Apologies in advance to my friends and colleagues that will disagree and/or dislike this post. But anyhow …
The world of venture fundraising has changed again dramatically the past 24 months. 250+ new seed funds have been raised (wow!) in the past 24 months. That really is crazy. And Big Funds have added even more growth capital, bigger core funds, and in many cases, more seed capital themselves. Competition for the hottest deals is at an all-time high in SaaS (yes, B2B trails B2D by 3-4 years, so now we are catching up there, too).
Net net, this means a new explosion of types of funds you can raise capital from in the early-ish days … if you fit the narrow mold of venture fundable startups.
This doesn’t mean getting funded is easier. In fact, even with all these new funds and new capital, it may be harder. Because the flip side is, everyone is hunting bigger exits, more Decacorns and Unicorns. More progress, more proof, better metrics.
As part of this change, more and more Big Venture Funds ($1b+) are looking to write tiny checks into as many potentially promising startups as they can. They view it as an implicit option, and a chance to track the new Salesforce or Facebook before it breaks out.
There’s nothing wrong with this in insolation, and it can certainly feel good & validating to have a Big Name invest even just $100k in your startup early. And all cash is green!
But my simple advice in the current climate: if you do take a small check from a big fund early (seed round or earlier) … maybe just take one of these checks. Because each will be viewed as an implicit option on your fundraising future. No matter what the legal docs say.
What’s changed? There’s always been an implicit social proof downside from taking a small check from a big fund too early. If Big Fund writes a small check but passes on the next, bigger, real round … what does that say about the startup? Well, if nothing else, it’s not a positive! If the Smart, Successful Folks aren’t leading the charge next time … what is everyone else missing?
That’s always been true, but in most cases, it’s been a minor issue. And having a Big Fund invest early often can give the team a nice psychological boost from the brand equity. That’s minor, but it’s real. Recruiting is easier, at least to some extent, with a prestigious investor behind you.
Today though, Big Funds are even more aggressive than ever in SaaS. Growth funds are investing at an earlier stage. There are more and more opportunity funds to invest in winners. Everyone is leaning in a bit more, to deploy more capital, more quickly — but only in their winners. And that means elbows have gotten even sharper. And that means the perceived meaning of a Big Fund not investing in the next round is amplified in today’s climate.
Today, if you have 2+ Big Funds in your seed rounds, many of these 250+ new seed funds will view you with skepticism. Not just because the fact the Big Guys aren’t leading the round is a negative signal (which it is, at least a little bit). But also because they fear they’ll be elbowed out of the round even more aggressively than just a few years ago. More money, going into more startups, more aggressively, puts the squeeze on a lot of smaller investors. They may even be reluctant to engage at all in the next round at some level. Or expect a large discount because the Big Fund implicitly passed. Or be reluctant to issue a term sheet at all if Big Firm is just going to push them out of the deal anyway. Why bid, if you are guaranteed to lose? Better to focus your time as an early-stage investor on startups where there aren’t structural impediments for you being able to invest.
My only real advice is this: I used to think the signaling issues from Small Checks from Large Funds to be real, but minor. So what. What’s changed is the strength of that signal. No one wants to miss Slack again. If you are a little bit hot early, everyone wants to put in $100k, $250k, etc. just in case. So they don’t get crowded out completely in the next round.
And when they don’t write a second check, everyone worries a bit more than they used to.
All money is green. Take it. SAFEs, debt, equity, bitcoin, whatever. Get the round done. Grow or die. And one Big Fund in your Early Round, if you really like the partner, may be great. We all need as many allies as we can get. Maybe stop there though with one.
If you have options, at least today, think about optimizing the right sized investor for each round. Get the best investor for each round you can, but ideally, one that is stage appropriate. No need to scare off too many of the next guys. They will still be there in 18 months.
And no need to give away too many free perceived options on your future.
(Cross-posted @ SaaStr)