The Inflation of the Seed Round
The majority of angel investors that I have met like to put in about $25-100K into a round. Of course there are the outliers but people who are consistently investing in companies with their own capital at the early stage are within that range. These people are the real financial risk takers who hope to catapult a founder and their company to becoming a well-oiled machine that can go on to raise institutional money and grow. Sometimes it works and many times it fails.
In the past couple of years I have witnessed the slow creep of the seed round. In the 90’s when technology was just starting to make an impact in the start-up world creating a frenzy of first time internet companies the cost to start those was much higher. There wasn’t any open source platforms to build companies on. Then of course the mortgage crisis came along and the start-up industry went through a bit of an implosion before returning to the slow build of what we see today.
When the next generation of founders came back with new ideas the cost to prove out the model, aka raise the seed round, was not that high. That has changed. In the past year the majority of companies that I have talked to believe that they are worth $7-10m if not more prior to proving out the model and are raising seed rounds of $2-3m. I actually asked two founders why did they think they were worth $7M when they had not really built anything yet? The answer was that is what everyone else in their vertical was getting. Then I saw another one where they had raised $500K from an accelerator and the next round was a seed round for $2.5. That is not what I would consider a seed round. The next round should give you an 18- month run-way so that is a lot of capital to piss through to figure out the model on stage 2.
What this all says to me is this will not end well. Companies who raised at high valuations who are even doing well, who have done everything right, will find themselves with down rounds as they grow because the smart investors and the later stage people who invest on analytics not a hope and a dream, won’t write the check. And not every vertical is equal. Hardware, SAAS, CPG, fast-casual, marketplaces to name a few are all valued differently. All you have to do is look at the publicly traded markets to see the real worth.
And so, I will be watching and not participating in supposed seed rounds where I can’t own enough of the company to make it worth my financial thesis. It doesn’t make sense. Why others do, is beyond me.