Seed rounds raising $2-3m?
When did raising $2-3m become a seed round? More than likely when the market became happy to bear it. To me, that sends a signal with red flags written all over it called the peak of the market.
Seed is super high risk. Seed means that there is not any true product-market fit. That there is little to evaluate except an idea, a team and perhaps something quasi-built. Today when there is plenty of open-source software, why does someone need that much capital?
We can point to so many companies that have taken in tremendous amounts of capital at ridiculous valuations. Even companies that are valued so high that I find it hard to believe that everyone sitting around the table isn’t wondering that this is not going to end well.
There are still many founders out there raising capital for companies that are extremely mature or really exploring new roads expecting to get funding at valuations that are twice as large as they should be. What is it that they don’t get? Just because you can doesn’t almost mean you should.
When this all blows up, it is going to be harsh for everyone including the founders. Being level headed about valuations, the amount of capital one is raising, growing the company at the right pace with the right amount of capital works. Building companies too fast with too much cash can lead to pissing a lot of money into the wind.
I could go on and on but it doesn’t take much to point to public markets and see the reality of where things trade for software, fast-casual restaurants, consumer products, marketplaces, and media to understand what companies need to be valued at from the start to the end.
When I get the emails that say we are raising a seed round at $3m and are 50% committed, all I can do is roll my eyes and say well, good luck with that.
Comments (Archived):
Perhaps it’s just corruption. Follow the money as it gets spent and with whom.
Startup investing is a victim of some well known and public successes. As such it has now been ‘big boxed’. Everyone wants in on the game. This is exactly what happens in business. Happened as you know to stereo stores when we were growing up. You remember that, right? Small specialty shops selling hi fi equipment. Marantz used to be in those shops. Then all the sudden you had the big box stores and that vanished. All about volume and price not quality and exclusivity (on a large scale sure there are specialty small brands).That there is little to evaluate except an idea, a team and perhaps something quasi-builtWas it ever primarily about the idea and not about the team though? In a sense when you invested sure you were looking at the idea and the product and so on. But primarily you were looking at the individual or the team and putting a high degree of relevance to what you saw and how you hoped they could figure it out or navigate or pivot (hate that expression but will use it). Because they were ‘smart’ and driven and hi capacity or had the personality of a winner. And if they had a degree from a well known and prestigious school you probably thought they had more potential to succeed. If not you that is what others did and still do (and perhaps for good reason).For younger people may be interested in knowing it was not always like this. If you were a young person and didn’t know anything (but were smart) you typically received little respect from older established people in business. You’d never get money. Getting money for something you didn’t know about simply did not happen. You couldn’t even get hired by someone they’d say ‘you don’t know the business’.That is what happened to me. When I graduated (Wharton no less) I couldn’t get a job working for someone my Dad knew who was in the business I thought I wanted to be in. He said ‘you are smart but unfortunately you don’t know this business so I am not going to hire you’. So I then started the same business. Guess what? That business is still around today. The person who wouldn’t hire me is long gone. He was right by the way I didn’t know the business so I can’t fault him (but love to tell the story). He also told me where I wanted to open was a non-starter. But I made it work. Once again he was right not wrong. General thinking he was right. So it took more work. That location is still in business.So that is how things have changed. People are willing to give chances to people who know very little vs. even those who (are older) who know something.
I disagree. Frankly I thought at the valuations and round size that Joanne was doing it was too high.Every single time it is the same. Why there are so few angels that span decades. People make money, they angel invest, the cycle goes down and they get SCREWED. Seen it happen in the 1990s, 2000, 2008, now we will see when. Soon.This time more “non technology” deals are getting funded. Now in some sense I agree with this. Pre-90s sold technology to the hardcore mainframe department, 90’s sold technology to the CIO: client server, 2000’s to CIO and end user department: cloud, now you almost have to reach end consumer: Mobile (meaning displace the entrenched company)But this is not “big box”. Big box means you built a niche and then the big box store came in took that, outsourced production to low cost (China)Now you have Amazon doing this and you see direct to consumer mattress, razor, glasses as examples.But this is like what happened in housing when everybody thought they could make money. Innovators, imitators, idiots. Sure now there are disciplined investors with low cost capital in housing. Go to Best Buy, Target, and Walmart HQ. I have a ton that is the game they play.But what is happening here is that people that haven’t touched the fire are going to get burned. And when they do not only will they run around with their hair on fire, but their ass will be catching as they say. These are not disciplined investors. And yes at the high end there are a few that are not either (ahem how long have I been saying We is bs)I have thought that it might be interesting to push U.S. made stuff but it is kind of like paying restaurant staff $25 an hour and saying no tips (yes, yes, I know this happens in NYC, stay in that echo chamber if you think it translates) people say they will spend more money….until they don’t.But there are things and services where you can’t purely go to low cost and I like those.
I thought at the valuations and round size that Joanne was doing it was too highIn the end if money was made then it was the right decision, though right? If you invest or you buy something and it is worth more, or you can sell it for more then very generally that is a win. Of course yes there is opportunity cost and the lower you buy the more bets you can make.Also comparing to what used to be I personally don’t find to be a good way to determine value many times. For example you have people who become Doctors and whine about the cost of medical school. You have people that go to private colleges and whine about the cost of the college. In the end if you are able to make a living with the education you have won even if your parents paid vastly less. If you choose the wrong major and so on then that is the mistake a large part of the reason you can’t pay off college. $200,000 for a college education? I had to buy machines after college that were that much (inflation adjusted). In no way was I guaranteed to be able to make a living with those machines (and that debt, leases, loans you get the idea). Graduate from medical school with $200,000 debt and say 30 years to pay it off at a low interest rate? Nothing to complain about. Liberal arts degree and no job prospects and working as a waiter? Plenty to complain about.I can tell you that I paid less for the same college than you did and obviously what people pay today. But if I had to pay as much (inflation adjusted) as it costs today it would still be a win.But this is not “big box”. Big box means you built a niche…Yes for sure that is my made up use of the word my version of ‘gate’ being tacked onto anything that is a scandal and so on. In this case I mean to imply ‘everbody and their uncle’ hence things will get bid up and so on. Or when you have something good going on and then others see that and get into the game.You remember how Staples got started? Thomas Stemberg was at a job interview at Makro Self Service wholesale place in Langhorne PA (off route 1). I used to go to that store as a kid. It was the early concept (at least where I was) of a store with bulk items. So while waiting for his interview he sees the office supply area and the people there. And bingo the idea for Staples is born (hopefully w/o checking and from memory I have that right). Well that is part of big boxing the way I see it. And it’s not just cost and overseas. I would guess that most of what Stemberg did initially included plenty of things that were made the same way and sold the same way as at the office supply store on Chestnut St (long out of business I used to go there in high school).Back to my point. People over the years have seen cases where things looked stupid but in the end someone who was stupid that took the chance made out big. They don’t know as much about the stupid things that failed. An example (of a win) is all the money Amazon was losing for years on Jeff Bezos’s dream. God know almost everyone thought that the money that he was losing you’d be an idiot to think it would ever work. Sure the idea in theory seemed solid enough ‘last man standing and rope a dope’. And you know when Amazon will start making even more money? When they can charge more and increase pricing even ever so slightly.
There is a misnomer that if you raise more money you are insulated from failure
We’re raising a $2-3mm “Seed” round right now. We quickly approaching $1mm in ARR, and have product market fit. Why are we calling it Seed? Because investors on the West Coast mostly have just shifted the rounds up. The A’s are $5mil or $15mil or more. So what was Seed is now Pre-Seed. And often companies are having Seed 1 and Seed 2, etc. So I’m not sure the pre-revenue folks are really getting those rounds (unless you’re a rock star founder). It might just be the name change.
Might be but might be inconsistency across the board.