What's 🔥 in Enterprise IT/VC #256

Supersizing 🍟 of Seed + the race to be 🥇 + bigger is not always better

Sep 25

Congrats to FreshDesk, a customer support platform, on its massive IPO, now worth over $12B, and also creator of over 500 millionaires in India 😲! However, the big news this week is Greylock’s announcement of its $500M seed fund, yes seed fund! This has had every VC and founder chatting nonstop over twitter, texts, and calls about what this means moving forward.

Greylock @GreylockVC

1/ We at @GreylockVC are excited to announce we’ve raised $500M dedicated to seed investing. This is the industry’s largest pool of venture capital dedicated to backing founders at day one.

$500M for Seeds | Greylockbit.ly

Dan Primack @danprimack

1/ $500 million for seeds is ridiculous. 2/ Except that it's not, which also is ridiculous.

Greylock @GreylockVC

1/ We at @GreylockVC are excited to announce we’ve raised $500M dedicated to seed investing. This is the industry’s largest pool of venture capital dedicated to backing founders at day one. https://t.co/j7RDGCv6mQ

Before I share my two cents on how this impacts the world of VC, let’s take a step back and look at the market. Using FreshDesk as an example, look at these numbers below: Accel was first in and backed the 🚚 up over time and then Tiger was next doing the same - both gobbled up as much ownership as possible. Their stakes are worth over $2.3B 🤯 each and the next largest shareholder, Sequoia, has 1/2 the ownership that the other firms who were in first do.

Madhav/The-CapTable.com @madhavchanchani

At $36, both Accel & Tiger Global have shares worth over $2.3 bn Sequoia Capital has shares worth over $1.1 bn Girish Mathrubootham - $600 mn That's the shareholding pattern before the IPO from @thecaptableco article - the-captable.com/2021/08/freshw…

As I’ve always said…

Ed Sim @edsim

There are only two rounds in venture now, day one or growth Adding my favorite gif

And here’s why:

If you’re not on the cap table on day one to build the relationship with the founder and also have the opportunity to preempt the next round or get pro rata, there is little opportunity to buy the ownership you want over time, especially because of how 🐅 has changed the landscape and can move quicker and pay more than anyone else. Concurrently, more seed investors (that term means nothing now 😄) have added Opportunity Funds (we have two ourselves @boldstartvc) which means they are investing longer into the company’s lifecycle meaning there is less room for new investors.
The entry price point, no matter what it is, even if the seed round is $20M, will be the lowest price paid with the most ownership for each company.
Finally, when founders and investors swing for the fences, the outcomes are bigger than ever 🤯. Case in point from this week:

Ari Levy @levynews

Toast opens at $32.5 billion Freshworks opens at $12.1 billion That's 19 tech companies (by my count) that have gone public in the U.S. THIS YEAR that are now worth > $10 bln. That's nuts.

To be clear, this does not mean that bigger is better or $20M is the right number for founders. In fact, I would argue that too much 💰 too early can kill a company.

Ed Sim @edsim

More 💰 than you need from day 1 can be blessing + curse Blessing: lots of runway, can hire/pay amazing talent Curse: can easily lose focus + try to do too much, hard to say no, huge expectations 🔑 Continue to operate like scrappy startup + only scale at real PMF

What we have is the supersizing of venture from exits to growth rounds to “seed” rounds to fund sizes. And within this context, the earlier you are, the more you can own and the less you pay relative to other rounds - that’s it.

So what’s a seed firm to do in this market? How should founders think?

Semil from Haystack lays it out and important to read the 🧵

Semil @semil

As VCs move earlier & earlier with more money, I'm reminded of a line from VC elders: Investors can rarely help founders find product-market fit. I'm sure there are a few exceptions, but I think about this truism a lot.

Ed Sim @edsim

@semil VCs take too much credit for what they can do. I can assure u having the wrong one first can kill the company. Best ones have patience + help founders not chase 1st dollar of revenue as sign of PMF. They can can certainly help accelerate time to PMF but can’t do it for them

Samir Kaji from Allocate nails it

samir kaji @Samirkaji

After a lot of conversations and thinking, I think the two toughest fund profiles to generate alpha in VC today are: 1)Non tier 1 generalist Series A fund 2)Generalist seed fund that invests in fairly consensus based companies/founders w/o benefit of capital and brand scale.

For the seed firms not entering the $400-500M “seed” arms race where seed isn’t really seed, my advice is simple - be first and specialize or be first and write smaller checks and get in the best deals. Every other strategy will get wiped out. Being first means partnering with founders and not investing in companies. It means taking technical risk which I would argue in today’s world is not that high versus what it was 20 years ago or unless you’re investing in biotech or other science projects. It also means writing a much bigger check on day 1 as even these day one rounds are no longer $1-2M but $3-6M. It also means your fund size does not have to be $400-500M but it has to be $125-250M.

And founders, if you think you’re getting a $20M seed check from Greylock, I can assure you the chances are slim. Not much has changed as many of these firms have always written these checks to their repeat founders and are just relabeling as massive seed funds. For those underdog founders, the ones we love to partner with, you have plenty of great day one or first check partners to choose from and bigger is not better!

Ed Sim @edsim

Are we going to see a $1 Billion seed fund next? There are no longer seed rounds Just dayone.vc or firstcheck.vc Let’s go! It is the best time in history to be a founder!

boldstart venturesDay one partner for developer first and SaaS founders.firstcheck.vc

Partner with a firm whose interest is 100% aligned with yours to help deliver the best next round possible without conflicts, who has the time to spend on day one founders versus investors looking for companies and also invest in Series A + B rounds, who specializes in your zone of expertise, who can help you with all of the other business functions so your sole goal can be getting to product market fit faster, and one who will be patient before pushing you for ARR!

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

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