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What's 🔥 in Enterprise IT/VC #256
Supersizing 🍟 of Seed + the race to be 🥇 + bigger is not always better
Congrats to FreshDesk, a customer support platform, on its massive IPO, now worth over $12B, and also creator of over 500 millionaires in India 😲! However, the big news this week is Greylock’s announcement of its $500M seed fund, yes seed fund! This has had every VC and founder chatting nonstop over twitter, texts, and calls about what this means moving forward.
Before I share my two cents on how this impacts the world of VC, let’s take a step back and look at the market. Using FreshDesk as an example, look at these numbers below: Accel was first in and backed the 🚚 up over time and then Tiger was next doing the same - both gobbled up as much ownership as possible. Their stakes are worth over $2.3B 🤯 each and the next largest shareholder, Sequoia, has 1/2 the ownership that the other firms who were in first do.
As I’ve always said…
And here’s why:
If you’re not on the cap table on day one to build the relationship with the founder and also have the opportunity to preempt the next round or get pro rata, there is little opportunity to buy the ownership you want over time, especially because of how 🐅 has changed the landscape and can move quicker and pay more than anyone else. Concurrently, more seed investors (that term means nothing now 😄) have added Opportunity Funds (we have two ourselves @boldstartvc) which means they are investing longer into the company’s lifecycle meaning there is less room for new investors.
The entry price point, no matter what it is, even if the seed round is $20M, will be the lowest price paid with the most ownership for each company.
Finally, when founders and investors swing for the fences, the outcomes are bigger than ever 🤯. Case in point from this week:
To be clear, this does not mean that bigger is better or $20M is the right number for founders. In fact, I would argue that too much 💰 too early can kill a company.
What we have is the supersizing of venture from exits to growth rounds to “seed” rounds to fund sizes. And within this context, the earlier you are, the more you can own and the less you pay relative to other rounds - that’s it.
So what’s a seed firm to do in this market? How should founders think?
Semil from Haystack lays it out and important to read the 🧵
Samir Kaji from Allocate nails it
For the seed firms not entering the $400-500M “seed” arms race where seed isn’t really seed, my advice is simple - be first and specialize or be first and write smaller checks and get in the best deals. Every other strategy will get wiped out. Being first means partnering with founders and not investing in companies. It means taking technical risk which I would argue in today’s world is not that high versus what it was 20 years ago or unless you’re investing in biotech or other science projects. It also means writing a much bigger check on day 1 as even these day one rounds are no longer $1-2M but $3-6M. It also means your fund size does not have to be $400-500M but it has to be $125-250M.
And founders, if you think you’re getting a $20M seed check from Greylock, I can assure you the chances are slim. Not much has changed as many of these firms have always written these checks to their repeat founders and are just relabeling as massive seed funds. For those underdog founders, the ones we love to partner with, you have plenty of great day one or first check partners to choose from and bigger is not better!
Partner with a firm whose interest is 100% aligned with yours to help deliver the best next round possible without conflicts, who has the time to spend on day one founders versus investors looking for companies and also invest in Series A + B rounds, who specializes in your zone of expertise, who can help you with all of the other business functions so your sole goal can be getting to product market fit faster, and one who will be patient before pushing you for ARR!
As always, 🙏🏼 for reading and please share with your friends and colleagues!
Keep preaching Scott 👇🏼
Food for thought for fully distributed teams and yes, one of our exits required a bulk of the company to move to the west coast…
The rise of mulit-cluster & multi-distro, service mesh will play an increasingly important role in application lifecycle, and bare metal and edge deployments
Point 1 is a huge trend:
“As different dev departments move from experimenting with user-specific DIY K8s platforms, customized in a way that suits their own unique requirements for whatever they are deploying, production-grade governance and streamlining is the next phase. As enterprises are adopting K8s as a mainstream container orchestration platform, there will be multiple clusters owned by different teams, potentially in different environments, even with K8s solutions from different vendors (including the public cloud managed K8s services). This means ownership moves to IT Operations and Kubernetes management solutions that now have to deal with looking after multiple diverse development efforts.”
Scaling to $100M benchmarking from Bessemer Venture Partners - I would start with product is the north 🌠 and within that know specifically what aspect of your product is the 🔑 differentiator, especially for PLG companies
Also nice to have these benchmarks but there is no true formula for any company - need to be creative and find the best of several ideas that work for you - too much over reliance on benchmarks can kill you as well - product first!
It’s all about the developer experience, even in infra - Mitchell from Hashicorp 🧵
Remove the friction
Still an unsolved and huge opportunity
Super 🔥 up for this from Slim (portfolio co)