What the Changing Seed Funding Market Means for SaaS Founders
Here’s the meta-narrative surrounding venture capital -- Hockey sticks in venture capital fundraising → larger venture capital financing rounds with concentration at the late stage (post-Series C) → larger required exits (IPO bets). All of which reinforce hypergrowth to massive scale as the end all be all for “successful” software companies.
Here’s the meta-narrative surrounding venture capital — Hockey sticks in venture capital fundraising → larger venture capital financing rounds with concentration at the late stage (post-Series C) → larger required exits (IPO bets). All of which reinforce hypergrowth to massive scale as the end all be all for “successful” software companies.Tomasz Tunguz, a VC with Redpoint who we follow closely and really respect, recently shared his thoughts on the state of the Seed funding market on his blog. Titled “The Strategic Question at Seed Today,” the post is primarily aimed at companies that are on the VC path, but his insights here are valuable for anyone considering either taking VC dollars in the future or interested in funding their company another way.While Tomasz provides an interesting perspective on what’s happening in early-stage VC, the post overlooks a simple reality about the startup funding ecosystem: VC cannot be the only option, and it no longer is. Differentiated capital has come along to support the 98% of companies for which venture capital is not a viable financing solution.Here are some of my takeaways on Tomasz’s post:
1. Venture capital seed rounds are growing
Tom’s View: “Seed rounds are rapidly approaching and now often equal to the sizes of Series As just five years ago.”
My View: This is not necessarily a new insight. Any Founder or investor who has been in the fundraising marketover the past 24 months has experienced this. Tomasz shows it with a dramatic hockey stick. Remember, it’s all about VCs writing bigger checks to deploy their bigger funds. What it does not note is the decline in the number of angel/seed financings as venture capital continues to concentrate.
2. Founders have more options than ever
Tom: “For founders, the increase of seed rounds (and the proliferation of seed derivatives like pre/post/second seeds) are a boon. A greater diversity of financial products serve a broader set of founder needs. Wonderful.”
Me: Maybe. Or, maybe Founders are succumbing to pressure to take on more of this dilutive capital than they really need, earlier on in their company’s lifecycle.Tomasz mentions a greater diversity of financial products, but he’s really just talking about the stratification of seed VC financing rather than the. The real benefit for Founders is that the early-stage financing market now presents them with true alternatives to VC that have traditionally not been available to them.
3. Mix and match is now a reality
Tom: “It means now there are many more ways to reach $10M in ARR. $1M or $3M or $5M seed. $7M or $12M or $15M or $25M Series A. Mix and match the financial product to the company need at the time.”
Me: I don’t believe Tomasz is actually speaking to mixing financial products as the company needs. That’s really how a capital stack with different forms of capital participating in conjunction works (e.g., senior debt, sub debt, preferred equity, common equity). Tom is really just speaking to mixing and matching the size/stage of a venture round.
4. Competition among investors is creating new seed options
Tom: “Competition amongst investors drives this panoply of options in the seed market. Seed investors are moving up, with some raising bigger funds. Series A investors must choose to move earlier into the new seed rounds, or play later in bigger Series As (the Series Bs of yore).”
Me: We agree that capital competition drives options for Founders, which is good. That said, we do not agree that the optionality is a result of VCs writing different check sizes than maybe they traditionally have and applying whatever series name (pre-seed, seed, post seed, A,…) to their investment.True Founder optionality is increasingly coming from alternatives to VC such as Bigfoot Capital, Indie.VC, Earnest Capital, Tiny Seed, Novel Growth Partners, Lighter Capital, etc.
5. Round sizes have evolved
Tom: “The previously fixed financial products that existed in 2008 of a $4-6M Series A and a $10-12M Series B are gone. Instead of these arbitrary discrete ranges, the market has evolved to provide a smooth continuum of fundraising options.”
Me: Again, we seem to be confusing a financial product with a round size. The financial product here is still venture capital. The only thing that has changed is that the investment band that falls within a given series name has become more flexible. This may provide some benefit to Founders sure, but really it’s still about VCs needing to deploy their funds. Not about them diversifying their financial product offerings.
6. Welcome to the ‘choose your own adventure’ market
Tom: “Competition has brought diversity and innovation into the private capital markets. And once again, it’s the founders that reap the benefits. Namely, much more diverse and varied financing options to suit the precise needs of a particular startup. Which is the right fundraising product for your business? In this market, it’s choose your own adventure.”
Me: Now we’re talking! Absolutely today’s early-stage financing market is an innovative area with newer players providing a diversified set of capital options for Founders. This is what we’re all about at Bigfoot, and we’re happy to talk about this and what it means for you. Holler at meRead Tom’s full post.What do you think? Agree? Disagree? Have your own take? Let me know at bparks@bigfootcap.com.
Other Commentary, SaaS Finance
By Brian Parks
August 22, 2019
What the Changing Seed Funding Market Means for SaaS Founders
Here’s the meta-narrative surrounding venture capital -- Hockey sticks in venture capital fundraising → larger venture capital financing rounds with concentration at the late stage (post-Series C) → larger required exits (IPO bets). All of which reinforce hypergrowth to massive scale as the end all be all for “successful” software companies.
Here’s the meta-narrative surrounding venture capital — Hockey sticks in venture capital fundraising → larger venture capital financing rounds with concentration at the late stage (post-Series C) → larger required exits (IPO bets). All of which reinforce hypergrowth to massive scale as the end all be all for “successful” software companies.Tomasz Tunguz, a VC with Redpoint who we follow closely and really respect, recently shared his thoughts on the state of the Seed funding market on his blog. Titled “The Strategic Question at Seed Today,” the post is primarily aimed at companies that are on the VC path, but his insights here are valuable for anyone considering either taking VC dollars in the future or interested in funding their company another way.While Tomasz provides an interesting perspective on what’s happening in early-stage VC, the post overlooks a simple reality about the startup funding ecosystem: VC cannot be the only option, and it no longer is. Differentiated capital has come along to support the 98% of companies for which venture capital is not a viable financing solution.Here are some of my takeaways on Tomasz’s post:
1. Venture capital seed rounds are growing
Tom’s View: “Seed rounds are rapidly approaching and now often equal to the sizes of Series As just five years ago.”
My View: This is not necessarily a new insight. Any Founder or investor who has been in the fundraising marketover the past 24 months has experienced this. Tomasz shows it with a dramatic hockey stick. Remember, it’s all about VCs writing bigger checks to deploy their bigger funds. What it does not note is the decline in the number of angel/seed financings as venture capital continues to concentrate.
2. Founders have more options than ever
Tom: “For founders, the increase of seed rounds (and the proliferation of seed derivatives like pre/post/second seeds) are a boon. A greater diversity of financial products serve a broader set of founder needs. Wonderful.”
Me: Maybe. Or, maybe Founders are succumbing to pressure to take on more of this dilutive capital than they really need, earlier on in their company’s lifecycle.Tomasz mentions a greater diversity of financial products, but he’s really just talking about the stratification of seed VC financing rather than the. The real benefit for Founders is that the early-stage financing market now presents them with true alternatives to VC that have traditionally not been available to them.
3. Mix and match is now a reality
Tom: “It means now there are many more ways to reach $10M in ARR. $1M or $3M or $5M seed. $7M or $12M or $15M or $25M Series A. Mix and match the financial product to the company need at the time.”
Me: I don’t believe Tomasz is actually speaking to mixing financial products as the company needs. That’s really how a capital stack with different forms of capital participating in conjunction works (e.g., senior debt, sub debt, preferred equity, common equity). Tom is really just speaking to mixing and matching the size/stage of a venture round.
4. Competition among investors is creating new seed options
Tom: “Competition amongst investors drives this panoply of options in the seed market. Seed investors are moving up, with some raising bigger funds. Series A investors must choose to move earlier into the new seed rounds, or play later in bigger Series As (the Series Bs of yore).”
Me: We agree that capital competition drives options for Founders, which is good. That said, we do not agree that the optionality is a result of VCs writing different check sizes than maybe they traditionally have and applying whatever series name (pre-seed, seed, post seed, A,…) to their investment.True Founder optionality is increasingly coming from alternatives to VC such as Bigfoot Capital, Indie.VC, Earnest Capital, Tiny Seed, Novel Growth Partners, Lighter Capital, etc.
5. Round sizes have evolved
Tom: “The previously fixed financial products that existed in 2008 of a $4-6M Series A and a $10-12M Series B are gone. Instead of these arbitrary discrete ranges, the market has evolved to provide a smooth continuum of fundraising options.”
Me: Again, we seem to be confusing a financial product with a round size. The financial product here is still venture capital. The only thing that has changed is that the investment band that falls within a given series name has become more flexible. This may provide some benefit to Founders sure, but really it’s still about VCs needing to deploy their funds. Not about them diversifying their financial product offerings.
6. Welcome to the ‘choose your own adventure’ market
Tom: “Competition has brought diversity and innovation into the private capital markets. And once again, it’s the founders that reap the benefits. Namely, much more diverse and varied financing options to suit the precise needs of a particular startup. Which is the right fundraising product for your business? In this market, it’s choose your own adventure.”
Me: Now we’re talking! Absolutely today’s early-stage financing market is an innovative area with newer players providing a diversified set of capital options for Founders. This is what we’re all about at Bigfoot, and we’re happy to talk about this and what it means for you. Holler at meRead Tom’s full post.What do you think? Agree? Disagree? Have your own take? Let me know at bparks@bigfootcap.com.
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