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- An investor gold rush is driving larger seed rounds, with more surpassing $5 million.
- Multi-stage VC firms are inflating seed round sizes by offering bigger checks.
- More investors want to write the first check with the hope of that turning into a huge return.
There's been an investor gold rush to find the hottest new startup, causing a new dynamic: larger seed rounds.
In some cases, the seed round is getting out of control. While most seed rounds still hover between $1 million and $5 million, a larger chunk of rounds have crept past that $5 million mark in the past three years or so. Recent data suggests this phenomenon might be becoming a new normal.
In the second quarter, the percentage of pre-seed and seed deals below $1 million hit the lowest point since 2015, according to PitchBook's Q2 Venture Monitor report. On the flip side, the share of pre-seed and seed deals at or above $10 million was the highest level ever in PitchBook's dataset.
There are a few reasons for this. Tier one multi-stage firms have decided to allocate more resources to investing at the seed stage, according to several traditional seed investors who Business Insider spoke to.
Firms like Sequoia doubled down on seed investing with a new $195 million fund in 2023 and planned to host more batches of its accelerator program, Arc. Last October, Greylock unveiled a $1 billion early-stage fund and a new initiative called Greylock Edge aimed at helping founders at the pre-idea, pre-seed, and seed stages.
By doing so and adding more demand, they've also caused the seed round size to inflate and can write bigger early-stage checks to founders with established track records. Let's also not forget that the AI startup hype is partially to blame for this as well.
My colleague Sri Muppidi has reported on these supersized seed rounds in AI startups throughout the summer. Felicis Ventures led a $10 million first round into the AI startup MemGPT. Other supersized seed rounds this year include a $10.5 million round by Swedish legal AI startup Leya, and Gameplay Galaxy recently announced a $24 million seed round for its Web3 gaming platform.
Investing in later-stage startups has also not proved as lucrative lately, with firms not able to jockey for enough of a stake to make it worthwhile. These startups are also staying private longer, waiting for a better IPO market, and focusing on improving their financial metrics.
Ed Sim, founder of the seed-stage firm Boldstart Ventures who ranked first on Business Insider's Seed 100 list this year, thinks this rush to invest at the earlier stages started happening more after Instacart's IPO last September. Many of his investor peers caught whiff of the better returns at the earlier funding stages.
Sim said many people looked at where investors bought in at each round and saw that the only investors who were in the money at the IPO were the earlier-stage investors like Sequoia, Khosla Ventures, and Canaan Partners.
Sim postured that many investors thought: "Well, this really says to me that probably being first is the best place to be in the cap table."
Take, for instance, Sequoia, which bought Instacart shares at 24 cents apiece in the company's Series A, The Information reported. The firm's stake at Instacart's $30 IPO price was worth over $1.5 billion.
For those investors that bought Instacart shares after its Series F round, which priced at just under $30, their investments were likely underwater.
Things are pretty much playing out as Sim predicted back in October when he wrote in his Substack newsletter about "the new race to be first" and a novel way to define this stage of check-writing called "inception investing."
For Sim, this first stage of investing can be broken down into three round types: the "discovery" round — typically less than $2 million and reserved for first-time startup founders; a "classic" round of funding ranging from $3 million to $5 million for first-and second-time founders; and then the "jumbo" round, usually over $6 million for repeat founders (this stage is where the larger multi-stage firms tend to get more involved, Sim said).
Shruti Gandhi, a seed investor and founder of Array Ventures who was also featured in this year's Seed 100, says this merging of pre-seed and seed rounds for certain startups isn't necessarily a good thing for the companies.
"If you raise 1.5 [million] and if you raise 5 [million], your growth in like one to two years is not any different," she said. "So then, when you go back out to market, you're screwed."
That's because if a founder raises more money, there's a higher investor bar of metrics and valuation multiples they'll have to meet to raise their next round of funding. Founders also risk diluting more of their stake as a result.
How this larger early-stage round plays out for founders in the next few years remains to be seen.
"I don't think this is going away," Sim said.