Amit Karp is a partner at Bessemer Venture Partners. This article was originally published on Medium. It has been republished here with permission.
Over the past few years, we have seen a big shift in the size of financing rounds. One of the major changes is in what is typically referred to as a Seed Funding (first money invested in the company). Only a few years ago seed rounds were mostly in the range of $500K-$1M, with some financing rounds expanding up to $2M based on the core team’s credibility (industry veterans, serial entrepreneurs, etc.). These seed financing allowed the company to build a quick MVP and demonstrate initial product market fit before going out to raise a larger Series-A financing. The seed investors were often friends and family, angel investors, and a few dedicated micro-VCs that wrote ~$500K checks.
Fast forward a few years, and the seed financing market has completely changed. Most early stage Israeli startups we meet these days attempt to raise a $2M-$4M seed investment with some seed rounds expanding even further (including a $13M seed financing). These larger seed rounds are often led by a new pool of dedicated seed funds which have taken the place of the smaller micro-VCs and accelerators. In addition, the larger funds sometimes also participate in these early rounds, which results in even larger seed rounds (and often higher valuations). Angel investors are often added into the mix to bring more credibility and help with their experience in the early stages of the startup, but it’s a ‘professional’ seed investor who often leads the seed round.
There are several implications to these new large seed rounds:
First, the traditional Series-A financing is consistently pushed later, and Series-A investors now expect to see much more business traction before they commit to investing. Building an MVP and demonstrating initial product market fit is no longer enough to raise a Series-A round. Founders are now expected to answer questions about GTM, sales cycles, and sales productivity when raising their A round.
Secondly, the Series-A rounds have also become larger and are now often north of $8M, intended to push the startup even further. This reduces the amount of Series-A investors as it requires a larger fund to invest in that stage.
Third, securing a Series-A investment is more difficult than it used to be since there are fewer funds and the startup needs to demonstrate more business traction. This results in more CLAs, bridge rounds, and even dedicated “Post-seed” investors who help the company bridge the gap between their seed financing and the Series-A.
Lastly, and likely most important, is that the winners are separated from the losers earlier than ever. It is very difficult for a startup which raised a $500K seed round to compete with another startup that raised $4M at the same stage. Seed investors are also forced to pick winners based on very limited data, having to rely mainly on the strength of the founding team as an indicator for success.
Some people argue that the new seed round is just a modern name for the ‘historical’ Series-A, and that the current Series-A is what was previously a Series-B round. But there is a big difference- current seed investors don’t get the benefit of seeing how a startup performs over the first year while burning through the seed round. Unlike ‘historical’ Series-A investors, they need to pick a winner even earlier. As the seed investors are taking more risk, Series-A investors have become more risk averse and require a broader set of data when they analyze an investment.
The main implication for entrepreneurs is that you need to ensure you raise enough seed capital to achieve the required milestones for a successful Series-A. It also means that it has become more difficult for ‘outsider’ entrepreneurs to launch startups since they will often find it hard to raise large seed rounds and will be forced to do multiple subsequent funding rounds before they are “Series A ready”.