When I moved to Silicon Valley over a decade ago, I thought “venture” meant looking for smart people with great ideas. I’ve learned that’s not true; they’re looking for smart people with great ideas who are “killing it.” That last bit is a fundamental change and has made modern-day Series A rounds effectively the Series B rounds of the past.
Series A used to happen when a special team with a big idea raised on a vision. Now those teams, with some rare exceptions of been-there-done-that founders of acclaim (Nest comes to mind), raise seed money instead.
Series B was historically considered “the most dangerous round.” The visionary ideas, funded in Series A, were unlikely to have proved enough to show a clear path to success, but with meaningful dollars and time already invested, the lead investor had a natural bias to get the deal done. One often had to take a leap of faith, even if doing so required an inside round. I’ve heard more than once an investor lament “your worst funding decisions are made after you’ve invested.”
The advent of prolific institutional and amateur seed investors, combined with the significantly lower cost of baseline technology infrastructure for startups, has changed the game. There are dramatically more entrepreneurial runners in the race now, and they are starting farther down the track than the last generation.
Because they are seeing the top competitors after they’ve had time to distinguish themselves, Series A investors are basing decisions on actual results rather than perceived opportunity alone. Series A companies now have profiles like those historically seen in Series B, and specifically in the Series B companies that had proven enough to eliminate much of the leap of faith otherwise required.
When we funded Zenefits in its seed round, the company was a few months old. By the time the company was 10 months old, it had already developed a fully functioning SaaS solution; proved out a creative and extremely effective GTM outbound marketing strategy; and an ARR figure — all achievements historically associated with the more successful Series A-backed companies. On the strength of those exceptional successes, they raised a very competitive Series A, netting $15+ million pre-money of $45 million this January.
Now, just over three months later, with the company demonstrating even more stellar sales growth results, and on track to delivering “1,300% growth for the year,” the company announced a $66.5 million Series B raise this week from Andreessen Horowitz and Institutional Venture Partners (IVP).
IVP is a classic venture growth/late-stage shop, historically last-money-in which has been a savvy chooser of companies of late with late-to-last private investments in Twitter, Dropbox and Snapchat. Their participation in Zenefits’ Series B round emphasizes how much further companies are getting earlier in their life shows the sometimes Series B is now effectively the “growth” round.
The seed round for these companies, when it is able to fuel their outsize success, effectively fulfills the role a Series A once did, allowing de-risking and proof of thesis. While, as Zenefits shows, this can result in very competitive, highly prized and highly priced rounds, the companies that are pursued at these levels are more logically chosen as:
1) The venture investor has no, or very little, stake in the company before they consider funding them. This allows a logical decision with no history or attachment of prior investment to influence the investor.
2) The select opportunities that break through from the many and get Series A attention are the best of the best (and the many) across a wide field, not the select few that were able to garner an old-school A. Traction, in the form of users, revenue or technology, has been proven and give the investor something to extrapolate from to understand the scale of the opportunity.
Of course with multiple quality players bidding for these top draft choices, the price rises, as the confidence in the company and its future creates more certainty in the decision that these are “the” companies to back. Therefore price becomes one of the tools used to win the bid.
The bidding can be scorching, when thought of in old-world Series A terms, but when considered analogous to Series B, the numbers may appear more logical (not always I know, and rightfully so, but that’s a post for another day).
The bar is ever raised, the success required is that much more meaningful, and the fury around the deals is that much more intense. But the companies that will come from this evolution will be that much more powerful and impactful.
A race of a dozen top athletes may or may not produce a world record, but a race of 10,000 highly talented, driven, smart business athletes probably will produce quite a few. The Darwinian process ensues and results in a much stronger “winner” — winners with real traction in revenue, users, technology or downloads. And it’s these top athletes that raise new world Series A’s.