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?

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