Entrées, No Appetizers

Most of my time is spent navigating the seed landscape, which now seems to be the spectrum of initial rounds of financing for tech startups. Anecdotally, the upper limit of these rounds if $3M-$4M, and the aim is to help startups find product-market fit and provide the right resources for the key 2-3 proof points that will surface the institutional A. Yet, what happens when companies skip over the seed leg of the journey? What goes on when startups work with larger funds, acting as founding investors, to kickstart their business with a $5M+ round? I believe this mechanism is under-discussed, and it happens more often than people realize with some of the Valley’s largest companies. I see three ways companies kick off their first round of external fundraising with a larger fund, going straight to the A and bypassing the typical seed - venture - growth passage.

1/ The Enterprise Infrastructure Motion: Over the years, enterprise infrastructure components largely have stayed the same, but the underlying and enabling technologies change from time to time. From the era of mainframes all the way to hybrid and multi-cloud, new companies emerge in compute, networking, and storage. Top-tier firms like Benchmark, Greylock, Lightspeed, and Sutter Hill have succeeded in identifying technical founders who can define new architectures in IT infrastructure, appropriately capitalizing these businesses, and providing the right enterprise sales resources to get the technology in the hands of Fortune 2000 organizations. In exchange, individual venture firms can own 20% - 30% at time of exit or IPO. Some leading businesses that emerged from this model include:

2/ Reworking Within a Domain: Firms that have scaled to prominence in the last decade like Thrive Capital and 8VC, along with individual GPs like Keith Rabois, work with founders to build companies that integrate across value chains in sleepier, legacy industries like transportation, healthcare, real estate, finance, etc. It’s the encapsulation of “if you can’t sell them, compete with them.” Sometimes venture firms and EIRs work together to create full-stack solutions reminiscent of the current industry paradigm, but with software focused on scaling acquisition and internal operations. Newfront Insurance is what happens when Aon or Willis Towers Watson understands technology. Others engineer the industry value chain in unique and interesting ways. One example I found this week was 8VC’s Baton. This company development motion is less proven in terms of dollars returned to investors than the previous one, but some businesses have grown quickly.

3/ Bootstrap to Growth: I’m not sure if this sub-section fits nicely within the framework in question, but given the news about 1Password this week, it’s worth discussing. There are companies (generally pure software) that take on little to no capital initially to build and grow for years before taking on a Series A (usually from Accel), with round sizes looking more like growth than venture. Sometimes, they take on growth capital to go toe to toe with a well-funded competitor. Other times, capital can help fund acquisitions or strategic initiatives beyond the core product offering. Market leadership appears on the horizon for these companies, and management decides they want to go for it. Examples include:

As always, this is an attempt to kickstart a discussion, so I’m open to hearing comments and feedback. Feel free to get in touch with me on Twitter if you’d like to chat further.