Seed investing is bifurcating


Image Credits: Nikolay Pandev

Homan Yuen


Homan Yuen is an early-stage startup investor at NewGen Capital.

More posts from Homan Yuen

A curious gap has emerged in the early-stage investment landscape: While emerging startups are able to raise very small, sub-$500,000 rounds, seed and pre-A investors are requiring increasingly higher revenue and market traction milestones before they deploy capital to companies. Lately, it seems as if the single, discrete “seed” round of $1-$2 million has largely disappeared.

The milestones these seed and pre-A investors require today resemble those needed for Series A financing pre-unicorn mania (before 2012), but a large majority of these financing rounds are smaller in size, utilize convertible notes and are not priced like a typical Series A round. At the same time, what is today called a Series A requires metrics and milestones that resemble the “classic” Series B.

It’s tempting to dismiss this milestone creep as a cyclical correction, but the emergence of a new category of investment fund and round called “pre-seed” suggests that this change will crystallize this new fundraising landscape for the next couple of years. The pre-seed round is usually smaller than $500,000 (almost never larger than $1 million) and is for companies that have interesting ideas that need to move beyond a potential proof of concept.

What comes after pre-seed is now less clearly defined and organized. As a result of this new status quo, an emerging startup with just an idea or prototype might be able to raise up to $500,000 pre-seed from formal pre-seed funds, angels or “friends and family.” However that amount is often not sufficient to hit the requirements that early-stage investors require for bigger, pre-A raises (often requiring completed pilots, sales, a healthy customer pipeline, proof of accelerating user acquisition).

Many companies I met amid the height of startup frenzy have returned to raise a new round; they fall into one of the following two scenarios:

Scenario A: The Scenario A company raised a full seed round of $1-$3 million at the height of the recent frenzy. Thinking that the growth it bought would stick or that raising additional funds would continue to be equally easy, this company failed to achieve the milestones it claimed would be met with the seed-round proceeds. The company now needs additional capital.

This type of round has traditionally been identified as a “bridge” round, but companies are rebranding the additional capital raise with new terms like “seed plus,” seed prime,” “double seed” or “second seed” to avoid the dreaded “B”-word and its associated negative baggage. These companies are more likely to face a down round or will die if their runways end before they can raise additional funds.

Scenario B: The Scenario B company has bootstrapped itself or previously raised responsible amounts of capital and has achieved meaningful traction and/or promising revenue metrics. While such a company could have raised a Series A round a couple of years ago, Series A investors have dramatically raised their requirements and expectations. Because the goal posts have now moved, this company may receive less-than-favorable terms or no terms at all from traditional Series A investors.

Instead of engaging these traditional Series A investors, this company will raise a convertible note from seed investors. These seed investors typically have not invested at Series A milestones/maturity. But these same investors are also not targeting the pre-seed arena. This strategic move would, in theory, enable the company to build up further momentum in order to raise a healthy and positive Series A round.

Across the board, the market is asking companies to do more, with less, and at a much faster timeline. This new fundraising reality will hit hardest the companies that raised seed rounds in 2012-2015, because these rounds were designed to enable the company to hit the previously lower Series A milestones. Entrepreneurs raising for companies founded after 2016 should also take heed and plan their fundraising pacing and strategy in light of these new rules. If your company is facing this gap, here are some ways to avoid or minimize its impact on your ability to grow:

  • Identify and pursue non-dilutive sources of capital. Make good use of government, academic and nonprofit grants, awards and tax breaks where they are applicable.
  • Keep burn at a minimum from Day One, and avoid vanity expenditures. Anything that does not directly lead to long-term customers and sustained growth must go.
  • Build long-term infrastructure to fuel growth; like it or not, the days of burning cheap VC money to buy growth through subsidies is over.

With support from Ivy Nguyen of NewGen Capital.

More TechCrunch

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

1 day ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

1 day ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo

Sony Music Group has sent letters to more than 700 tech companies and music streaming services to warn them not to use its music to train AI without explicit permission.…

Sony Music warns tech companies over ‘unauthorized’ use of its content to train AI

Winston Chi, Butter’s founder and CEO, told TechCrunch that “most parties, including our investors and us, are making money” from the exit.

GrubMarket buys Butter to give its food distribution tech an AI boost

The investor lawsuit is related to Bolt securing a $30 million personal loan to Ryan Breslow, which was later defaulted on.

Bolt founder Ryan Breslow wants to settle an investor lawsuit by returning $37 million worth of shares