In the last year or so, the debate over the definitions of seed versus pre-seed capital (sometimes called genesis rounds) has exploded. Much digital ink has been spilled about what dollar amount constitutes a pre-seed and how that might affect a startup’s ability to go raise a “normal” seed round from institutional investors. (Among those trying to inform the industry and offer perspective was my partner Rob Go.)
Despite all of this discussion, however, it really doesn’t matter.
This conversation is about optimizing fundraising “optics,” which shouldn’t be a primary focus for entrepreneurs.
Our stance at NextView is that any reasonable amount of pre-seed capital raised (generally speaking, sub-$1M) won’t change how we look at a possible investment in a given company. Instead, we care about what should be both obvious and most important: the state of the business and it’s potential going forward.
But given the popular dialogue and related confusion, it was no surprise when I found the following email from an entrepreneur friend in my inbox on Monday morning:
Can I ask your opinion on something? Is there an amount you see companies having raised, before they get to you, where you think, “These folks have already raised seed”? What’s the difference between a healthy pre-seed raise and a small seed?
Again, this is a completely understandable and increasingly common question, and I advised my friend according to the thinking above.
Seed’s Evolution and Subsequent Confusion
When my partners and I started NextView five years ago, the most prevalent Seed round size was $750K-$1M. This amount was enough to bring entrepreneurs’ companies to the point where they’d gained enough signs of product-market fit with enough future promise to go out and raise a Series A.
A-round sizes then started increasing, which combined with both a heightened bar to raise those funds and the “Series A Crunch.” Those trends increased the typical “institutional seed” round sizes from the previous levels I mentioned to $1.5M-$2M or even more.
So it’s natural now for founders to raise a smaller “pre-seed” round prior to the full seed to get the company going and to attract seed venture capital beyond angels.
To share more details from my reply to my friend’s email: Today, in March 2015, if an entrepreneur raises anything less than $500K, they get complete “forgiveness” from later seed investors. It’s typically considered a friends and family round. Less than $750K starts to look a little bigger, but for the most part you still get a full pass. But if you raise anything more than a $1M, then it really looks like you’ve already raised your seed, which comes with heightened expectations about what will have been accomplished.
However, there are a number of very important caveats:
1. These figures are guides and are not set in stone, as it’s merely an exercise in optics, not substance.
It all depends on the type of startup, the types of investors, the structure of rounds, and so on. Additionally, it’s a spectrum and not a series of concrete levels, and I very much expect these guides to change over time as the fundraising environment evolves.
2. Raising a pre-seed is neither necessary nor sufficient to get an institutional seed.
Many of the companies in which we’ve invested at NextView have not raised a pre-seed. It’s because of conviction, strength of team, or early promise that these companies could raise a larger institutional seed despite being true “genesis stage” companies.
3. Often, things just take time to click.
Even if a startup needs to raise a seed extension, regardless of whether it already raised seed, some businesses need to pivot or take time to hit their stride and can still be very successful.
So What’s the Optimal Round Size?
My conclusion with all of these numbers and labels is simply this: at whatever juncture, the optimal round size to raise is the amount of capital needed to propel the company to a step function gain in progress, not just incremental progress.
Optimizing fundraising optics is like rounding out the corners, whereas the status and traction of the startup is the more important part of determining the actual shape of the company. Depending on the business, step function progress might be an early prototype launched, a revenue threshold, or expansion from one to many cities.
A good heuristic is that you want a potential new investor to think, “Wow! They’ve accomplished a lot since their last capital into the company.”
At NextView, since we care less about the amount of capital already raised and focus on the potential going forward, we’ve led genesis rounds of a couple hundred thousand all the way up to larger rounds of a couple million.
And to be clear: We’re not worried what we call it.