When you meet startups and VCs these days, there’s usually a lot of verbiage spent on defining stage (pre-seed, seed, post-seed, pre-A, Early A, A, Late A, B, C…) As a venture eco-system, we continue to struggle with this.
The sources of semantic confusion on round/stage labels
Some of this struggle comes from startups trying to define their stage in a way that will support their fundraising efforts (or the specific meeting they are in). You’ve already done a seed round, you think are too early for a Series A, you are meeting with a Series A fund, and so do you call yourself “Early A” or do you risk calling yourself “post Seed?”
Some of this struggle comes from VC firms trying to define a rational or differentiated investment strategy — and trying to explain that to the eco-system so they see the right dealflow. Sometimes this is done very clearly. For example, see Notation’s emphasis on “first check” and Bullpen’s thoughtful definition of “post-seed.” Other times, listening to a fund try to define their stage can be painful: “We are a post-seed to ‘late A’ VC firm, but we won’t do seed extension rounds, and we occasionally do pre-seed first checks but consider that off-strategy. Oh, also, we just led a Series C in a company where we know the founders really well.”
Thoughtful Responses to the Chaos: Manu, Semil, and Hunter
Some of this confusion is due to the semantic inflation first pointed out by Manu Kumar of K9. In 2014, Manu wrote a post on the New Venture Landscape, in which he highlighted the inflation of later stage (B, C) rounds, the fact that there seemed to be a new type of “pre-seed” round taking place, and that “Seed is the new A.” In 2015, he wrote another piece where he revisited the theme of “Seed is the new A,” going into more detail into how the dynamics of VC growth and capital flowing into the space were causing inflation of round size and shifting nomenclature.
Recently, two blog posts caught my eye that revisit this theme. In February, Hunter Walk of Homebrew wrote an important piece called “Seed is no longer a round, it’s a phase.” Hunter writes about how companies are taking longer and often more complex routes to “Series A” financing and how thinking about “Seed” as a single round — a single point in time — is a lot less helpful than thinking about it as a phase of indeterminate length. A few weeks ago, Semil Shah of Haystack wrote about the significance of the Series A round in the life of a startup and in the life of an early-stage VC.
So in summary:
- Manu argues that nomenclature changes with time
- Hunter argues that these are “phases” of a startup’s life, not “rounds”
- Semil argues that the “Series A” is an absolutely critical milestone
I think they are all correct — and the conclusion I draw is that there are really only three stages for startups
There are only three stages (or phases) in a startup’s life
While it’s always possible to add additional distinctions and classifications, I think in reality there are really only three stages that matter — and they are all defined by what I’ll call the Series A.
Importantly, these stages are defined by qualitative fundamentals and not by some quantitative measure of dollars raised or age.
- The Series A Stage: This, obviously, is the phase of a company’s life that is financed by the Series A round — usually an 18–24 month period. It’s by far the most significant stage because it is during this stage that the company must complete a complex transition: from a company with a great offering that could scale to a company with a great offering that is rapidly and predictably scaling. The Series A round takes place when a Series A investor is convinced that a company could scale. The main risk that the Series A investor is taking (or should be taking) is that the company can not figure out how to scale — but the risk around the potential for scaling should have been eliminated. In the enterprise context (where I invest), this means that a company has a working product, paying reference customers, proven product ROI, and some early evidence that sales cycles are low and sales efficiency likely to be high. There probably isn’t a full sales team in place, and there might not be a VP Sales in place yet. In some cases, there isn’t even a sales team at all. But there is substantial evidence that in the hands of the right sales team, the company could dramatically scale revenues. Building and de-risking that capability is the main activity during the Series A phase.
- Early Venture (Before Series A): The phase before the Series A is defined by an effort to de-risk the question of whether or not the company could scale. Investors in this stage are often taking a long list of risks: but mostly product risk, engineering risk, market risk, and — often — tons of team and execution risk. Because of the myriad of risks, this “pre A” early stage of investing often takes a long time, and often involves a range of financing options. The many terms used in the industry (seed, pre-seed, post-seed, pre-A, seed extension, etc.) are all efforts to capture and categorize various sub-stages of this risky (and often long and painful) phase of a startup’s life. I’m not saying the terms are meaningless — they are not — but these are distinctions with blurry edges. The defining characteristic of this stage is that the company is not ready to start building out the machinery of growth. In the enterprise context, this means the company is still lining up the evidence and traction it needs to justify the Series A: building product, deploying product with early customers, demonstrating product/market fit, proving out the sales dynamics that will support efficient growth, and making sure that the team is in place to execute.
- Growth Stage (After Series A): The phase after the Series A is all about growth. You can call this Series B, C, D, etc. You can call it growth stage or expansion stage. Investors here can include traditional VC firms, “growth” firms, private equity firms, or any other financial or strategic backer. The key, however, is that if the Series A stage has been successful, the company has already built the machinery of growth and can prove that is it working. In the enterprise context, this usually means that a skeleton sales, deployment, and support team is in place. VPs have proven they can hire and bring sales reps up to speed. New sales hires are successfully carrying quota. If relevant, metrics on acquisition, self-service conversion, and user/customer engagement are holding up even as the company scales up. The CEO is no longer involved in all new accounts, and probably not even in all major accounts. The machine is humming and needs more fuel to go faster. The risk calculus is very different, even from Series A, as it’s mostly about expanding a set of activities that are ideally already working.
So that’s it. Three stages. Three types of investors and three sets of challenges.
It’s important to note that the reason Series A is so critical is because it’s transitional. Great Series A investors need to have one foot in both worlds. They need to know how to identify great companies that have not yet but will soon build the machinery of growth, help them build it, and get them additional growth capital later on. Early investors like me need to have a great sense of what good Series A investors are looking for, but most of our energy is on identifying and de-risking companies on the way to A.
I’ve invested in companies that are pre-seed, classic seed, post-seed, post-pivot, seed extensions etc. The unifying factor, however, was conviction that we could get to the Series A phase with a reasonable level of risk.
A final note: why the term “seed” makes me uncomfortable
There is no doubt that the term “seed” is here to stay. Not only that, but pre-seed and post-seed have come to mean real things. We need a term to capture the “pre-A” phase of a company’s life — and as much as I would prefer to use the term “early stage,” I think the usage of the term “seed” is likely to persist.
But I think I am going to continue to resist it. For me, “seed” will always have a subconscious connotation of “spray and pray.” The phrase “it’s a seed check” when coming out of the mouths of certain investors strikes terror into my heart — and should send entrepreneurs running. They are using the word not to describe a phase as Hunter does, but they are using it to describe the check they wrote — it’s small and “pre A” and so it doesn’t matter as much. For every “spray and pray” seed investor, there are many others who are more concentrated and thoughtful, but the word continues to make me uncomfortable.
I see myself and my work as being an “early venture investor.” I work to carefully and selectively build a concentrated portfolio of companies that are clearly “pre A” in terms of stage, but where I believe the likelihood of “getting to A” is high and where I will intend to work hard with each one of them in order to get there.