I wrote my first angel checks in 2014. I’ve now written almost 70. The landscape has changed greatly: back in the day, I would see seed rounds valued at $4-8M post-money, with $1-2M invested so the investors would get about 25% of the company. To boot, the lead investor would usually get a board seat, and the company would take another 10% dilution in form of an options pool.
In 2021, deals at $4-8M post-money are called pre-seeds. Today’s seed has crept toward the Series A of old, with post-money valuations generally not below $10M, the median in the $12M-15M range, and the high end at $20M or beyond.
It’s fantastic that founders are able to raise at greater valuations, and commensurately more money. Instead of raising $1M at $4M post, founders today are raising $3M at $12M post. That’s great, right?
Well, maybe. You’ll notice that the investor ownership at the seed stage – 25% – is the only element that has remained constant. The founder is still selling the same amount of the company. They’re getting more dollars in return. Is that a good deal?
Again, maybe. Dollars in the bank have diminishing returns for a seed-stage founder. Can you make productive use of $250K on day one? Totally. $1M? Probably, over 12-18 months. $3M? It gets harder to allocate larger amounts of capital efficiently.
This is compounded by the fact that successful startups are now raising rounds faster than before. VCs are hungry to deploy capital, so follow-on rounds and pre-empts are happening more than before. I’ve seen companies raise their Series As at good valuations while only half-way to the “traditional” Series A benchmark. I’ve seen Series Bs three months after the A. And so on.
In this environment, VCs are under significant pressure to deploy their funds. They aggressively push capital on founders. The result is that good companies are raising, at the seed stage, capital they will never deploy. And that’s a waste of the dilution they take on.
Strong startups are raising monster seed rounds, $3M plus. In the old paradigm, that would be for a 18-24 month runway, so implying an average spend of $125-167k a month. Actually doing that productively is hard.1 It implies building a 15+ person team. That’s tough in itself. But now you actually need to deploy even faster, because the old paradigm has been broken. If you’re good, you may no longer need 18 or 24 months to get to the Series A. You’ll get there in 12 months.
So, suppose you raised a $3M seed, and you get to your Series A in 12 months. You’ve still got $2M in the bank. You paid 17% of your company – a co-founder-level chunk – for that capital. You gave away a board seat. You swallowed the options pool shuffle. All that for capital that you now don’t need.2
You raise your Series A. The press will cheer you on for being capital efficient. Your friends will congratulate you on the great brand name that’s getting put on your website and on your board. And you will bow and shake hands and perform all the social graces, with the venture capital force-feeding tube still hanging out of your mouth. But knowing that you’ve thrown away 17% of your company at the seed should make you sick to your stomach.
So maybe you’ll raise a smaller seed. You’d like the same valuation, of course. But the institutions won’t like that. “Sorry, we have a minimum ownership requirement of 20%”, they’ll tell you. Needless to say, minimum ownership requirements are bullshit.3
So what is a founder to do? The simple answer is to abandon the institutional raise, and stick with angels and angel-style investors. This is another big change since 2014: the number of angels in the market must have increased 100-fold. I’m being hyperbolic, but it feels like half the valley is angel investing these days. Everyone, VC firms and individuals alike, are aggressively deploying capital. Importantly, angels will pay institutional valuations, and the better ones are so well-networked that they can help you put together an entire round. It’s now well possible to put together a multi-million dollar round without a traditional venture firm involved: the best example is probably Front’s Series C, a $59M round led entirely by individuals, with traditional VC firms only getting small allocations.
There are four other key benefits to skipping the institutions as you break your round down for many smaller checks:
The use of SAFEs enables high-resolution fundraising. Close parties as they commit. You no longer need to get everyone together in an institutional round to close. (Of all rounds that collapse, timing is usually the main factor.)
No board seats. If you don’t have a lead investor, then no investor has the muscle to negotiate themselves meaningful corporate control.
Many small investors who hustle usually constitute a bigger, more helpful network than your one point-person at a VC firm, particularly for early-stage companies.
You dictate the deal terms. Again, with no lead investor, no-one has the muscle to force better terms for themselves. You’re in control.
It’s a competitive time in the market. Many people, myself included, have written about how personal brands are disrupting venture capital via Rolling Funds and other mechanisms. it turns out that going with the newly liquid kids on the block has material advantages over going with the capital gatekeepers of old. This is good.
Startups can burn capital aggressively, pay for top-tier services and best-in-class salaries, but that kind of spending culture usually sets up for difficult conversations about operating economics at later stages, so I can’t recommend it. ↩
Astute readers will point out that maybe it wasn’t so unwise to take on more capital, because you might not have gotten to your Series A so quickly. Sure. However, in our example, tacking on a six or twelve-month buffer would have implied only another 4-8% dilution, as opposed to the 17%. You’re still talking about a massive piece of equity. ↩
There are many respects in which they are bullshit, and many reasons for it, but going through all of them in detail seems like good material for another essay. ↩