Archive for July, 2018

On $80M Series A rounds…

Posted on July 11, 2018. Filed under: Uncategorized |

I read Dan Primack’s term sheet email most days. Increasingly I read things like “xx startup raised $80M Series A” and I’ve been trying to make sense of it. I am an early stage investor. I love the beginning and I love thinking about the future with people in their first years of building and testing and learning. When I started working in venture capital in 2006, the standard high profile Series A deal was $3-5M, split between two well regarded firms. A competitive seed round in 2008 was $500-700K at $4 or $5 Pre. Obviously, things have changed. I’m not the first to suggest that constraints and sobriety yield success in the nascent stages of development. USV and others have been singing that song forever, and I tend to agree. I’ve also lived raising $10M when I should have raised $3M and I’ve seen what happens when the money gets ahead of the stage of development. I think the purest early stage investor in me believes that less is more and the discipline that comes with is healthy, but the market is the market, and a founder rightly questions this position. “Why would I raise $5M when for the same dilution I could raise $10M?” There are some arguments around valuations getting ahead of you, and down rounds, and limited outcome options when you do this, but if you are upside thinking, the $10M is attractive. Extrapolate that out, and the $30M, $50M, $80M war chest at onset can also be attractive.

Increasing fund sizes for early stage investors is driving this early stage round bloat. Most marquee firms are raising $1 Billion+ funds now and a $10M early stage check from a % of fund standpoint, economically feels to them like writing $3-5M in a past company in a past smaller fund at the same stage of development. Yes, the outcomes might be increasing in size, and this behavior might be justifiable both for scaled firms and aggressive entrepreneurs, but it leaves me wondering if and how you can play the purist, sober game while everyone else is buying into the creep.

If you have been in venture for a while, you know that these dynamics move in cycles as opposed to straight lines. Normal 5 years ago, isn’t normal today, and what’s normal today won’t be normal 5 years from now. It’s not clear to me when the market is getting ahead of itself on the risk/reward curve whether or not holding the line on what you know is healthy and normal is the right approach or not. There’s an argument that you have to invest through all stages in the cycle and a smaller check size product is “off market” in today’s terms. And there’s an argument for not chasing the inflated financings, staying disciplined, slowing down if need be, and allowing for self selection in the founders and companies with whom you work. i don’t think there’s a right answer to this question, but a $50M or $80M Series A round is something I want no part of. I don’t care if Softbank, or A16Z, or whoever else does…