The venture financing path has evolved incredibly fast over the last 18 months. In this very busy financing market, what used to be a reasonably well understood progression from a seed round to a Series A to a Series B, etc. has now morphed into a more complex nomenclature of pre-seeds ($500k or less), crowdfunding rounds (especially for hardware), seeds ($1M-$2M, 6-9 months after the pre-seed), seed primes (an extra $1M or so, 12-18 months after the seed), Series A (now routinely $10-$12M in size, occasionally up to $15M), Series A-1, Series B, C, D, E, F etc. (as companies remain private longer).
The latest entrant in this rapidly evolving nomenclature seems to be what I’d call the “Straight to A” round, where the founders skip the seed stage altogether and raise directly a $5M-$10M Series A, often before building anything, sometimes even before incorporating a company. I had seen it here and there in the past, but it now seems to have become an accelerating trend.
The “Straight to A”, at least for now, seems to be an option available only to a very small number of startups, that have some of the following characteristics in common:
- Exceptional founders, such as serial entrepreneurs with big prior outcomes (multi-hundred million dollar and above exits) and/or unique and deep technological expertise (world class level at a specific technical problem)
- Often, but not always, entrepreneurs with long-standing relationships with the VC firms that invest in the “Straight to A” round
- Founders starting a venture exactly in their area of expertise/prior success
- Existing (meaning, comparatively less experimental) markets, with a reasonable chance that great entrepreneurs executing perfectly will be able to get significant traction quickly
The “Straight to A” is neither a good or bad thing in itself. Certainly, it reflects the specific context of the financing market we’re in; at the same time, there’s a real logic to it, for the right type of entrepreneur and venture.
But I worry that the addition of yet another type of financing scenario creates more confusion for most founders – my sense is that the dislocation of the traditional path to VC financing is increasingly bewildering, rather than liberating, to entrepreneurs. “How much should I raise” and “when should I raise?” are questions that seem to be harder to answer than ever.
In this context, I would invite founders to be prudent, and focused on their actual needs. For all big raises that are announced in the press, many other deals never get done, behind the scenes. When talking to VCs, one bit of practical advice would be to communicate lower, rather than higher, round size targets in the earlier stages of the fundraising process, regardless of whether you’re raising a seed, Series A or any other type of round. While there’s something tempting about asking for a lot of money and conveying an impression of wanting to “go for it” and overall confidence, this backfires more often than one would think. It’s much easier to shoot for a lower amount and then increase it based on investor demand. The opposite – coming out of the gate with a big round size number and ending up having to reduce it – raises all sorts of red flags and could tank a round. Overall, there’s some real value in shutting out the noise of the tech echo chamber, and focusing on what makes sense for you.
10 thoughts on “The “Straight to A” Round”
Completely agree. I’m seeing this as well and the thing that seems to confuse the entrepreneurs are the lack of comparables. One company in a similar space gets $10M straight to A and another is looking to raise just $250k in seed. Whose right? Angel investors are confused and some are just now refusing to do convertibles and want priced rounds immediately. The of course you have the boot strapping conversation that seems to be going around as well.
Your advice is spot on. As an entrepreneur, focus on what you need. If someone tells you that you’re not asking for enough, then find out why and consider it, don’t take it as correct….
Thank you. Interesting times!
I remember seeing this with Matt Ehrlichman/Porch. Although they did a $6.25M seed round based on the characteristics you mentioned and then of course did the much large A round ($27.3M) a year later and the mega-B round ($65M) four months later. Interesting times indeed!
Thanks, that’s a good example. And of course, great the people with more capital move a lot faster, which makes the allure of raising more money even more compelling to others…
Should we just ditch the nomenclature all together? How is a 6.5m seed round with 27m A round any different than a 500k seed, 4m A, 10m B, and 17m C? 31.5m is 31.5m… regardless of nomenclature. The importance of the letter, while I do understand usefulness for VCs, I do think just confuses the entrepreneur. Maybe we should use numbers (millions) instead of letters
Rob, I like the idea a lot. You could imagine VC firms positioning as “we’ll provide your first 3 million in financing” (which would cover seed, seed prime and small Series A) and other saying “our focus is to provide the 2nd to the 10th million of investment in a venture” (which would cover large seeds, Straight to A and Classic A). Pretty cool.
really good read and just on time!