- Seed round funding amounts are becoming larger, approaching numbers once common to later rounds.
- Think carefully about taking as much funding as possible during the seed round, as it might backfire on you during future fund raising.
- Sometimes a huge capital infusion at the seed round is a necessity for survival.
Over the last few years, we’ve watched the seed round become supersized. The round that might have been $1 million a handful of years ago might be $5, $8, or even $10 million in 2022, as we’ve seen over the first quarter here in LA. It’s all a result of more investors jumping into early-stage investing, and they’re coming in with bigger and bigger piles of money. That’s great news for founders, right?
Well, yes and no. While massive seed round funding might make a startup blast off more dramatically than ever, it can also present problems down the road when a founder is trying to raise their Series A funding. It’s hard to prove an upward trajectory when you start sky high. And that’s not the only implication of the new supersized seed round. Here are a few things founders should consider.
More money is shifting to hypothetical potential.
As inflation increases and public markets get shakier, investors with a lot of assets under management are moving somewhat wildly. They want in earlier and earlier, so they can own more equity and take a potentially huge payout somewhere down the line. As a new founder, you may find yourself at a seed round being offered a ton of money and a high valuation.
Typically, at this point you would have a product, and, depending on how advanced your tech is, you would have revenue. But since you’re still working through product-market fit at the early stages, you might not have either of these things nailed down. As a result, an outsized amount of emphasis is placed on you, the founder, who your team is, and why your team has the right expertise. Investors also heavily consider the market size for what you are creating. What’s profound here is that more and more money is shifting to hypothetical potential versus evaluating what you’ve actually created. You have to be prepared for that line of inquisition.
Huge seed amounts can make for a harder growth story.
Here’s something that can be really painful for founders: if you get a ton of money for your seed, but then don’t get the traction that you need to get to your Series A funding, all of a sudden the funding spigot can shut off. You might get a lower valuation, and you might not get the next round of investment that you need. My colleague, Lewis Hower, wrote a great piece on how to think through your startup’s valuation. A down round puts you in a really tough spot. So, think carefully about taking as much as possible during the seed round. You might want to take a more measured and conservative approach to grow your company thoughtfully and sustainably. With each fundraising round, consider thinking about the next one. You want to be able to show that revenue arrow continually going up.
The power is with serial entrepreneurs.
We’ve seen a recent trend of serial entrepreneurs with their reputations already built out coming in and getting a lot of money before they've even nailed down a product. It can be shocking. At the same time, we’re seeing first-time founders with revenue-making products struggle because fundraising is a relationship game. This is another argument to play it somewhat conservative and vet your investors wisely, so you can find the ones that will help carry you to the next round. They can make the best introductions for your business. They can help you get plugged in to customers, advisors, mentors, and the right talent you need. Best of all, they can help you understand the larger fundraising ecosystem and how to position yourself strongly in it.
A massive seed round can make you (if you’re ready for it).
Sometimes a huge capital infusion at the seed round is a necessity for survival. It can be vital if you're in a space where there's a lot of competition, or you're working on a new idea where other people at the pre-seed and seed stages have ideas or products relatively close to yours. When rapid scalability is necessary and you know exactly how to do it, that’s when to pull the trigger. For example, if you need the money to recruit the best engineers, or exponentially grow a sales team, a big seed round can put you ahead of the curve. And that’s what venture capital funding is really for: taking the money, running with it, and beating the market.
Storytelling is even more important.
Culturally some of us are taught to be modest and quiet and let our work speak for itself. But when you're looking to do a seed round, your business might not have accomplished much impact in the market yet. So as soon as you can, consider asking yourself, “How am I telling the story? How am I describing my market positioning? How am I creating myself as a brand?” This can be hard to do when you just want to put your head down and get work done. But in LA, especially, you need to be somewhat flashy and have a brand.
You need a story. I specifically see female founders and female founders of color being hesitant to create a self-branded narrative for themselves at the early stage. But you have to realize that this isn't about you trying to feel like a celebrity — this is for your business. So do whatever feels authentic to you. Reach out to folks and say, “I want to speak on this,” or “I want to be part of this panel,” or offer to co-author content. Do the things that feel natural to you. Find the thing that you're already passionate about and speak to it. Remember, at these early stages the investors are betting on YOU. Show yourself off to the world and you may be surprised that the funding will follow.
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