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!