Earlier this year, Sequoia and Index Ventures each unveiled seed funds of roughly $200 million. Then, Andreessen Horowitz and Greylock Partners announced seed-focused pools of capital with $400 million and $500 million, respectively.
That’s a total of $1.3 billion from four funds—a considerable sum for a stage that in the US collected $8.7 billion in 2020 and $8.6 billion in the first three quarters of this year, according to the Q3 PitchBook-NVCA Venture Monitor.
Greylock, a16z and other multistage firms typically make their first investments into companies at Series A or B. But now that they’re competing at those stages with Tiger Global and other crossover investors, brand-name venture firms are moving into the seed market, where competition among VCs historically has been less intense.
As rounds beyond Series A get more competitive, multistage firms aim to secure less expensive stakes in the most promising startups as early as possible and then continue to build their position in these companies over subsequent rounds.
“We are seeing a lot of groups trying to go earlier and earlier,” said Miguel Luiña, head of global venture and growth equity for Hamilton Lane, a firm which advises limited partners and itself backs venture funds. Luiña added that this approach is becoming a “selling point to LPs.” Since later-stage rounds now command very high valuations, firms that hold seed stakes benefit from significant step-ups in price.
One firm that has capitalized on LPs’ increased interest in seed investments is NFX. The seed firm just this month raised a $450 million third fund, which is over 60% larger than its $275 million second vehicle and one of the largest seed funds on record. Hamilton Lane is an LP in NFX, according to PitchBook data.
An abundance of capital
The market is now flooded with capital from Series A investors who are eager to write the next checks to seed companies as soon as they begin showing signs of traction. Michael Kim, founder of Cendana Capital, a seed fund-of-funds, said he routinely hears from fund managers that startups are receiving hefty preemptive Series A offers three to six months after seed rounds close. Since its founding in 2010, Cendana has backed dozens of seed and pre-seed firms, including Lerer Hippeau, Forerunner Ventures and Uncork VC.
Multistage firms have previously backed companies at the seed stage. But the strategy hasn’t been an area of focus for these funds, which has prompted some seed investors to question multistage firms’ dedication to very early startups.
“Many of these firms don’t care if they own 3% or 12% of the company at the seed stage,” said John Vrionis, co-founder and managing partner at the seed-focused Unusual Ventures. “They just want to make sure that they have an inside lane to put more money into these companies at later stages.”
Multistage firms also aren’t as price sensitive as traditional seed funds and are open to joining seed deals at higher valuations, said Vrionis, a Lightspeed partner before launching Unusual Ventures. But he is skeptical of their willingness to roll up their sleeves to help get the startups off the ground.
“These firms have hundreds of portfolio companies. How much time would they really spend with a company where they’ve invested $4 million or even $8 million?” Vrionis said. “They are just buying lottery tickets.”
Accepting funds from large, passive investors is common among early-stage startups. Some founders may want to take the highest offer and be left alone.
“I think this is a mistake. Even Cristiano Ronaldo and LeBron James need a coach,” said Vrionis, whose firm emphasizes providing founders with company-building advice and other support.
Different approaches
Multistage firms with and without dedicated seed vehicles have varying approaches to seed investing, according to Luiña. He said that some firms have specific teams that spend as much time at this stage as most seed investors. Greylock, for instance, has a history of taking an active approach in some of its early investments, including incubating companies such as Abnormal Security inside the firm’s offices.
But other managers are happy to “sprinkle around” small seed bets, Luiña said. They don’t always spend much time on these investments because they comprise a de minimis portion of an overall fund.
It is common for lead seed investors to co-invest along specialized seed firms, and Greylock, for its part, intends to continue this practice.
“For seed investments we make, we recruit helpful angels. On many investments, we team up with seed-specific or domain-specific funds,” a Greylock spokesperson said via email.
Time will tell how many resources top-tier firms will allocate to their seed-stage investments now that some of them have dedicated seed funds. In the meantime, the most likely near-term outcome is that valuations of the most sought-after seed deals will go up even higher.
Median valuations for US-based seed-stage companies have nearly doubled to $12.3 million from $6.8 million in 2015, according to PitchBook data. But investors are willing to pay much more for companies founded by experienced entrepreneurs, said Chris Farmer, who leads early-stage firm SignalFire. “I’ve seen deals at pre-money valuations of $50 million, $70 million, even $100 million,” he said.
Investors are indeed willing to plow enormous sums into the most promising seed deals. When former Zillow executives Greg Schwartz and Carey Armstrong joined forces to start Tomo, a mortgage platform focused on first-time homebuyers, VCs like Ribbit Capital, DST Global and NFX were ready to fork over a $70 million seed check when the startup was only an idea laid out in a PowerPoint presentation, according to James Currier, general partner at NFX.
Many founders will welcome the higher prices, and having a top-firm on the cap table could also attract customers and employees.
But Cendana’s Kim warned about other potential drawbacks beyond large firms’ arguably more hands-off approach noted by Vrionis.
“If I were a founder, I would welcome the large firms to be part of my seed round, but I would not want them to lead it,” Kim said. The reason is that the same firm often is expected to lead the Series A round; but if it doesn’t, other VCs could see this as a negative signal about the company.
Farmer said he often uses this as an argument to beat large funds in competitive deals.
“I’m better aligned and more involved with the founder than a multistage firm that is essentially buying a call option for an opportunity to take a bigger stake later,” he said.
A branding exercise?
Traditional seed investors also see multistage firms’ foray into the seed market as a marketing exercise that can help them learn about attractive opportunities earlier.
“I think they want to be perceived as an earlier-stage investor,” Farmer said, adding that the seed funds give them an opportunity to meet founders as early as possible but not necessarily write a check right away.
Some investors said these firms’ efforts to add to their brand through seed offerings could help them woo more founders to send them pitches.
“I think it’s still aspirational,” Currier said. “We haven’t started to see Greylock or Andreessen or much of Sequoia in our deals.”
Competition at the seed stage is poised to become fiercer as big firms join deals. If these firms start hiring partners specifically to focus on the seed stage, that could signal an even more dramatic development in the market, Kim said.
“If they do, that means they will probably start leading many rounds,” Kim said. “That is when it is going to become even more competitive for our fund managers.”
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