Wow, that was lots of fun! I’ve been investing at the earliest stages of enterprise venture for 27 years and have been witnessing a sea change in early stage venture and in particular, what it truly means to be a founder’s first partner.

Thanks to my friend Harry Stebbings for hosting me on the 20VC to discuss the new era of “Inception Investing”, the 3 types of Inception rounds, and why it’s happening and not going back.

20VC: The Three Types of Seed Round Today, Why Seed Has Never Been More Competitive, Why Pricing Has Never Been Higher, Why Boards at Pre-Seed Can Be Helpful & How Too Much Cash Too Soon Can Harm Companies with Ed Sim, Founder @ Boldstart Harry Stebbings | Entrepreneur | Investor | Blogger Episode

Harry did a masterful job challenging me in the interview and then breaking down the 7 lessons from the podcast in a 🧵 here in case you want the highlights.

Inception investing is the most competitive area of VC at the moment which means in order to win one must compete with angels, pre-seed firms, seed funds, and multi-stage firms in the 3 types of rounds.

For those who are unfamiliar with the dynamic I’m talking about, let’s discuss how we got here and what “Inception Investing” actually is.

First, growth is mostly dead and many of the largest funds have pointed their 💰 war chests earlier and earlier because well, the pricing is much lower than buying into growth, and one can be relatively insulated from economic factors for the next 2 years while founders are in build mode. In addition, earning spots on cap tables as funds got larger and continued backing up the 🚚 in winners made it harder for later stage investors to get meaningful ownership. Hence the race to be first also encompasses the need to get pole position for the future.

Looking at the data, pole position used to be Pre-Seed, but frankly Pitchbook says the median age of companies funded at Pre-Seed is now 1.2 years old. That’s really not the beginning. Also, I can’t with a straight face call a 3rd time founder building his/her 3rd company in same domain raising $10M at idea stage a pre-seed round. I mean what’s the next round for this founder, a seed round? In that scenario, Pre-Seed just doesn’t have the right connotation for a 3rd-time founder who can and will raise much more. Also would you call 2 founders raising $20M a pre-seed round? What, are they going to raise a $50M seed next?

What’s needed is a new definition for what first is.

Let’s call these “Inception Rounds”.

“Inception Investing” means engaging with founders well before they incorporate, helping them battle test and iterate those ideas, helping them pre-sell some of the initial hires, and leading those rounds upon company formation so founders can run fast out of gates and not spend months trying to raise capital. It’s been happening for quite some time and is not constrained by any dollar amount.

Here’s timeline showing where Inception Rounds really happen in green, and also the median age of companies upon raising rounds.

This is not incubating, since that’s not scalable unless that is all you do like folks at Atomic who are great at it. This is pre-accelerator since, well, you have to be incorporated to join, and this is pre-Pre-Seed.

There are 3 kinds of Inception rounds I regularly see:

Discovery Rounds: <$2M

These are usually reserved for first-time founders who are exploring new sectors like WASM, who just need a bit of funding to hire their first few folks and iterate on some ideas. Discovery rounds typically graduate to a Classic or Jumbo round. This is the right size for a “Pre-Seed” fund, but it seems like many Pre-Seed firms still want a product before funding. Perhaps this is the byproduct of raising institutional capital?

Classic Rounds: $3–5M

A Classic round is generally for a first or second-time founder who usually can raise more but understands necessity is the mother of invention. They choose to be more constrained and lean to move faster, setting a lower bar for next round success. This is where most Seed firms play, but the median age for startups raising a Seed is 2.7 years — far from Inception stage.

Jumbo Rounds: >$6M

These rounds are almost always for a seasoned repeat founder with a prior exit, building their next company. Many times, it can be iteration #2 or #3 of the same idea, reinventing an existing market with a huge TAM. When multi-stage firms meet founders and markets like this, they are ready to SUPERSIZE the Classic round. This is also known as the classic multi-stage, Billion Dollar Fund round.

The race to be first

I ❤️ founders who prefer capital constraints, but sometimes you must also be able to do a few Jumbos for those special founders. This is the new race to be first — finding those special people, working with them well before incorporation, and arming them with capital to run fast.

Founders who are thinking about starting companies need one place to go to avoid all this confusion of going to a Pre-Seed fund, Seed fund, multi-stage or whatever. They need someone who can iterate with them, give them the confidence to incorporate, and know that when they become a legal entity they have the right amount of capital they need to succeed from the beginning. They will also need to partner with a fund with the right size who is big enough to lead any of these rounds, but also small enough that they get 1:1 attention — which means firms with concentrated portfolios.

This is happening across the board, especially as many $1B+ funds are creating programs to help founders start. But let’s face it — while it’s an amazing way for these firms to leverage brands built over decades, it’s really just a programmatic way to put option checks into lots of companies, and no great founder wants to be someone’s option.

For better or worse, the cat’s out of bag: look at the dispersion of round sizes as firms from Pre-Seed, Seed, and $1B+ compete and in world of multiple compression.

First is clearly the best place to be. This dispersion went from $300k-$5m in 2018 and almost doubled to $300k-$9M. This is not going back, and everyone must adapt! (I also posted on Twitter/X if interested in some of the comments/discussion)

If you’re a technical founder thinking about starting a developer first, enterprise infra, or SaaS co, please do reach out. Also check out our resources page and our Dev First Founder Toolkit for how to accelerate your path on day 1 (first day of incorporation) to PMF.

There are lots of nuances here but over the next couple of months I hope to share how to pick the right Inception Investor and how to start fast out of gates from Inception and upon funding at Incorporation.

As always, 🙏🏼 for reading and please share with your friends and colleagues.

Scaling Startups

1. Startup nation 🇮🇱 - resiliency

   And from Tal Zackon, co-founder of Tres.finance, where I’m on the board sums up the mentality:

   The dissonance between what happened to us as a nation and the fact that life continues outside of Israel as usual and there is no one else to do the work for you is very difficult. Victory is not only in the battlefield, it is also in continuing to live and succeed. We have no other option

2. Storytelling matters…starts with recruiting a co-founder and then first hires before you even raise 💰

   You may have brilliant ideas, the kind that could revolutionize the world, but unless you can express them effectively, they will have no force, no power to enter people’s minds in a deep and lasting way.

3. Seed takes a long time before delivering $$$ and when the best do it really does 🧵

4. Not every founder is built to be a CEO - amazing introspection from Nick Schrock, founder of Dagster, on his decision to make a change and the end result…

Enterprise Tech

1. Typical times to get $1m ARR from Lenny Rachitsky - Infrastructure cos take longer to bake and mature, also when creating new markets - Snyk where I’ve been involved since inception took 1.5 years to first customer and 2.5 years to first $1M and then 📈

2. 👇🏼 💯 what I’m hearing as well

3. The AI opportunity for applications according to Microsoft

4. Other interesting notes from Microsoft earnings transcript.

   First, growth is reaccelerating - albeit slightly but could be sign we are near the bottom

   Revenue just from Azure jumped 29% during the quarter, higher than the 26% consensus among analysts that CNBC and StreetAccount polled. Microsoft doesn’t disclose Azure revenue in dollars. At constant currency, Azure revenue rose 28%, accelerating from 27% in the fiscal fourth quarter.

   from Satya on net new workloads in cloud

   Second thing, of course, is the workloads start, then workloads get optimized and then new workloads start. And that cycle continues. We'll lap some of those optimization cycles that were fairly extreme perhaps in the second half of our fiscal. And the third thing is, for us, that's unique and different is new workload starts around AI.

   Given our leadership position, we are seeing complete new project starts, which are AI projects. And as you know, AI projects are not just about AI meters. They have lots of other cloud meters as well. So, that sort of gives you one side of what's happening in terms of enterprise.

   The other piece is on the SaaS side. Obviously, again, this is a new product that's going to go through the enterprise adoption cycle. The results are on productivity, which we demonstrated with GitHub Copilot is what's giving us good confidence and our customers, more importantly, good confidence around what these products represent in terms of value. And so, we are in the very, very early innings there.

   Github copilot - 1M paid which at $120 per year = $120M per year…

   Now on to developers. With GitHub Copilot, we are increasing developer productivity by up to 55% while helping them stay in the flow and bringing the joy back to coding. We have over 1 million paid Copilot users and more than 37,000 organizations that subscribe to Copilot for business, up 40% quarter over quarter, with significant traction outside the United States. This quarter, we added new capabilities with GitHub Copilot Chat, which are already being used by both digital natives like Shopify, as well as leading enterprises like Maersk and PwC to supercharge the productivity of their software developers.

   All of the number of developers using GitHub has increased 4x since our acquisition five years ago.

5. “Navigating the LLMops landscape: What you need to know” from Insight Partners

6. AWS Earnings Call Transcript

   Some nuggets:

   Are we near bottom as AWS growth rate did not decline for first time in many quarters

   AWS revenue grew 12% year over year in Q3, with $919 million of incremental quarter-over-quarter revenue and now has the annualized revenue run rate of $92 billion. AWS' year-over-year growth rate continued to stabilize in Q3.

   On Generative AI Impact

   A few last comments on AWS' generative AI work. As you can tell, we're focused on doing what we've always done for customers, taking technology that can transform customer experiences and businesses, but they can be complex and expensive and democratizing it for customers of all sizes and technical abilities. It's also worth remembering that customers want to bring the models to their data, not the other way around. And much of that data resides in AWS is the clear market segment leader in cloud infrastructure.

   We're innovating and delivering at a rapid rate and our approach is resonating with customers. The number of companies building generative AI apps in AWS is substantial and growing very quickly, including adidas, Booking.com, Bridgewater, Clariant, GoDaddy, LexisNexis, Merck, Royal Philips and United Airlines, to name a few. We are also seeing success with generative AI start-ups like Perplexity.ai who chose to go all in with AWS, including running future models in Trainium and Inferentia. And the AWS team has a lot of new capabilities to share with its customers at its upcoming AWS re:Invent conference.

   CodeWhisperer, AWS answer to Github Copilot - bring models to data

   The No. 1 enterprise request for coding companions has been wanting these companions to be familiar with customers' proprietary code bases. It's not just having code companions trained in open-source code, companies want the equivalent of a longtime senior engineer who knows their code base well. That's what CodeWhisperer just launched, another first of its kind out there in its current form and customers are excited about it.

Markets

1. Yep - happens in every cycle - from BuccoCapital Guy

   Aswath Damodaran on low rates: “Risk capital wasn’t just accessible, it was excessively accessible Businesses that should never have become businesses w/ founders who are borderline sociopaths raised billions and burned though it b/c risk capitalists threw money at them”