The New Venture Landscape

12/1/2014
The New Venture Landscape - K9 Ventures
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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 <$100M, with the majority of them being clustered around the $40M mark (thats the point where
the fund economics start to work in terms of management fee and ability to take a meaningful stake in
http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/
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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 to
ownership. 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 serious
traction. 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 companies
that 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 winner
takes 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 10x
that number to even be eligible. If you have <$100M in revenue, youre probably going to stay private. These
companies now end up raising more capital in private rounds than they raised in public offerings 10-15 years
ago. And the players for these massive rounds basically decided that they cant wait for these companies to
go public and so the hedge funds that used to take positions in companies once they IPOd are now taking
those positions before the companies go public in these mega rounds.
Hiring costs are up dramatically
The cost of hiring top quality talent in the bay area has gone up dramatically. Top engineering talent today has
a bimodal distribution. You will find top engineers either being founders or working at super early stage
startups where they can expect a big outcome based on their equity if the company succeeds, or, you will find
the top engineers at companies that can pay top dollar, sometimes with pay packages
(salary+benefits+equity) that approach low to mid hundreds of thousands of dollars and sometimes even
hitting the million dollars a year mark for select super stars.
Now what are the implications of all this? Well
It hard out there for a Startup
Companies that are just starting out have it really tough for getting to the next round. They can probably
cobble together an initial round of funding because a) theres a lot of money in the early stage ecosystem right
now (both individual money and institutional money), and, b) theyre raising the initial round on hope (see
Hope and Numbers). But in order to get to a Series A they need to show a lot more traction than they did
before (because the supply is higher and the Series A investors will pick the best companies).
At the same time, since the hiring costs are much higher, the companies need to spend more money on
recruiting and retaining top talent. Remember all the rhetoric about how its so much cheaper to start a
company these days? Its not true in my opinion. Yes, the CapEx is significantly lower and has been replaced
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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 sizes
Two 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. The
deal 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 have
transitioned 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 A
traction 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 nomenclature
The 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 to
be the first significant round of funding for a company regardless of the nomenclature.)
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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 helped
shed 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 mistaken
impression 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 background
of 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 best
guess and a *rough* rule of thumb is: Pre-Seed (10%-20%), Seed (10%-25%), Series A (1525%), 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 Shah
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 going
towards a traditional small B.
It will be interesting to see if accelerators reduce the need for the new seed round by validating market
fit through their programs.
Reply
ned renzi
Manu great post and a good perspective. It will be interesting to see how effects of latency in seeing
trends & 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 to
the 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?
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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 Kumar
Keith, Just opened it in a tab and look forward to reading it. Would be happy to catch up.
Reply
hunterwalk
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 after
an incubator/accelerator experience and sometimes after <$1m have already been committed. If you
had to classify us I'd just say Pre-A we want to get to conviction and back you as quickly as we can.
Also psyched you're writing more in general.
Reply
Manu Kumar
Hunter, I struggled with whether to give it a name. And in fact a couple of people have pointed
out that Pre-Seed was not the best choice of a name either! (See http://preseed.com)
Although it may not be bad comparison if your product is your baby.
The big realization for me/K9 is that I want to be involved super-early and the landscape had
changed yet again, to where I couldnt really describe K9 as a seed stage fund any more. The
best description Ive heard yet of the stage at which K9 invests is frighteningly early.
And I agree 100% about getting conviction. Conviction can come in two forms. The rational
form is when you know something others dont that gives you a different perspective or the
company has amazing numbers. The non-rational (note that I didnt say irrational) and more
emotional form is when you just happen to fall in love with the founders and want to work with
them.
Reply
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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 Kumar
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,
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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 Ashton
simply put, well done
Reply
Hong Quan (@Quan)

Excellent explanation of the new landscape. Ive seen this change from the recruiting side for years. Its
a vicious cycle of higher Eng offers/salary that in part causes this shift to larger investment rounds at
every stage.
Reply
Michael Berolzheimer (@berolz)

Manu, well written reset of the landscape. At Bee Partners, weve been using the term Genesisstage to describe that pre-Seed, and we share your continued enthusiasm for this stage of venture
creation! All the best, Michael
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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 WordPress
blog on July 16, 2014 at 12:57 pm
[] week Manu Kumar had a spectacular post titled The New Venture Landscape. While its bay
area 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 Venture
Landscape. 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 the
Series 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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