally invested behind momentum had to shift their behavior to grab more exposure to the earlier stage. How else would a large fund get the ownership they need to make the model work? If you don’t invest in the seed or pre-empt the A, the opportunity cost for larger funds of not having enough exposure to new startups (especially in certain hot categories, like fintech or infrastructure) became so high, it was worth it to spend more money seeding companies and absorbing the costs than to miss out on the next Plaid, Robinhood, Chime, Snowflake, Okta, or Datadog.
I expect the early-stage seed market to be like this moving forward. It’s been this way since 2018, and this year super-charged it. Most of the top funds are taking on this strategy. Missing out on the seed or the Series A of a company effectively blocks any other investor from coming onto the cap table. It’s a fight for limited real estate, and the result is more noise, high prices, bigger rounds, and more shots on goals. It’s a bloodbath to find that next DocuSign — that company that isn’t hot, looks like a feature, is slowly built over the next decade and then turns into a monster — and the prize is worth the fight.