For Startup Fundraising, Seed is No Longer a Round, It’s a Phase

Want to know the biggest challenge Satya and I faced when announcing Homebrew’s third fund? How to describe the moment in time we seek to invest. “Early stage” has been coopted by billion-dollar VCs who try to shoehorn a $10m ARR SaaS company into their idea of risk capital. And the verbal gymnastics of some founders! “We did a pre-seed, followed by a seed, then a bridge and an A. Now we’re raising an A-2 to scale. But it’s definitely not a B – that’ll come in 18 months.” What?!? Makes me wish we’d just adopt version numbers, a la software releases – Round 1, Round 2, Round 2.5 and so on.

But ahead of the industry solving this problem, we had a blog post to publish. So, what to say? We decided on “seed phase” because now more than ever, we believe seed isn’t a round, it’s a period of time where you are starting, learning and iterating to a business that has proven its core value proposition and raises a Series A to begin scaling. Why does this matter to founders (and to us)? A few reasons.

1. Asking founders to prematurely perfectly forecast the amount of capital they need to get to a Series A is an unnecessary constraint

When we invest in a startup we expect aspects of the roadmap will change, heck, if it doesn’t I’m suspect they’re not taking enough risks or aren’t running the right experiments to get the data they need. Why should I expect premature precision in budgeting and forecasting the capital requirements? Of course a CEO should be thoughtful and disciplined when it comes to their cash and early stage startups don’t usually die because of lack of funding but rather lack of ideas and output. At the nascent point where we invest I’d prefer a CEO to be absolutely correct about their focus and directionally correct about the economics it takes to get there. You should get multiple bites at the apple if things are going well.

2. Series A investors are increasingly looking for derisked companies and willing to pay more for momentum

While there still exist conviction-based VCs, many more are momentum-based. That is to say, evidence of a startup being a potential outlier is worth a lot more to them. Why? Well, the long path to liquidity means many GPs don’t have much capacity open and the cost of getting stuck with a mediocre company is high (sucks up capacity and a competitive blocker for other investments). Later stage capital markets seem to be more willing to pile into perceived “winners” so the Series A VC can draw a path to where the next few rounds will come from. A result, the more mature the vertical (SaaS, commerce as examples), the less interested a Series A VC will be in an investment that just checks the boxes – ie it’s not about simple milestones. Which also means….

3. Startups are raising more total dollars, in various configurations, to get to the point where a strong Series A can occur

Many of our most successful investments have raised 2-3 rounds of capital before going out to do a Series A, in various configurations, in order to build not just product-market fit, but a real company! They’ve gone to market for a Series A that’s happened quickly and from a point of strength because they’re a real operating vehicle, not just six months of heat. This was the case with Lumi, who closed a very competitive Series A led by Spark. While the total amount they raised during their seed phase wasn’t out of line with a single larger round, they traunched it in a way to accelerate when necessary without taking all the dilution upfront. Call it whatever you want – a pre-seed followed by a seed followed by a seed-2. I don’t care – those are 90% marketing terms.

4. Founders benefit from having a financing partner who will write more than one check into the seed phase when necessary or desired

Homebrew will write multiple checks into your seed phase when it makes mutual sense. We’ve participated in pre-seeds and then led seeds. We’ve led a seed and then doubled-down to help a company go even further before heading out to the markets for a Series A. We don’t need outside validation because we’re investors of conviction. So yes, whether you’re raising your first $500k or multiples of that or your last $1m before a Series A, we want to chat with you.

So founders, whether you work with us or not, Homebrew’s belief is that seed is a phase and increasingly having an investor of conviction who can back you through the entirety of the phase is a competitive advantage. 

[Inside baseball: our goal is to concentrate our dollars in 6-8 investments per year because that allows us to concentrate our time and sweat too. For Fund 2 so far that’s looked “typically” like ~$1m of your first $2-3m raised, but we’ve done several pre-seeds, participating in rounds < $750k and then putting more into your seed. We’re agnostic and can work with you about pros and cons of different approaches. And yes, there is such a thing as “too early” for us, but that’s based on type of company, not stage of development. Will write a separate post on that…]