178. Follow Ons Part 1: Lengthening of Seed Phase

VC Minute
Over the next few days we're going to dive into why follow-on investment is the most important thing for Seed startups. Today, a quick background on the lengthening of the Seed Phase and why Series A raised the bar.

VC Minute – quick advice to help startup founders fundraise better

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This is Rich Maloy with SpringTime Ventures, bringing you the VC Minute and quick advice to help startup founders fundraise better. Over the next few episodes, I’m going to build up a case for why you should be talking to every investor about their follow-on strategy. But first, I can confidently say that our sponsor is a financial game-changer. AVL Growth provides fractional finance and accounting services to companies pivoting from growth to scale. At AVL, they have a mindful growth approach and a proven methodology that are pivotal in making the right moves at the right time. Ready to elevate your financial game? Ready to elevate your company? Ready to move from growth to scale? Head to AVLgrowth.com and explore how they can be pivotal to your growth.

I want to build up why investor follow-on is the most important thing it’s seeding right now. The need for this goes much deeper than the surface level of it’s nice to have that validation from your current investors.” It is absolutely essential that you have the support of your current investors because you’re going to need more than just your pro rata and a show of support from them. So over the next few days, we’re going to talk about Series A raising the bar and why that’s not coming back down, the time between fundraises, the amount of money that there still is in the Seed market, and how Seed funds are reacting in this current environment.

The world that we’re in right now has seen the seed phase lengthen to proportions that it has never been before. We have pre-seed, pre-seed extension seed, seed extension, and seed 2. I’ve even seen pre-seed. A. I’ve been talking about this for a while, and the reality of the market is that it’s harder to raise a Series A. And by the way, it’s harder to raise a Series A because it’s even harder to raise a Series B, and subsequently a C and a D, and all of this because there are no IPOs in very limited M&A. When the gates to the exits finally open, and by the way, everybody is really hopeful that that’s going to happen this year, we’ll see. But when they finally open, then we’ll start to see all of this trickle its way slowly—not immediately, but slowly, back upstream to Series A and to Seed. And hopefully, we will start to see a little bit more graduation from the seed to the A.

All of this has come to pass because Series A raised the bar over two years ago. In retrospect, it makes sense to see how Series A could raise the bar. There have been more venture funds founded in the last five years than in any other period in history. Most of those funds are invested at Seed. Believe me, it’s much easier to start a fund focused on Seed than it would be focused on Series A. So with more small funds and putting more money into Seed companies, Series A funds found themselves with far more choices. They were able to invest in the companies that had the highest growth and showed the most potential, so Series A raised the bar. But given the amount of capital that is at Seed right now, I don’t see any reason why Series A would ever lower the bar. Keep that in mind as we move through the next few pieces of this as to why following is the most important thing with investors at Seed.

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