Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.
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Venture capital’s new seed-industrial complex

Fields of soybeans being harvested

Hello and welcome to Pipeline. This week: venture capital's Great Resignation, how startup execs say you should run meetings, and the great arms race in seed funding.

Overheard

  • "Are you going to re-sign or resign?" asked former Greylock VC Josh Elman. This week the Great Resignation in venture capital is in full swing with Lightspeed's Jeremy Liew, Spark Capital's Bijan Sabet, and IA Ventures' Roger Ehrenberg all leaving their firms. Meanwhile, David Pakman left Venrock after 13 years to go all in on crypto at CoinFund. "Going to invest in climate change" is the new "spend time with family" when it comes to venture retirements.
  • The Benjamin Button of startups: Gainsight's Nick Mehta came across a startup that raised its seed from a hedge fund, its Series A from a growth fund and a Series B from an early-stage fund. It's the best example of this upside-down funding environment that I've seen.
  • It's no longer "developers, developers, developers." Instead ex-Microsoft CEO Steve Ballmer has a new passion: "I've become a real obsessive about toilets. Toilets, toilets, toilets."
  • "The best way to beat China is to simply make Better Americans," tweeted Founders Fund partner Delian Asparouhov in a truly eyebrow-raising take on a Bloomberg story about a family that chose an embryo with higher health odds thanks to genetic testing.

Biz on Biz

The arms race in seed funding

In August, Andreessen Horowitz announced a new $400 million seed fund — more than double the size of the seed pool rival Sequoia had touted in February. Not to be outdone, Greylock one-upped a16z a month later when it raised $500 million to invest in seed-stage companies

That's nearly $1.1 billion dedicated to seed investing between the three this year as all the firms found that nearly half or more of the deals being done were all in seed-stage companies.

  • The big impetus for Greylock was the new speed with which deals were getting done and the number of interesting opportunities at the seed stage, Greylock's Saam Motamedi told me. While Greylock has historically been more of a Series A and Series B fund, it's made seed more core to its mission: 70% of its deals this year have been seed.
  • That's a big commitment: Motamedi said he and his partners were prepared to partner for the life of the company, not to just hand it off to the general fund or growth stage once it's emerged from seed.
  • Part of the need for large funds is just the size of seed rounds these days. Greylock's Sarah Guo told The Information that they'd be willing to go up to $20 million. Abnormal Security raised $9.5 million from the firm in 2018. "Because we see these opportunities that are really really large, and we're willing to back ambitious entrepreneurs in significant ways, the check size does go up," he said.
  • Motamedi wouldn't commit to a dollar number or quantity of companies Greylock expects to fund, but he sees the firm taking a very concentrated approach rather than a spray-and-pray model that's more common in seed. "We're not making 17 investments so that two of them can be candidates for our growth funds," he said.
  • The firm has also been incubating more companies (it's currently recruiting for a founding software engineer for a blockchain startup) and plans to devote some of the capital to in-house startups.

There's a question whether these funds are playing offense or defense. Offense: Snap up larger stakes in the best startups earlier. Defense: Don't let the Tigers of the world eat their lunch in later stages. The answer: Both, as VCs get sandwiched.

  • Tiger Global, Coatue and SoftBank have moved their way down the stack from being purely growth money to leading series A and B rounds with some frequency. They're even being spotted in some seed deals.
  • Bubbling up from the bottom are investor-operators and solo capitalists like Lachy Groom and Josh Buckley. They're now leading early rounds and besting some name-brand firms in the process.
  • Serial entrepreneur Hiten Shah told me that he thinks the new megafunds for seed rounds are more of a reaction to the investor-operator dynamic than the Tiger cram-down. "The founders are going to investor-operators and everyone knows that," said Shah.
  • He sees these announcements more as marketing to attract founders. From his perspective, brand name alone isn't doing it. "I think those firms are dealing with a deal-flow problem," Shah said.

So what happens to the seed industry from here? One view of it from Vitalize's Gale Wilkinson is that it's going to bifurcate and that "we're going to naturally have a falling out into two camps."

  • The first: multistage firms raising the giant seed funds. The result for founders will be more money at higher valuations with more resources, said Wilkinson. The flipside: The potential for signaling risk if one of the firms doesn't double down on the company. Plus there's a fear companies can take on too much funding, she said.
  • The second camp will be specialized seed firms with strong brands that founders want to work with. They admittedly have fewer resources and can't go lead a Series F down the line, but founders are choosing to work with specialists in the early days to get companies off the ground, Wilkinson said, before turning to multistage funds to pour fuel on the fire.
  • The problem will be folks caught in the middle who don't have the rotational pull of deep pockets or specialized expertise, she said.

It may be an arms race, but it doesn't mean it's war. "Both options play nice in the sandbox," Wilkinson said. The real winner here will be founders who have more of a choice than ever. Their main dilemma is picking between them: "Founders are going to have to decide what they stand for," she added.

A MESSAGE FROM ASANA

The way we work has fundamentally changed. According to the International Data Corporation, the revenue for worldwide collaboration applications increased 32.9 percent from 2019 to 2020, reaching $22.6 billion; it's expected to become a $50.7 billion industry by 2025.

Learn more

Inside Track

  • ARR is the North Star for cloud companies, says Bessemer's Mary D'Onofrio. After 200 investments in cloud startups, Bessemer published its guide on how to scale to $100 million.
  • Three minutes and 20 seconds: That's the average amount of time VCs spent reading seed-stage pitch decks that got funded, according to DocSend's latest report on seed fundraising.
  • If you're also joining the Great Resignation and looking for a new job, Candor co-founder Niya Dragova has "The 10 commandments of salary negotiations," including how to navigate it at a small startup that doesn't have your typical comps.
  • Running a 10-person meeting is different than running a 100-person meeting. First Round spoke to 25 startup execs for their top tips on how to run the best executive meetings.

Need to Know

  • This week in Theranos: Former defense secretary James Mattis once believed in a young Elizabeth Holmes, but "there just came a point when I didn't know what to believe anymore," he said. On Friday, Theranos' former lab director Adam Rosendorff testified that the company put "PR and funding over patient care" and that he felt pressured by management (including Holmes) to vouch for tests when he felt the technology didn't work.
  • Big bucks for NFTs. Sorare scored a $680 million Series B round from SoftBank for its NFT fantasy soccer game. Dapper Labs, which is behind NBA Top Shot, raised $250 million at a $7.6 billion valuation.
  • China's NFT makers have found their own crypto workarounds. All crypto transactions are now illegal in the country, and cryptocurrencies cannot be circulated, the nation's central bank said in a statement. But that hasn't stopped NFT makers, who have found their own clever workarounds, reports our Protocol | China team.
  • Fund watch: The former Tiger Global investor Lee Fixel is reportedly planning a third fund, just two years after his 2019 launch. A16z is also eyeing a gaming fund and is looking to hire a partner for it.
  • LinkedIn named its top 50 startups. The top spot went to fintech startup Better, followed by HR software maker Gong and beauty startup Glossier.
  • QSBS exemptions could be under fire. Democrats have proposed changing the popular tax break for startup investments, something Carta is opposed to. It's far from guaranteed to make it through Capitol Hill, but as the last four years have shown us, anything in politics can happen.
  • Zoom's having acquisition troubles. Zoom's $15 billion takeover of Five9 is on hold as the DOJ reviews the deal because of Zoom's ties to China.
  • On Protocol: Performance reviews suck. These tech companies are trying to make them better.
  • Also on Protocol: Canva's now worth $40 billion. The next step? Getting users to pay.
  • Your weekend reading: Billionaire investor Marc Lore wants to build a utopia in the desert. "But is it just greenwashing?"

A MESSAGE FROM ASANA

This fall, as enterprises everywhere decide whether to return to the office, continue working remotely or establish a hybrid working model, collaborative technology platforms will be more important than ever. Asana COO Anne Raimondi shares advice with business leaders as they move into the next productive work phase, whatever shape that may take.

Learn more

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