Marc Andreessen kicked off another great debate on Twitter last night, one that I’ve been talking about incessantly in private circles for the past 2-3 years – what actually IS the definition of a seed vs. A-round.
This is something I think entrepreneurs don’t totally understand and it’s worthwhile they do. My view:
“Spending any time or energy trying to game the ‘definition’ of your round of fund raising is a total waste. Nobody cares. No VC will be so naive as not to see straight through it. And actually many will probably find the gamesmanship as a bad sign of lack of property priorities or perspective.”
Here’s how all the drama started for me.
When I first became a VC, seed rounds were typically $500k – $1.5 million. There weren’t a lot of seed funds in 2007 so this was often done by angels, funding consortia or sometimes early-stage funds that existed then (First Round Capital, True Ventures, SoftTech VC, etc.). A-rounds back then seemed to be anywhere from $2-3 million (LA or NYC) or up to $5 million in Silicon Valley. $5 million was always the classic definition of an A-round between the late nineties (crazy financings aside) and say 2007.
What changed — and why the definition changed — was it became 90+% cheaper to start companies and thus seed funds appeared en masse as did angels so the size of seed rounds actually INCREASED and the size of A-rounds in many instances decreased. Why the latter? My speculation is that entrepreneurs had more options and wanted to take less dilution so the old $5 million for 33%-40% of your company no longer made sense and on the VC side it made no sense to pay $20 million pre ($25 million post, which implies the VC gets 20% of the company = 5/25). [If you’re newer to VC math here’s a great primer]. So VCs started writing some smaller A-rounds.
If you want a great primer on how the VC and startup funding scene changed here’s a great primer.
But. [and there’s always a but]
Entrepreneurs started demanding that VCs call their first-round financings “seed” rounds even if they were $3 million.
I saw this myself a few times in a row. I had very smart entrepreneurs where I gave the company $2-3 million and we raised anywhere between $3-5 million and when I put A-round in the term sheet they had their lawyers change it back to seed rounds. I found this annoying (I can’t think of a better word for the behavior) because it seemed like entrepreneurs were more concerned about the optics of the financing round than who was participating, would the lead (me) but supportive or simply focusing on building a great product and trusting that the financing nomenclature would work itself out. I think it would have been equally annoying if I had chosen to be dogmatic about it. If I had said, “You MUST call it an a round because be honest – it is an A-round” I think would make me a bit hypocritical. So I did not. I simply said, “Call it whatever you want but frankly I don’t understand why you’re obsessed with this. It seems such a silly thing to focus on.”
But since it was equally silly for me to fight, seed rounds they became. Equally silly were advisors & entrepreneurs insisting that founders use convertible notes but we funded a few of those, too. I have come to realize that since the great tech boom started in 2009 and given the massive increase in first-time angels, first-time seed funds, first-time accelerators … the market is just filled with well-intentioned, but inexperience advice. Whom you take advice from really matters.
So back to reality. If it looks like an A-round, smells like an A-round & tastes like an A-round … it’s an A-round. My personal definition? It is less about actual money and more about structure of your Cap Table. If you have raised $2-4 million from a bunch of high-net-worth individuals I simply don’t see it as an A-round. If you raised $2 million from two small seed funds I probably don’t either (although in the past I would have). But if you raised $3-5 million from well-known seed funds or from a VC and you’re asking for $8-10 million in your next round … that next round is a B-round no matter what we collectively decide to call it when we VCs fund you.
I think an easier definition is “first institutional capital” which is what most A-round VCs think about what their personal funding strategies are. They want to be early and first.
I haven’t obsessed about what definitions people choose for precisely the reason I would advise entrepreneurs not to. It’s simply not worth the time, effort and drama. But I would say a couple of things:
– I now believe that entrepreneurs who are overly obsessed about the optics of the nomenclature of A-round probably set off some invisible red flag in some VC investors mind even if the VCs don’t internalize it themselves. I know it does in my mind. Obsessing about the wrong things in starting a company says something about one’s priorities even though this is subtle and hard to define. I’m not saying I won’t fund somebody who did a $4 million seed round before I got involved. I will. But if I’m funding their “first institution capital” round and they are obsessed about what we call it that is probably not a great sign for me.
– What Marc said above. Please know that I have never met an experienced VC who can’t pierce through any mechanics in your deal and see your company history in a fairly accurate light. If you raised $1m, then $1m, then $500k over a 2-year period they will most likely assume you had a hard time raising capital. That’s ok. It’s hard building a startup. But no amount of “spin” will change how they view you so it’s best just to be honest. And if you have raised $6 million from non-startup-type investors they will probably see you as an entrepreneur who prefers easy, dumb money over putting in the effort to find the right long-term investors no matter how you try to convince them your hedge-fund buddies really make great funding partners for a startup. If you have raised $6 million in a “seed” round and you’re looking for $10-12 million for your A-round they simply will mentally adjust that they’re funding your B.
In the end, life most things in life, none of it will matter unless you build shit people care about and use en masse and thus you can attract capital even if you call it a Z-round. But my advice to entrepreneurs – stop sweating the silly optics. It’s more likely a negative signal to VCs than a positive one.
(Cross-posted @ Both Sides of the Table)