This is a topic that has arisen recently in two different conversations with a couple of seed VCs, in which they explained how this is, in fact, a proactive strategy. Therefore, we figured we would share our knowledge with you, since it is a really positive sign, especially for seed-stage startups!
The reason for this shift, much like many things, is a result of the change in economic climate.
When times are good, seed VCs invest in more startups
In times of affluence, seed VCs focus on making as many bets as possible. You will hear the term ‘shots on goal’, which means they never really know which startup is going to be the breakout company in their portfolio. They are simply making educated guesses to make as many bets as possible.
Part of getting as many bets down as possible means reserving less capital for follow-ons or companies in trouble, compared to how much a Series A, Series B, or Series C venture capital fund would reserve. Less capital reserves mean that, if a startup isn’t doing well or can’t quite hit product market fit, the company is probably just going to die. When the seed stage funds recognize a company is struggling and unlikely to make it, they aren’t going to spend the time and money required to support them.
When times are harder, seed VCs can focus on fewer startups
In hard times, the market seizes up and this approach flips. Which is what has been happening since late 2022. This change in the economic climate affects seed-stage companies in two ways:
- Series A funds are preoccupied. With this switch, the traditional Series A (as well as B and C) funds have to do follow-ons. Their first priority is their existing portfolios and ensuring those companies survive. The majority of their time must be spent working with those companies and, therefore, there is a lot less time to look at new seed-stage opportunities.
- With financial hardship comes a lot of general confusion. It’s harder to grow quickly in a tough market, which makes it much harder to show the Series A funds that your startup is gaining traction. Unless a seed-stage company is in the top 5% of a portfolio, it’s becoming really hard to get a Series A fund’s attention.
Responsibility Falls on Seed Stage VCs
What we are seeing is the responsibility to help keep those seed-stage companies alive is falling on the seed-stage VCs (and sometimes pre-seed funds). This is in the best interest of the seed funds because a lot of these startups are good companies that deserve to survive. They are gaining some traction or having a type of product market fit, but not quite enough to get a Series A fund’s attention. So seed-stage funds are supporting them with inside rounds and bridge rounds and a much larger percentage of their funds are being allocated to these companies.
From real world examples, we can see how this strategy makes perfect sense. The two top seed investors we spoke to are from completely separate firms but are both pursuing the exact same strategy. And it is beneficial for both parties:
- It helps to separate these investors from the other seed funds. By helping these struggling companies, instead of dismissing them and moving on, they gain brand and reputation enhancement.
- There are also economic benefits. Giving solid companies that are struggling more funding, or helping them manufacture a defensive round, can hopefully help the seed-stage companies reach Series A funding in a year or two. And the seed-stage VCs benefit from that success .
A real change in strategy
We’ve moved from times of financial affluence, in which seed funds take every opportunity to bet on a new company, into a tougher economic climate. In this climate we are now seeing seed VCs shift their focus to helping the seed stage startups that have been missed by series A, so they are saving far more capital for the defensive rounds that these companies need.
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