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Perspectives on entrepreneurship, startups and venture capital from K9 Ventures.

The New Venture Landscape

By Manu Kumar | April 10, 2014

In May 2011, I wrote the post: Investor Nomenclature and the Venture Spiral. That post got a lot of attention

because back then all the buzz was about Super Angels. The venture landscape was evolving and had

reached a point where Super Angels were an important part of the ecosystem. Well, now in 2014, almost 3

years to the date, things have changed again. The funding landscape has shifted and is now even more

confusing than ever. Heres whats changed in my opinion:

The Super Angels are now Micro-VCs.

Yes, almost everyone who was operating as a Super Angel, went on to raise a venture fund. Most of these

funds are



portfolio companies).

In keeping with the thesis of the Venture Spiral, as the Super Angels matured into Micro-VCs, the style of

investing changed because now the Micro-VCs had more dollars to put to work, and became sensitive toownership. The party rounds, which were the range in late 2010 and early 2011, became less common and

we started to see the smaller funds begin to lead rounds.

Significant tightening for follow on rounds

We heard about this in the press as the Series A crunch, but it wasnt really a Series A crunch. Instead, it

was more of a result of over-funding at the seed stage. There was simply too much money coming in to the

seed stage, which increased the supply of companies at the seed stage. The Series A investors could

therefore be a lot more picky. Even if they did the same number of deals as they did before, it felt like a

crunch because of the increased supply of funded seed stage companies.

Massive late stage rounds

The late stage (Series B and Series C) investors are hunting for breakout companies that have serioustraction. But there are few companies that breakout, and there is a high supply of capital looking to invest in

the companies. The low supply and high demand is driving up the valuations and deal sizes. The companiesthat get to traction have a lot of capital chasing them. But scaling is hard, and these companies can suffer from

The Curse of Over Capitalization. However, the bet that these investors are making is that it will be a winnertakes all market.

Threshold for an IPO is higher

Ten years ago, if you had $20M in revenue you were ready to go public. Today, you need almost 5x or 10xthat number to even be eligible. If you have



mostly by variable costs, but the people costs are a lot higher than they used to be. Also its becoming harder

for companies to break out of the noise and so the marketing costs are a lot higher than they used to be.

The traction bar is higher, which means the companies need to survive longer in order to cross that threshold.

And the hiring costs are higher. Taken together, it means an early stage company needs to survive longer,with higher expenses. Startups have realized this and investors have realized this, which is why these days a

seed round is usually closer to $2M! Yes, a $2M seed round.

Re-jiggering of deal stages and sizesTwo years ago, a seed round used to be $500K, now it is $2M+. A Series A round used to be $3M $4M,

now its $6M $15M. A Series B round used to be $10M-$15M, now its well, you get the picture. Thedeal stage and sizes have changed dramatically.

Seed is not the first round of financing any more. In fact after noticing this trend last year, I havetransitioned to calling most of my initial investments pre-seed rounds, where the company raises close to

$500K, before raising a full seed round. The Seed round is larger closer to and sometimes upwards of$2M. The Series A is now the fourth round of funding for a company the first is usually friends and

family, or an incubator (~$50K), then pre-seed (~$500K), then seed (~$2M), then Series A (~$6M-$15M).

Note that Im describing what Im seeing these days as a typical fundraising pattern and it is somewhat

simplified. Some companies may be able to skip stages, others may end up raising money on a rolling basis.In fact, Ive seen companies use a convertible notes to do an add-on or seed-extension round as well.

Sometimes the seed-extension round can be done to just provide more cushion for hitting the Series Atraction mark, in other cases it is because the company mis-executed, or didnt achieve product-market fit

and wants to get another shot at the Series A goal.

The new normal and new nomenclatureThe institutionalization of the early stage means that it has now matured (Super Angels are now Micro-VCs).Theyre starting to use similar metrics and structures as what the old Series A folks used to. For example,doing equity rounds only, no convertible notes, leading rounds and taking on board seats. The seed round is

bigger. The Series A is bigger too, and the Series C/D are even bigger yet. Effectively, were approaching a

new normal in the venture landscape, where the criteria for and the size of the round has shifted up a level, but

we simply forgot to adjust the nomenclature (yet again).

Here is how I think about it today:

Pre-Seed is the new Seed. (~$500K used for building team and initial product/prototype)

Seed is the new Series A. (~$2M used get for building product, establishing product-market fit and

early revenue)

Series A is the new Series B. (~6M-$15M used to scale customer acquisition and revenue)

Series B is the new Series C.

Series C/D is the new Mezzanine

Welcome to the new venture landscape!

(When I was starting K9 Ventures, I used to describe it as a seed stage fund. Im now adapting to this new

nomenclature by coining the pre-seed phrase for the stage at which K9 likes to invest. The goal for K9 is tobe the first significant round of funding for a company regardless of the nomenclature.)



You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related

tweets. K9 Ventures is also on Facebook and Google+.

33 Comments

Charlie O'Donnell (@ceonyc)

Posted May 29, 2014 at 10:42 pm | Permalink

I missed this previously Steph from Softtech pointed it out to me. Its brilliant and it really helpedshed some light on things I was seeing.

Reply

deepaksgupta

Posted April 24, 2014 at 4:11 pm | Permalink

Nice Manu! Could not agreed more!

Reply

Michael Feng


This article should be assigned reading for all first-time entrepeneurs out there.

Your observation that the seed round is typically the 3rd round of financing is important. Due to the

opacity of the prior rounds (i.e. they dont get covered on Techcrunch), entrepreneurs get the mistakenimpression that fellow startups are raising massive initial rounds. These entrepreneurs then waste

precious time and energy pitching to the same seed investors when theyre not yet ready.

Reply

Ned Gannon


Thank you for this excellent post Manu. I wondered if you could provide some insight on the typical

valuation ranges at the funding levels you describe (Pre-Seed, Seed, Series A). Thanks.

Reply

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Manu Kumar


Ned, Its very tough to assign valuation ranges as they really vary a lot based on the backgroundof the team, the idea, the amount of progress, amount of money being raised, etc. What doesnt

change is that most institutional investors have a target ownership they like to get. Its never set

in stone (thats a blog post in itself), but most professional investors do think that way. My bestguess and a *rough* rule of thumb is: Pre-Seed (10%-20%), Seed (10%-25%), Series A (15-

25%), Series B (10-20%).

Reply

Raj Kapoor

Posted April 12, 2014 at 7:58 am | Permalink

Well said Manu spot on with all the changes in the venture landscape. Having stepped back into the

entrepreneur side from 7 years as a VC, i still find myself re-learning fundraising as the landscape has

indeed changed even in a year!

Reply

Prashant ShahPosted April 11, 2014 at 11:03 pm | Permalink

Good observations Manu. I think of it as first round sizes are still the same ~$500k, but the traditional

$4M A round is being split, with $2M going earlier into the new seed and the other $2M goingtowards a traditional small B.

It will be interesting to see if accelerators reduce the need for the new seed round by validating marketfit through their programs.

Reply

ned renzi


Manu great post and a good perspective. It will be interesting to see how effects of latency in seeingtrends & opportunities changes the landscape going forward, capital & talent.

Reply

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Derek Andersen


well said Manu thanks for the insights.

Reply

Trevor Loy


Manu, this is spot on. Thanks!

Reply

Fabio Krauss


Great post. As many said it here, clear and efficient framing of the topic =)

I see this is as basic inflation problem, where demand exceeds supply, and thus prices rise. As you said

it, talent is scarce in the Bay Area and has a limited output, and because of the attractiveness of

Venture investing, many more people are pumping up money in the industry looking for companies.

Talent is gonna be picky with whom invests in them, driving prices for venture rounds up and thats

why the rounds are inflating so much and even getting new names.

Ive never been to the Valley but maybe its the time to look for cheap talent elsewhere and bring it tothe Valley as part of the investment workflow and not as exceptions (like ZenDesk and other

European companies that only moved to the valley after getting investments).

The bottle neck would be immigration laws, but who knows? The cost of importing talent could be

lower than the cost of relocating internal talent.

Cheers!

Reply

Karen Pellegrin (@ChromaKi)


Im just wondering about this but, you make it sound like success is dependent and exclusive

only to being in the Bay Area. Is there not hope for other regions of the country and/or world?

http://startupgrind.com/http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1139#respondhttp://www.flywheelventures.com/http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1138#respondhttp://twitter.com/FKrausshttp://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1137#respondhttp://twitter.com/ChromaKi



Does talent *have* to move to the Bay area to be truly successful? My instincts say no but im

wondering what the rest of the group here thinks.

Reply

Manu Kumar


Karen, I only invest in companies that are wholly located in the San Francisco Bay Area

and therefore my posts are written with that context in mind. You can certainly be

successful in other parts of the country and the world my first two startups were based

in Pittsburgh, Pennsylvania. However, there is something about the Bay Area that is very

unique and hard to replicate elsewhere. I talk about this in more detail in a previous blog

post: http://k9.vc/OnGeography

Reply

Greg Furlong


Thanks for the article. Totally agree that pre-seed (Angel?) and Seed have split out entirely. We are

currently looking at a Seed round and noticed this when discussing with our initial investor.

Reply

Keith Teare


Love it Manu

Did you read my Silicon Valley Startup Valley of Death piece?

http://us6.campaign-archive1.com/?u=8454d2b163d2af3884753acd6&id=8afe2053be

Video Here:

https://www.youtube.com/watch?v=tM1gX2iLQ_k&index=4&list=FLrNuTaKCtGCmn8XCqSW9WoQ

Would love to catch up some time.

keith at archimedes labs dot com

Reply

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Manu KumarPosted April 11, 2014 at 3:48 am | Permalink

Keith, Just opened it in a tab and look forward to reading it. Would be happy to catch up.

Reply

hunterwalkPosted April 10, 2014 at 7:48 pm | Permalink

I like everything about this post with exception of pre-seed term because I dont think more jargon is

the solution to increasing confusion about jargon. It just sounds to me like youre unafraid to invest

early in a companys lifecycle. Great! The amount of money someone is raising at that stage varies

wildly based on the type of business, credibility of the founders, state of the marketplace, etc.

In Homebrews 1st year weve found ourselves sometimes being first dollar, sometimes investing afteran incubator/accelerator experience and sometimes after



Narayan Chowdhury


Manu, William Hsu wrote a supplementary article in ReCode that you might enjoy.

https://recode.net/2014/04/01/the-seed-valley-of-death-caught-between-19b-and-series-a-crunch/

Reply

Manu Kumar


Thanks Narayan. Ive had that article open in a browser tab for a few days now, but havent

read it yet. Will read it soon.

Reply

Paul Arnold


Clear and helpful framing. Thanks Manu

Reply

TJ


Do you think crowd sourcing from non-accredited investors(once it becomes legal) will bump the

number higher than today?

Reply

Manu KumarPosted April 10, 2014 at 5:20 pm | Permalink

Crowdfunding is an interesting topic that deserves a post by itself and so I intentionally avoided

touching on in in this post. The two-line version of that post is that: Crowdfunding is not what it

seems. In most cases companies that are successful in crowdfunding have already raised capital

before they do crowdfunding. Crowdfunding right now is more about testing product-market fit,

https://recode.net/2014/04/01/the-seed-valley-of-death-caught-between-19b-and-series-a-crunch/http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1128#respondhttp://k9ventures.com/http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1129#respondhttp://paulparnold.wordpress.com/http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1127#respondhttp://awarded.me/http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1125#respondhttp://k9ventures.com/



the money it brings in is just the icing on the cake.

Reply

tracyleelawrence


Interesting to see how the public and private markets both have higher expectations for companies.

Hitting it out of the ballpark has new meaning great overview!

Reply

Chris Yeh


I think Im going to have to become a pre-pre-seed investor!

Reply

Fabio Krauss


Youll be a Zygote investor!

Reply

David Norris


Great post, thank you.

Reply

Manu Rekhi


As large funds have gotten larger they are putting more money to work in the same round but dont

want to change their PPT and prospectus to their LPs on the stage they invest in. So its just easier to

move the goal post.

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Reply

Brad Feld (@bfeld)


Great post Manu!

Reply

Manu Kumar


Thanks Brad!

Reply

Dave AshtonPosted April 10, 2014 at 3:12 pm | Permalink

simply put, well done

Reply

Hong Quan (@Quan)


Excellent explanation of the new landscape. Ive seen this change from the recruiting side for years. Itsa vicious cycle of higher Eng offers/salary that in part causes this shift to larger investment rounds at

every stage.

Reply

Michael Berolzheimer (@berolz)Posted April 10, 2014 at 6:29 am | Permalink

Manu, well written reset of the landscape. At Bee Partners, weve been using the term Genesis-

stage to describe that pre-Seed, and we share your continued enthusiasm for this stage of venturecreation! All the best, Michael

http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1120#respondhttp://twitter.com/bfeldhttp://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1119#respondhttp://k9ventures.com/http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1121#respondhttp://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1118#respondhttp://twitter.com/Quanhttp://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/?replytocom=1117#respondhttp://twitter.com/berolz



Reply

5 Trackbacks

By Spartina 2014! Assembly of Spartina-backed startups | Buddy's Blog on September 30, 2014 at

8:27 pm

[] Kumar of K-9 Ventures (http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/)shared his view of how the seed market has fragmented into four stages: F&F/incubator, []

By Todays Fun Gnip, Twitter, Uncommon Stock, and Pre-Seed Rounds | My great WordPressblog on July 16, 2014 at 12:57 pm

[] week Manu Kumar had a spectacular post titled The New Venture Landscape. While its bayarea centric, I especially agree with the punch []

By The New Series A | MELD on May 12, 2014 at 7:57 pm

[] couple of weeks ago Manu Kumar from K9 ventures had a post called The New VentureLandscape. Brad Feld from Foundry also noted it here and thought it was a little bay area centric. []

By Seed Is A Process | TechCrunch on April 27, 2014 at 1:16 am

[] Kumar at K9 ventures wrote a great post this month in which he points out that these days theSeries A is now the fourth round of []

By The New Venture Landscape by Manu Kumar | Kjael Skaalerud on April 16, 2014 at 1:51 pm

[] The New Venture Landscape by Manu Kumar []

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