Mark Suster surprised me last week with this article about the decline of Seed Investing…

Mark Suster, the MD of Upfront Ventures (and blogger at Both Sides, one of my favorite VC blogs) wrote a really interesting article last week about the state of Seed. The title would certain capture anyone’s attention, “Why has seed investing declined? And what does this mean for the future?”

I have to admit, I was pretty shocked when I saw this since lately, all I’ve been hearing about is how Seed rounds are growing in size, more investors are jumping into Seed, and more companies are raising seed rounds than ever before. 

So here I am feeling wonderful about the state of Seed, then Mark comes in and rains on my parade.

“Seed investments are down by any measure (funds, deals, dollars) over the past 3 years in deals < $1 million AND in deals between $1–5 million. What gives?”

(Source – Both Sides)

What!?

Well, it turns out, ever year Mark and another VC from Upfront Ventures, Chang Xu, get together every year and do a deep dive into VC data. This year they uncovered that financing for “Traditional VC” is pretty much flat over the last five years, but the Venture Industry as a whole grew massively mostly thanks to big tech company IPOs.

The trend that jumped out at them the most though is a major decline in seed financing over the last three years. 

So why did this happen? Luckily, Mark spent the rest of the post trying to explain why we’re seeing this decline. I’m no Mark Suster but I’ll do my best to break it down for you in a short, digestible, 3-minute overview:

  • First – how did the Seed Market start? Between 1999 – 2005 the cost of starting a technology startup went down by 90%, from 2005 – 2010 it went down by another 90%. With lower startup costs, VCs were able to invest less money and create the Seed round that we know and love today
  • With the Seed market in full swing, investors started raising their second and third funds and realized a few things about Seed deals, mainly that they wanted a bigger piece of the pie, which means writing bigger checks
  • As the Seed market matured, median deal size went, as we all like to say, “up and to the right” as you can see from this handy chart:
  • You might think this increase in deal size is because valuations went up, but the reality is, it’s really because as Seed funds matured they started to realize more and more the importance in ownership rights when it comes to driving returns
  • Everything was going great until 2015…then things started to change. Here’s another handy chart compliments of Upfront:
  • Mark notes that this decline isn’t due to an overall decline in Venture Capital, late stage deals actually grew by 60% so this really has been a Seed-specific decline 
  • So now let’s cut to the chase…why has Seed declined? Mark says that one of the following factors would need to hold: Series A and B investing would need to be up, Seed deals would need to scale without needing more capital, or Seed deals would need to bypass A and B rounds and go right to a growth round or IPO. None of this has held true.
  • More and more Seed deals now can’t get to A which means Seed Extensions have been growing like crazy:

And when seed deals have no where to go you end up with “seed extensions” where seed funds and angels are buying an extra 6–12 months of runway to try and reach a phase that can attract traditional venture. You can see this trend in the excellent data from Cendana below where the number of seed extension rounds has gone up dramatically in their portfolio and the time from seed to A has extended. This data seems pretty consistent with what we’ve seen across the industry.

(Source – Both Sides)

The good news here is that Seed investing is still going strong, it’s not going away, and Seed stage startups as solidified as a stage that will be here for a long time. We are seeing a bit of a cooling off, and that’s probably okay, so don’t panic, just keep on keeping on. 

If you want to see Mark’s deck that goes through this and a lot more information, you can check it out on Slideshare using this link: download the full deck it is here

HUGE thanks to Mark and Chang for putting all of this together, it was a super interesting read and I hope I’ve done it justice trying to condense it down for my readers.

3 mistakes founders make in Seed pitch decks

While I haven’t seen nearly as many pitch decks as most VCs or Angel Investors, I have seen probably close to 100 by now, and it feels like we made close to 100 ourselves when we were raising our Seed round.

Last week I was talking to a friend who is getting ready to raise his Seed round and he asked me for a list of things he should avoid doing in his deck. After sharing a few things that came to mind he said, “you should share that on your blog!” So I’m doing that right now.

If you’re putting together a Seed deck, here are three simple mistakes to avoid:

  1. Showing a TAM that is unrealistically too large – this is #1 for a reason since it’s something that can make investors think you don’t really understand how big your actual addressable market is. I’ve seen TAM numbers in the 100 billion range, which is crazy. Know that every investor has heard the same pitch of, “our market is X Billion, imagine if we just got 1% of that.” The reality is, you should really be showing TAM, SAM, and SOM to clearly illustrate how big your market is. If you don’t know what SAM and SOM are, read this.
  2. Creating projections that show rapid hockey-stick growth – some people might argue with me on this one but I prefer to see realistic projections if you’re going to have projections in your deck. While it would be great to go from $0 to $100k MRR in your first six months, that’s probably not going to happen. It’s a lot more powerful IMO to show that you know your unit economics but either hold off on projections, or if you do many projections, make them grounded in reality vs. setup just to show an investor how you’re going to be the next unicorn.
  3. Being untruthful about anything – this is a great point that Joe Floyd brought up in my interview with him. If you lie in your pitch deck, sure it could get you another meeting, but once an investor goes into diligence, they’re going to find out that you lied and that’s pretty much going to be the end of that conversation. It’s never a good idea to start any relationship with a lie, so don’t do it with an investor that you want to have on your side through thick and thin.

Interview with Joe Floyd from Emergence Capital

I had the chance to meet Joe for the first time about three years ago after getting an introduction from Kyle Porter, the founder of SalesLoft. I actually hadn’t heard of Emergence Capital before I met Kyle, but after talking with Kyle about his experience with them I realized, this must be one incredible firm.

I met with Joe at a coffee shop on Market Street in San Francisco a few years ago while we were both at SaaStr. It was clear almost immediately that he was incredibly bright, plugged in, and really cared about understanding our business.

Some VCs are checking their phones or rushing through pitches, not Joe, he was listening carefully, clearly interested, and really took the time to do a deep dive into what we were doing. Since meeting Joe I’ve had the chance to meet more of the team at Emergence and I’ve been equally impressed.

So I was incredibly honored when Joe agreed to be on the podcast and in December I went over to the Emergence offices in SF for the interview. You can listen to the interview below, and scroll beyond it if you’d like to read some of the nuggets before diving in. In the interview we talk about common mistakes founders make when pitching VCs, the problem with raising too much money on convertible notes, what to look for in an investor and much more including a fun fact you probably didn’t know about Joe…but you’ll have to wait until the end to learn it!

Nuggets from my interview with Joe:

  • Financing mistakes that Seed stage startups make – raising small rounds on notes each at a little bump up. Better to not stack convertible notes, at some point, just price the round.
  • What should founders look for in a Seed investor? Someone who will help them in the specific stage they’re at, and with solving the problems they aren’t as good at solving.
  • The biggest mistakes startups make when pitching – exaggerating or stretching the truth because in diligence, those investors are going to find out the truth, and breaking trust at the beginning of a relationship never goes well.
  • Seeing a startup have a Seed 2 round, good or bad? Doesn’t bother Joe, in fact, in some ways he sees it as a sign of maturity.
  • A mistake that many first time founders make – putting up a front that everything is going well. Investors see through this and they would actually rather have everyone come to the table to solve the problem then pretend everything is a-okay.

Thanks for reading and listening!

Learn about the latest in sales and SaaS strategies from Joe & the rest of the team behind Salesforce, Box, Yammer, Zoom, and more. You can subscribe to their newsletter here: eepurl.com/c1IPvf

The Series A Bar Is Now Set At $150k MRR for SaaS startups

Last year I wrote an article about how the bar for Seed Rounds had gone up dramatically over the years. Well, not surprisingly Seed wasn’t alone, the bar for A Rounds has also gone up a lot and like the title says, in 2018 the average startup had an ARR of $1.8M going into their A Round according to a new study from Tomasz Tonguz from Redpoint Ventures.

I can still remember back to 2014 when we were first raising from VCs and the generally accepted MRR for an A Round was $50k. I can remember having that ingrained in my head, “we need to get to $50k MRR to raise our A.” 

A couple of years later I can remember talking with an investor who said, “the companies we’re seeing get A Rounds now have an MRR of $80k or higher.” Well, while that sounded like a high number at the time, that number is now almost double, sitting at $150k MRR and growing, fast.

Before you panic, here’s the silver lining.

Almost a quarter of the companies in Tomasz’s study raised their A Round with an ARR of $0. Which goes to show you that while $150k of MRR is likely going to solidify your A Round, there are plenty of companies out there with much lower revenue numbers that are landing A Rounds. 

That being said, it’s clear the bar has gone up quite a bit over the years, and Tomasz shares his thoughts about why this has happened:

There are two reasons for this increase. First, the science of building SaaS companies is better understood today than in 2014. Consequently, more companies are able to reach $1M in ARR than in the past because they can be more efficient with their capital. Second, round sizes at the seed and the A have increased. More money enables startups to achieve greater milestones before raising the next round. Both of these factor work to increase the ARR at Series A.

(Source – tomtunguz.com)

While I do agree a bit with his first point, I also disagree with it. I’m not sure that having the science of SaaS better understood necessarily makes it easier for founders to start and grow SaaS businesses. In some ways I actually think it’s gotten harder because the reason why the science is more well-known is because there are more SaaS companies than ever before so a lot more competition. This, IMO, also makes it a lot harder than in 2014 when you likely had a lot less companies doing what you’re doing and competing for the same contracts.

As for his second point, I agree there – round sizes have gotten a lot bigger and there are a lot more companies raising “Seed Rounds” when they already have $100k in MRR which makes getting to $150k a lot easier than starting at zero.

All this being said, no matter how you slice it, the reality is that Seed Stage founders do need to hit a much higher revenue and growth benchmark today than they did just a few years ago. I don’t see this trend slowing down either so it wouldn’t be ridiculous see the average MRR at the A Round to go above $200k this year.

What does this mean for Seed stage founders?

I go back to Tomasz’s second point – the bar is higher because Seed rounds are getting bigger. This means that raising a $500k or even $1M Seed likely won’t get you where you need to go. Let’s be honest – do you really think you could scale up to $150K MRR off of $1M? Maybe you can but I certainly don’t know how to do that!

This makes me think that if you’re a first time founder raising a Seed round for the first time in 2019, I’d say raise as big of a round as you can. You might have to give away more of the company that you expected, but given how high the bar for an A Round has become, and how likely it is to keep going up, you’re going to need more money to get there, period.

Of course, that’s just my two cents. As I’ve said many times here, I’m not an expert, I’m not a serial Entrepreneur with a bunch of exits under my belt, so what do I know? I want to hear from you, comment and let your voice be heard!

What I’ve learned so far about Angel Investing, and Angel Investors

One of the things I’ve learned pretty quickly since I started Angel Investing about two years ago is that there seem to be two types of Angel Investors.

  1. The “know-it-all” – I’ve found that the most junior Angel Investors tend to fall into this camp. Many have never run a startup themselves but they make $250k+ in a corporate job or had a big win in the past and now consider themselves startup experts. They rarely invest and mostly waste founders time and say incredibly obnoxious things about startups and startup founders. Suffice it to say, this category of Angel Investor makes me sick and the second I find out someone is in this category, I stay away.
  2. The “givers” – the second category of Angel Investor I’ve encountered is those who want to do everything they can to help a startup whether they invest or not. Whether they’re big time millionaires or not, whether they invest in ten startups a year or one, they are deliberate about the meetings they take and they value founders time. Suffice it to say, this is the category of Angel Investor that I try to spend my time with.

So back to the title of this post, as a new Angel Investor I’m not trying to pretend I’m something that I’m not. First, I am not a “serial entrepreneur” and I don’t have any exits, instead I’m a founder and someone who has been in the tech world since the mid-90’s. At my core I’m an Engineer so more than anything I’m really interested in building cool things.

When I started Angel Investing I realized that there weren’t many resources out there for getting started with Angel Investing. I went to a few Angel Investor MeetUps but found that they were full of investors in category #1 listed above. Recently I went to a particularly obnoxious one where they invited a handful of founders to pitch but gave them only two minutes. When I asked why they gave such a short time limit the response I got was, “who wants to hear a founder talk for longer? My attention span is less than two-minutes anyways.” (Ugh, well that was annoying and a waste of everyone’s time)

So as a new Angel Investor I’ve found it harder than I thought to learn the ropes, until I made one breakthrough last year that made a huge difference, I found a mentor. 

Last year I met a very experience Angel Investor in SF and we started meeting for coffee every couple of weeks. He would share with me some of the deals he was looking at, what he thought about them, and more importantly, how he thought about them as investments. What really inspired me about this investor is that whether he invested or not, he did everything he could to help the founders he met with. Oh, and he also showed up 15 minutes early to ever meeting and yes, let founders talk about their business for a lot longer than two minutes.

I asked him if I could join him for some of his pitch meetings so I could hear the kinds of questions he asks, understand why he meets with certain founders, and what he does after the meeting. This has already proven to be one of the most valuable things I have ever done when it comes to learning more about Angel Investing. 

Going into 2019 I’m trying to do more of this – connecting with experienced Angel Investors in category #2 and shadowing them in meetings, learning from how they conduct their investment habits. If there’s a way I can help them in any way, I’d love to do it, but for now I know the best thing I can do is to listen and learn as much as I can.

My biggest takeaway about Angel Investing so far is that unfortunately there are a lot of bad players out there, a lot of people in category #1. I hope that in my own way, over time, I am able to get some of these obnoxious, egotistical Angel Investors to stop wasting founders time and to be more honest with themselves and those around them. While you might think you look impressive, you actually just look like a clueless jerk, and wasting founders time, IMO is one of the worst things you can do and shows how out-of-touch you really are.

I don’t mean for this post to come off as an angry diatribe. At the same time, it has been interesting trying to learn the basics of Angel Investing and meeting so many people that consider themselves experts. Isn’t it okay to not be an expert? Can’t we just focus on why we’re all really doing this? There are easier ways to turn money into more money, I want to invest because I love building things and I really enjoy supporting people building incredible things for the right reasons.

In 2019 you won’t see me at an “Angel Investing MeetUp group” or any upscale private clubs in San Francisco drinking martinis with the “Angel Elite.” I’ll stick to my people, the ones who take the bus around the city, or ride the Ford Go Bikes (my main method of transportation in SF), don’t brag about money/things, and who, like me, love talking about innovation and the incredibly creative people who have dedicated their lives to it.

What do you think? If you’ve read this far I’d love to hear what you have to say. Comment and let your voice be heard!

Less than 20% of Seed-focused funds lead rounds

When it comes to raising a Seed Round, often the hardest investor to get onboard is the lead. Without a lead investor, founders raising their Seed Round will often hear the following from investors, “I’m interested, but I don’t think I could lead, once you have a lead, circle-back.” 

As a founder, it can be exciting to hear so many investors are interested in your startup, but at the end of the day, how interest converts to actual investment is an entirely different story. In many cases, until you have a lead, getting a clear intent and amount from other investors can be tough.

It’s the reality that most founders learn the hard way. Most investors are happy to follow, but far less are ready to lead. Last week NextView Ventures wrote an article on Forbes sharing research that they did on the Seed Stage investing market, they looked at data from over 600 Seed-focused firms and ran the numbers on how many lead rounds. In the end, even a fund specifically focused on Seed Rounds lead less than 20% of the time. 

NextView also put together a pretty interesting chart that they also shared in the Forbes article, it shows the geographic location of active Seed VCs.

location-of-lead-vs-non-lead

For the analysis, we considered a fund an “Active Lead Investor” if they were designated as the Lead Investor in the seed round for at least 2 companies since the beginning of 2017.

Despite this low bar for a lead investor, we found that out of over 600 seed funds on the list, only 102 fit the criteria as a lead. This is obviously a much smaller minority of the seed VC universe, but still is a substantial number of investors.

(Source – Forbes)

No surprises here, the Bay Area sees the most activity when it comes to Seed Stage Funds leading rounds, and let’s be honest, that’s because the sheer number of firms in the Bay Area is the largest. Next up is New York and then LA and Boston, and then a big category that other ancillary markets like Seattle, Portland, Austin, Miami, etc. get lumped into.

Of course, this chart doesn’t mean that if you want to have a Seed-focused firm lead your round you need to be located in the Bay Area…but there’s a better chance the firm you find will be. 

So what does this mean for founders of a Seed Stage startup?

I think there are three key lessons to be learned here, or at least datapoints that I think are interesting to digest.

  1. You’ll really need to do your homework if/when you’re looking for a lead investor. Talking to a Seed-focused VC firm that rarely leads might not be your best pick if you’re looking for a lead yourself. 
  2. If you’re not in the Bay Area or New York, plan on flying there to meet with investors, the firms who could lead your round are there.
  3. When you’re meeting with a Seed-focused fund, don’t be afraid to ask them if they lead (i.e. don’t just assume that they do) and ask them if they could see themselves leading your round.

Thanks to NextView for doing the deep dive here, this is great data to have and also a much lower % of Seed-focused funds leading than I would think. Before I saw this I thought that a majority of Seed-focused funds lead rounds, but the reality is, over 80% of Seed-focused funds don’t.

It’s here! My Interview with Hunter Walk from Homebrew

Hunter Walk has been one of my favorite VCs for some time now, and when it comes to Seed Stage funds, it’s safe to say that Homebrew is one of the most-respected firms out there. So when I decided to kick-off a new interview series, Hunter was at the top of my list, so I reached out over Twitter, he said yes, and a few weeks later I was at the Homebrew offices in SF.

Morgan Linton interviews Hunter Walk from Homebrew in San Francisco.

I prepared a list of questions for Hunter which he told me not to show him beforehand which is an approach I think I’ll stick with going forward. I’ve always found Hunter to be an incredibly authentic person so I’m not surprised he wanted to answer the questions in realtime. 

Since both my blog and podcast are focused on Seed Stage startups and Seed Stage investing I think you’ll find this interview incredibly relevant if you are a Seed stage founder (or aspiring to be one). If you’ve ever wondered things like, “What’s the one thing that bugs Hunter in a Seed Stage pitch deck?” or “Does Hunter care about a startup hitting a certain revenue threshold before he invests?” or “Did Hunter ever happen to work on a certain now-famous late night TV show?” then you’ll enjoy this podcast.

Okay so enough from me, you’re probably ready to dive in and listen right? Simply click the image or link below to listen on iTunes or open your favorite Podcast app and search for Morgan.xyz and you should see my big goofy cartoon head.

Morgan Linton interviews Hunter Walk (Listen Now)

Don’t have time to listen but want to hear some of the highlights? I’ve got you covered. While this is by no means a replacement for listening to the interview, if you just want to spend a few minutes getting a taste of what’s in there, then read on.

  • When looking at founding teams at a Seed Stage startup, Hunter likes it when founders have worked together in the past, it’s a positive signal. If founders went to school together or have always been friends, this isn’t as valuable – he really want to know if they can work together (“just see how it feels”)
  • Hunter was worried that when he started Homebrew, would he encounter teams he was excited by on a daily basis – the answer turned out to be a resounding yes. Now the number of startups he roots for ends up being much larger than what he can invest in.
  • Hunter’s advice on choosing your early investors – never take money from people you don’t want to “live with” – focus on investor alignment early on.
  • Don’t over-obsess about perfect, find a deal structure where both sides take a little pain and then get to work.
  • Hunter’s thoughts on fundraising – “No matter how hard and stressful fundraising might feel – it’s actually building the company that is hard.”
  • What does Hunter hate to see in Seed decks? Exit slides! “If you are on day one telling me how your company is going to get acquired or by whom, you are in some ways not thinking about building a long-term company.”
  • Hunter cares a lot about the why not just the how. Why do you want to spend ten years of your life on this?
  • Projections at a Seed stage will not be taken as fact, but can show if you understand what it’s like to build and scale a venture business.
  • You don’t want to get “short-funded” 
  • After you raise your Seed Round, it never hurts to take a step back and really make sure you understand your customer, funnel, etc. don’t think you have to immediately put your foot on the gas.
  • What makes a good funding story? Durability. 
  • Hunter used to work on a particular late night TV show, you’ll have to listen to the whole podcast to hear more!

Okay, by now you’re probably thinking, okay – I’ve gone through these bullet points and I want more! Lucky for you, there is a more, a lot more, in my interview with Hunter – click here to listen now.

I would like to express my sincere thanks to Hunter for taking the time to do this interview with me. As many of you know, I am not some big name blogger, and this is my very first interview with a VC. For someone like Hunter who is a big name VC and blogger to take the time and the risk of being on my podcast speaks to the kind of guy Hunter is. I thought the world of him before this interview and meeting him in-person and getting to hear how he thinks about the world only further validated those feelings!

If you want to read more from Hunter I highly recommend checking out his blog – HunterWalk.com. If you’re raising a Seed Round and think Homebrew could be a good investor you can find them at Homebrew.co.

There are a growing number of companies in “Venture no-mans” land

Venture Capitalist Micah Rosenbloom  of Madrona Ventures wrote an interesting tweet recently that I think highlights what is a growing trend for Seed stage startups. Before I go any further, here’s the tweet:

The point that Micah makes here is a good one, and a very relevant point given how high the bar has become to raise an A round. The reality is that years ago $50k MRR was the bar companies had to hit in order to be considered for an A round, today that number is closer to $150k. 

As I mentioned in my post last week, the entire concept of a Seed round has become somewhat arbitrary since companies can raise a $40M+ round and that can still be legitimately labeled as a Seed. Large Seed rounds are becoming more and more common, heck just a few weeks ago Oh My Green raised a $20M Seed round, and the same week ICON raised a $9M Seed round.

When companies raise Seed Rounds in such a high range, it only continues to inflate revenue and growth expectations both at the Seed and Series A levels. As this trend continues, more and more startups find themselves in a tough position, they have a product well beyond the MVP stage, paying customers, and yes – they’re growing, but the bar keeps getting higher and they can’t move onto the next round.

This so called “Venture no-mans land” has created a new normal where second and third Seed rounds are becoming increasingly common. Hunter Walk (Homebrew) wrote a great article about this called, Second Seeds: The New Normal But Know This… that’s definitely worth reading if you want to do a deeper dive here.

The reality is that startups raising a second or third Seed round aren’t failing, like I said above, many of them have great products that are delivering incredible value to customers, they’re onboarding new customers, building their pipeline, but the gap between growth expectations from Seed to A continues to grow, leaving more and more companies in purgatory. 

A real challenge Seed stage startups face is being able to hit these high growth targets with smaller amounts of funding. I think this is why second and third time founders are also raising much bigger Seed rounds now, they know the expectations are higher than ever before so they need more money to hit the goals. 

So what does this mean for startups who raise a $1.5M or $2M Seed round? Well let’s be honest, taking $2M or less and scaling up to $150k MRR is hard, really hard – even raising another $1M – $2M in a Seed 2 and/or 3 round still might not bridge the gap. 

The question is, what’s the right path to take? Should more startups bootstrap and only go for their Seed round once they have product market fit and $10k+ in MRR? If you need to get to $150k in MRR to raise your A, is a $1M or $1.5M Seed round just too small to make it happen?

What do you think? I want to hear from you, comment and let your voice be heard!

Can you really call a $41M raise a Seed Round?

I’ll cut to the chase, the answer is – yes, you sure can. Or at least that’s what Alpha Source is calling their most recent raise from 11 investors, a whopping $41M Seed Round.

“The developer of radioisotopes, also doing business as Alpha Isotopes, raised $41,464,543 during a seed round from 11 investors, according to a filing to the U.S. Securities and Exchange Commission.” 

(Source – LA Business Journal)

What I think this highlights is the relatively arbitrary way in which funding rounds get named. The reality is, Alpha Source is an 11 year-old company, not a brand new startup. This round looks a lot more like a Series C or D round for a startup that followed the normal venture path. In this case, the path that Alpha Source took allowed them to be a very valuable company in the eyes of investors when they actually got out there and went to raise some money.

Getting a good feeling for the average size of a Seed round means combing through the data and removing things like this. Yes, this is a Seed round, but no, it really shouldn’t be grouped in with and used in explaining anything about a typical Seed round that a venture-backed startup would raise.

All this being said, the amount of money startups raise in a Seed round has gone up quite a bit over time, Mark Suster highlighted this trend years ago:

When I first became a VC, seed rounds were typically $500k — $1.5 million. There weren’t a lot of seed funds in 2007 so this was often done by angels, funding consortia or sometimes early-stage funds that existed then (First Round Capital, True Ventures, SoftTech VC, etc.). A-rounds back then seemed to be anywhere from $2–3 million (LA or NYC) or up to $5 million in Silicon Valley. $5 million was always the classic definition of an A-round between the late nineties (crazy financings aside) and say 2007.

What changed — and why the definition changed — was it became 90+% cheaper to start companies and thus seed funds appeared en masse as did angels so the size of seed rounds actually INCREASED and the size of A-rounds in many instances decreased. 

(Source – Mark Suster)

Still, this got me thinking, maybe we do need a little tighter definition of what a Seed round is? If a company that just started a few months ago and one that started 11 years ago can both raise Seed rounds, one for $2M and one for $41M means that we probably have created something that just too darn broad.

Of course, I’m happy for Alpha Source, they’re doing really interesting things and I understand why investors jumped at the chance to join the adventure. The question is – if we really wanted to describe this round and not have it confused with what we traditionally call a Seed round, how could we update or revamp the term to make it more specific?

Or is it just me that thinks about this stuff? I want to hear what you think. Comment below and let your voice be heard!

The bar for Seed Rounds keeps getting higher

It’s no secret, so we may as well all talk about it – the bar for Seed Rounds is the highest it has ever been, and it looks like it’s going to continue to get higher. Rather than spouting off a lot of my own opinions about Seed rounds, I thought it would be better to highlight three data points and do a deeper dive into each. Let’s start with this one:

“In 2010, 10% of companies who raised a seed round were generating revenue, in 2017 that number grew to over 50%” (Source)


First, I’ll start by saying, yes – of course you can still raise a seed round without revenue, just look at the data above, 50% of startups are doing just that. Still, revenue has gone from being something investors don’t care about at the Seed stage to something that many now do want to see. 

What you can’t really see in the data here is how many startups in the 50% that didn’t have revenue were started by second-time founders. It is pretty well-known that if you have a nice juicy exit, you can raise money for your next company, at a nice valuation, and without revenue. 

Putting my investor hat on for a second, this makes a lot of sense. If I can invest in a founder that has already proven they can build, grow, and exit a startup, I can imagine them doing that again. With a first time founder, it really is unknown, so you’re taking more risk as an investor, and things like early traction/revenue/customers can help to mitigate that risk.

What does this mean for your startup?

This means that you’ll need to do a little extra homework if you don’t have revenue to make sure you’re talking to firms that have a track record of investing in pre-revenue companies at the Seed stage. 

Of course this research is relatively non-trivial since many companies don’t publicly announce if they had revenue or not when they raised their Seed Round. So if you can’t figure it out beforehand, just ask the investor directly. At the end of the day, you want to make sure you’re a good fit for their firm and if existing revenue is a deal-breaker, better to find that out sooner.

Remember, investors will take meetings with you if you’re a good fit or not. They want to learn the market and possibly learn something about you that could even help one of their other portfolio companies. By doing your own homework or just asking directly, you can make sure you’re spending your time with someone who could invest in your company now, not just when you have revenue.

“Most investors and entrepreneurs I speak with agree that the new seed round looks like what an A was 3 or 5 years ago.” (Source)


This is something I’ve heard over and over again, the A Round of yesterday is the Seed Round of today. However I think this often gets misunderstood. The idea here is not that investors expect you to have a perfect repeatable process when going out to raise your Seed Round.

Instead, the size of the Seed Rounds today are as big as A Rounds were 3-5 years ago. It’s not all that crazy to hear of startups raising a $3.5M Seed Round, and $2M Seed Rounds have been all the rage and that trend doesn’t seem to be going away.

What does this mean for your startup?

There are two takeaways from this IMO:

  1. If you go into your Seed Round trying to raise $500k or $750k, it might sound like you’re going too small to build something big. This might also look a lot more like a friends and family or angel round so VCs could be less interested in a round this small.
  2. While you can likely raise a bigger Seed Round, be careful, the more you raise the higher the expectations will be when you go to raise your next round. Raise what you need with a nice buffer but don’t just raise as much as you can as it could set the bar unrealistically high when you go out to raise again.

Keep this chart handy


This is a great chart to print out, memorize, or tattoo on your arm for future reference. While hard and fast rules like these are proven wrong all the time, they are good general metrics to keep in mind.

Like I said in #1, you can raise a Seed Round without revenue so don’t let this chart freak you out. That being said, if you want the greatest chance of raising a Seed Round and you do have revenue, this can give you a good idea of where you stand.

What I really like about this chart is that it breaks down the milestones by the type of company you’re running. It can be easy to default to talking with founders you know and like, but who might run completely different businesses.

What does this mean for your startup?

If you’re running an enterprise SaaS company, talking to a founder running a consumer-focused app is still valuable, just know that investors are going to judge each of you differently.

Also, it’s important to know that if you’re a SaaS company with $5k in MRR, know that every investor you’re talking with has likely seen plenty of companies at the same stage at $50k MRR so you’ll really want to make sure you highlight all the other amazing things about your companies beyond the revenue.

The best way to use this chart isn’t to look at it as numbers you need to hit. Instead look at it as a guideline for numbers that investors are seeing so you can see things from their perspective as well. If you’re a Seed Stage SaaS startup trying to raise your A Round and your MRR is $60k, know that you’re at about a third of what most investors are seeing. It doesn’t mean it’s impossible but knowing how you stack up can help you decide when you should get out there and start fundraising.

Fundraising too early isn’t necessarily a bad thing, just know that next time you talk with that investor you should have made some meaningful progress since you’ll be establishing a baseline.


Phew! Well if you made it this far then you clearly are interested in absorbing as much information as you can about understanding the dynamics of Seed Rounds in 2018. First – right on! The more data you have the better.

Second, remember, that this information can become stale quickly. If you’re reading this post and it’s 2019, be careful, the numbers will have likely changed. All data has a shelf life and when it comes to understanding the dynamics of raising a Seed Round, getting the freshest data is critical because investors spend all day every day studying this, so you want to know as much about how they’re thinking as you can.

Thanks for reading and now I’d like to pass the mic to you. Is there anything you’d like to share about the current state of Seed investing, either as a founder or investor?