In the ever-evolving landscape of venture capital funding, seed-stage startups are finding themselves in a unique position. With the IPO market on hold and late-stage deals becoming increasingly rare, larger multistage funds are turning their attention to the seed-stage arena. This surge of interest has resulted in record-breaking valuations and larger deal sizes for seed-stage companies. However, with the allure of name-brand firms and access to larger pools of capital comes a set of considerations that seed founders must carefully evaluate before partnering with multistage funds.
While the allure of partnering with larger multistage funds may seem enticing, seed founders should carefully consider the trade-offs involved. Seed-focused funds and angels offer a level of hands-on involvement, collaboration, and mentorship that multistage funds may not be able to provide. Their focus on securing a successful Series A round also gives them an incentive to go the extra mile for their portfolio companies. By evaluating these factors, seed founders can make informed decisions that best align with their company’s needs and long-term goals.
The Hands-On Support Conundrum
One primary consideration that seed founders need to keep in mind is the level of hands-on support they can expect from multistage investors. While a $1 billion multistage firm may provide a sizeable investment, the reality is that the level of engagement and guidance may not be as hands-on as what seed investors can offer. As a small percentage of their portfolio, founders may find themselves competing for attention with companies that have received eight- to nine-figure checks. Alternatively, they may end up working with less experienced junior investors. In contrast, seed-focused funds and angels tend to be more intimately involved and provide mentorship, growth strategies, and valuable network connections.
The Power of Collaboration and Mentorship
Seed-stage companies benefit greatly from the close collaboration and mentorship that specialized seed funds and angels can provide. These investors have the expertise to guide founders through growth strategies, navigate market nuances, address regulatory challenges, and handle PR and communications. Additionally, their networks can be tapped into to source customers, advisors, and forge valuable partnerships. By having individual angels with operational experience on their cap table, seed founders can tap into their superpower to overcome common pitfalls and propel their startup to the next level.
A Focus on Series A and Beyond
Seed-focused firms have a vested interest in their portfolio companies’ success, as their markups and outcomes are tied to the ability to raise a Series A round. This incentive structure motivates them to work harder to help secure the next funding round. Unlike multistage funds, they are not in competition for the Series A allocation and can provide better access to Series A investors within their network. Seed-focused firms are also driven to open more doors and help secure a better valuation, whereas multistage firms may prioritize ownership and aim for a lower price on the subsequent round.