
Seed 'extensions' are becoming the new normal in fundraising - prostoalex
http://venturebeat.com/2015/11/07/why-seed-extensions-are-becoming-the-new-normal-in-fundraising/
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tsunamifury
Granularizing rounds seems like a good idea until you realize how much work it
is to raise. If a startups path goes from seed, A, B, Exit to Seed 1, Seed 2,
A, Bridge, B, C, Bridge etc then the founders have significantly less time to
focus on their product and spend more time playing the game.

Anyone have any advice on raising enough on the seed round to match your needs
without having to create an absurd valuation that will crunch you in A?

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austenallred
> Anyone have any advice on raising enough on the seed round to match your
> needs without having to create an absurd valuation that will crunch you in
> A?

Grow extremely quickly by doing everything else right? There's really no
shortcut or trick, that's just what it takes.

To raise <$1 million and be ready for a Series A is just brutally difficult.
For example, my brother just raised his A and he said investors were looking
for a $1.5 million run rate and 3-4x YOY growth. So in ~18 months with ~5
people you'd have to build product, make that many sales and still have
compounding growth.

That's set up to find the companies that are doing _extremely_ well. It will
happen, but that's not something you can really brute force (it didn't happen
to my company, even though we're on a very promising trajectory).

Now, say you raise a $2m seed extension. That gives you an additional ~18
months to hit those same metrics, while hiring a couple more people. That's
just _so much more_ doable. Especially considering most first-time founders
(myself included) spend the first six months making mistakes around building
the right team. (One way to help make it to a series A on your seed is to have
all the people you want/need ready to be plugged in.)

I think either the Series A expectations will come down slightly or "seed
prime" rounds will become the norm, as they already are becoming. Not many are
ready to go to the NBA after playing in High School. Simple as that.

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codinghorror
Interesting. Due to the seed explosion (which is absolutely a good thing, more
entrepreneurs trying new stuff) Series A has indeed become very challenging --
extremely challenging, even.

Rather than raise more seed, we decided to buckle down and try to fund through
paying customer growth. Slower of a curve than a 2 or 3 million dollar
injection, but no strings attached either. And I figure you need to develop
your billing and customer chops eventually anyway, so why not start building
those skills now?

~~~
wpietri
Bravo! I occasionally mentor at startup events and I can't tell you how crazy
it makes me when first-time entrepreneurs look down on getting revenue as some
sort of grubby detail not quite worth their attention. I love it when people
go after actual customer money; it forces them to pay careful attention to the
heart of the business.

There is a risk, though. (I'm sure you know it already, but I mention it just
to balance out my enthusiasm for others.) If a company's revenue is $0,
investors can imagine anything they want. But if revenue is $1.39, investors
may be subject to an anchoring bias [1]. I don't think that's a huge risk for
companies that have a well-understood business model; if you are selling
annual software subscriptions, it's pretty easy for investors to imagine
scaling that up. But I think Twitter and Facebook were smart to avoid revenue
for a long time because it let them sell the dream.

[1]
[https://en.wikipedia.org/wiki/Anchoring](https://en.wikipedia.org/wiki/Anchoring)

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gavazzy
> "What, revenue? no, no... no revenue! Why would you go after revenue? No, if
> you show revenue, people will ask "how much?" and it will never be enough.
> The 100x'er or the 1,000x'er will now be the 2x dog. But if you have _no
> revenue_ , then you're _pre-revenue_.

[https://www.youtube.com/watch?v=BzAdXyPYKQo](https://www.youtube.com/watch?v=BzAdXyPYKQo)

~~~
wpietri
Wow, that's a little too good. I'm think going to save watching _Silicon
Valley_ until I'm retired so that I can experience it as comedy rather than
horror.

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7Figures2Commas
> ...most seed companies aren’t actually burning that much money. A lot can be
> done today with a small team and $50,000 a month.

> In many of these cases, the founder simply didn’t raise enough to hit the
> milestones they promised. Product development often takes twice what was
> anticipated, and many early stage companies simply didn’t have the capital
> to achieve what they hoped in advance of an A round.

This is contradictory. On one hand, the author claims "a lot can be done today
with a small team and $50,000 a month" but on the other he's admitting that
many of these companies aren't able to do what the founders "promised" they'd
be able to do.

> Valuations tend to be flat or flat-ish.

> In the end, however, the entrepreneur benefits because they usually see a
> step up in valuation from the first to second seed.

Which one is it?

> These differ from your classic seed. They tend to have new participants,
> unlike the more classic extension, which is merely the insiders injecting
> additional capital into the company.

This is the perfect demonstration of what happens when there's too much money
chasing too few opportunities. _New_ investors are willing to put _more_ money
into a company that underestimated its funding needs, missed its targets and
can't raise a Series A, and do so at the same or slightly higher valuation as
previous investors. Insanity.

The "seed extension" phenomenon also demonstrates why early-stage startup
employees should be skeptical about equity. These "seed extensions," which
look like dumb money bridge rounds, can be really destructive. Just do the
math on what happens when a company raises $1 million at a $10 million
valuation, and then raises a $2 million "extension" at a "flat-ish" valuation.

~~~
wpietri
I agree with your concerns about the article, but I'm not so worried about the
phenomenon. The new money in a seed extension could be dumb money. But it also
could be real validation of a pivot, where the first idea didn't work but the
second, better informed one could.

I'd certainly prefer people taking multiple seed rounds to them taking a ton
of money up front. Too much money is startup poison.

~~~
danieltillett
>I'd certainly prefer people taking multiple seed rounds to them taking a ton
of money up front. Too much money is startup poison.

Is there any reason that a large seed round could not be drip fed to the
company? As an investor I would rather the company get on with building and
stop worry about fund raising, but I would not just want to give then a huge
amount of money that they blow on a hiring craze trying to hit some ludicrous
growth number. Something like "here is $3 million, but we aren’t going to give
it to you at more than $100K a month - now get on with building and stop
worrying about fund raising. If you hit all your targets early come back and
we will talk more."

~~~
wpietri
I've heard of people who have tranched funding and it seems like the worst of
both worlds. Pricing is locked in up front, so founder upside is limited.
Plus, getting tranches is conditional on continued investor approval, so the
risk hasn't really gone away.

Honestly, I've never heard of investors saying, "Hey, slow down on the
spending." I'm sure it must happen, but the stories I hear are all the other
way, encouraging investors to spend faster and get bigger to establish market
dominance. Founders are in some ways naturally more conservative, in that they
have exactly one company to gamble with, while investors are just hoping for a
couple big hits in their portfolios.

~~~
danieltillett
>I've heard of people who have tranched funding and it seems like the worst of
both worlds. Pricing is locked in up front, so founder upside is limited.
Plus, getting tranches is conditional on continued investor approval, so the
risk hasn't really gone away.

Couldn't the valuation issue be solved with SAFE? Also if the funding was
locked in and handed to some third party to administer then the founders could
stop worrying about investor approval changing?

Maybe I think too much like an founder, but the last thing I would want to do
as an investor is give some 22 year olds a couple of million dollars and let
them go crazy. Having personally been through a similar situation it is all to
easy as a founder to convince yourself that getting more money in the future
is going to be easy.

~~~
wpietri
Well if the money is locked in, then all we're talking about is a prearranged
spending limit, right? But I've just never heard of investors wanting that.
They already have a lot of influence. And the whole goal is to get to the
point where the startup will need (and spend) a lot more money.

If it were my money, I'd certainly be concerned with young founders
overspending. But I'd solve that just by energetic board meetings and
occasional calls with the CEO. And with VCs, it's not their money anyhow.
Their constrained resource isn't cash, it's time.

~~~
danieltillett
I am more trying to think about ways to try and remove the pressure off
founders to bb raising money all the time, while at the same time not just
handing over a massive check. Having to work to a budget might solve both
problems.

I agree VCs are trying to create unicorns rather than maximise the chance of
the founders succeeding. If you are an early stage investor with limited funds
to throw around then you might be better off not chasing unicorns and instead
concentrate on minimising losses.

