Of the companies we looked at in 2017, 48% were raising a Seed, 52% a Series A or later. Based on this information, you have some sense of the types of companies with which we spend our time. But round nomenclature has become increasingly arbitrary and less relevant to how we segment opportunities. The meanings of Seed, Series A, Series B, and other round terms have changed in the last three years and will continue to morph as new technology is introduced and startup costs change.
Much the same way averages in statistics mask the most interesting information about datasets, the round nomenclature process used by most founders today ends up obfuscating important operational milestones. More fundamentally, it shouldn’t be important to entrepreneurs what a company calls a round - instead a round should be about bringing the right partners and right amount of capital into a company to achieve milestones and de-risk the opportunity set.
The letter of a round in its simplest form is a measure of the number of times a company has raised equity financing. However, in the last few years we’ve seen even that logic break and round nomenclature morph into more of a distraction for early stage teams. The rise of terms like Pre-Seed and Series A-1 reflect an evolution in early stage capital strategy but not substantive changes in asset classes. It is true that the naming of a round can be helpful filter for entrepreneurs to sort through potential investors. Yet, merely knowing that a firm is a “Series A Investor” is no longer enough granularity to understand potential investor-company fit.
Instead of round letters, founders should think in terms of milestones on the path to inflection points. A more accurate representation of stage is whether a business has built a minimum viable product (MVP), begun the process of testing and customer segmentation, determined product-market fit, or started to scale. Inflection points can come at different round letters depending on the industry and business model of the company, so creating a broad standard for round letters can’t work. For example, healthcare and insurance businesses usually take more time and more capital to reach many of these milestones, which should be reflected in their capital strategy.
Round letters can sometimes be a useful shorthand for broad categorization of companies, but it is just that: a shorthand, and not something on which we encourage entrepreneurs to focus as it’s not something on which we constrain our investment decisions.
Examples of the chaos
To explain why entrepreneurs’ time is better spent outside of naming their round, we submit a few examples of how the name of a round can be distracting:
An alternative rubric for finding the right investor
If the letter of a round isn’t a complete segmentation for entrepreneurs to use when considering potential investors, what factors should they consider? Fundraising is a time-intensive effort. so understanding quickly if there is potential investor-company fit can save weeks or months of time. There are three major areas where entrepreneurs should look for alignment:
Too often we see entrepreneurs focused on the name of their round vs. conveying how achieved milestones reflect an inflection point in their businesses. It’s important to be specific about what information the letters in rounds actually convey as well as what nuances they erase. That’s especially true as the lexicon expands and meanings shift. In determining the capital strategy of a company, entrepreneurs should plan for what it costs (with cushion) to achieve specific milestones. Similarly, when trying to find an investor who will fit those capital needs, entrepreneurs should consider more specific criteria than arbitrary letter categories.