For Fundraising, Seed is No Longer a Round, It’s a Phase

Want to know the biggest challenge Satya and I faced when announcing Homebrew’s third fund? How to describe the phase of company we seek to invest. “Early stage” has been coopted by billion-dollar VCs who try to shoehorn a $10m ARR SaaS company into their idea of risk capital. And the verbal gymnastics of some founders! “We did a pre-seed, followed by a seed, then a bridge and an A. Now we’re raising an A-2 to scale. But it’s definitely not a B — that’ll come in 18 months.” What?!? Makes me wish we’d just adopt version numbers, a la software releases — Round 1, Round 2, Round 2.5 and so on.

But ahead of the industry solving this problem, we had a blog post to publish. So, what to say? We decided on “seed phase” because now more than ever, we believe seed isn’t a round, it’s a period of time where you are starting, learning and iterating to a business that has proven its core value proposition and raises a Series A to begin scaling. Why does this matter to founders (and to us)? A few reasons.

1. Asking founders to prematurely perfectly forecast the amount of capital they need to get to a Series A is an unnecessary constraint

When we invest in a startup we expect aspects of the roadmap will change, heck, if it doesn’t I’m suspect they’re not taking enough risks or aren’t running the right experiments to get the data they need. Why should I expect premature precision in budgeting and forecasting the capital requirements? Of course a CEO should be thoughtful and disciplined when it comes to their cash and early stage startups don’t usually die because of lack of funding but rather lack of ideas and output. At the nascent point where we invest I’d prefer a CEO to be absolutely correct about their focus and directionally correct about the economics it takes to get there. You should get multiple bites at the apple if things are going well.

2. Series A investors are increasingly looking for derisked companies and willing to pay more for momentum

While there still exist conviction-based VCs, many more are momentum-based. That is to say, evidence of a startup being a potential outlier is worth a lot more to them. Why? Well, the long path to liquidity means many GPs don’t have much capacity open and the cost of getting stuck with a…