Seed Rounds At $100M Post Money. Why isn't that a good thing?

Fred Wilson's main arguments:?

• The seed stage is a story about a company that has a good team and an interesting idea. But that company has yet to prove the product's fit with the market and demonstrate a sustainable business model.
• These investments have a high failure rate. As experience suggests, about half of investments at the seed stage fail. This means that all investors' money is burned in this way. Including the founders' money as well.?
• Investments of this stage go through a lot of dilution from seed round to exit. Seed-stage investors dilute by an average of ?.?
• ?A power law distribution exists in outcomes in any early-stage portfolio and a seed portfolio is no different.

How does it work?

We'll look at a conditional $100M seed round. The total number of investors is 100. 1% of the total round is $1M. The assumed dilution from seed stage to exit is 66.6%. The post-money value is $100M. And you think that this is your top-performing investment.?

If you think that your best-performing investment out of 100 investments will end up being worth $100 billion, then you could end up with a 13X fund. In reality, however, such a fund would get at most 1.3Х.?

However, we should not forget about the dilution of investment. If you believe the dilution from seed to exit is only 50% and your top-performing investment, out of 100 investments, will be worth $10 billion, then you will end up with a 2x fund, before fees and carry.?

But, there are only a few hundred companies worldwide with a capitalization of more than $100B. And about a quarter of them has emerged from the portfolios of VC funds over the past 30 years.?

So all assumptions about ?the best investment out of 100 conventional investments? are shattered.?

Bottom line?

So, in a world where we see more and more $100M valued seed rounds, one has to ask the question: ?what are the investors expecting??. A $100B outcome? Doubtful. Less dilution? Maybe.?

If you run the same model at a $20M post-money fund, you'll get a 6,667X fund before fees and expenses. If you think you can get one of your hundred seed investments to a $10B outcome, then paying $20M post-money in seed rounds seems to make a lot of sense.

The exit values in VC have increased significantly over the last decade leading to escalating entry values. It can make a difference. It includes increasing the volume of seed rounds. However, two fundamental principles have not changed over the past decades: the dilution from seed to exit and the power-law distribution of outcomes in an early stage portfolio.