Conditions are tricky for seed investors.
Photo: Christian Joudrey/Unsplash

Seed funds need help. Can late-stage funds provide it?

Protocol Pipeline

Hello and welcome to Pipeline! This week: pro rata problems, the SEC's SPAC sparring and a new record in VC funding.

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  • Speed is up — and strategies are adrift. "The atmosphere of sheer panic among VCs these days is disconcerting. If I was an LP, I would be sitting on my hands right now. Up and down the capital stack, people have lost their wits, if not their minds." —Angular Ventures' Gil Dibner.
  • Capital calls can hurt or help returns, and fees affect them, too. "The surprising thing to me that I learned when I became a VC is that VCs actually have very little cash on hand. Most of it is sitting with their investors." —Hustle Fund's Elizabeth Yin.
  • NFT talk. "NFTs tokenize all the things. We are going from a world where every protocol has a token, to where every (decentralized) application has a token, to where every valuable digital representation of an object or person has a token." —Naval Ravikant.

The Big Story

Filling the growth-stage gap for seed funds

Global venture funding reached a record $125 billion in Q1, up 50% from the prior quarter, and almost double the first three months of 2020. While early and seed-stage funding data often lags because startups often wait to announce their raises, many signs point to early-stage funding coming back after some weakness last year.

The fundraising cycle itself also seems to be speeding up. Companies can be marked up over several rounds in just a matter of months.

It sounds like a good problem to have. But seed funds with hot investments can find themselves with hard choices to make. Without investing their pro rata, seed investors can be crammed down to a small holding in a suddenly big company. If they do chip in, there's less money to make new investments.

  • When seed funds reach a certain size, they'll likely seek to raise their own growth funds and keep the profits for themselves. Uncork and True Ventures are examples.
  • That's fine for seed investors with a track record. But it's hard for first-time funds that outperform to predict the need. Only 3% of seed funds have raised their own growth funds, one insider estimates.

Outside late-stage capital could be the answer. One firm, Alpha Partners, provides exactly that. The firm, which has raised $62 million for its first two funds and is raising a third fund of up to $300 million, targets newer seed firms on their first, second or third funds.

  • To help seed funds that are trying to compete in series C or D rounds that can be $100 million or more, Alpha works with seed funds that need capital fast. It splits carried interest with the seed fund.
  • Alpha has done this to invest in companies such as Coupang, Coursera, Ro Health, Vroom and Wish. It has seven exits over the past two years, said Brian Smiga, co-founder of the firm.

Another answer is special-purpose vehicles. These are one-off funds created to invest in growth deals.

  • This can be attractive for investors, because they don't have to make back a whole fund before seeing carry.
  • But for some firms, especially those with $50 million or less under management, it's a hassle to create and fundraise for these one-off deals, Smiga said. "We're like SPV as a service," he said. "Wouldn't your time and money be better spent finding the next great deal?"

Not every follow-on deal makes sense. There are so many companies to look at, and prices are rising, which can make it hard for seed investors to stay in deals.

  • Smiga's firm has learned that sometimes it's worth paying up for hot deals — it has previously passed on deals such as Robinhood, Slack and Lemonade because of high prices.
  • And there's the delicate dance between existing investors and new ones. "In this environment, early stage investors are encountering situations where the valuation and round size translate to 15-20% total dilution which leaves very little (if any) room for pro rata," QED Investors' Frank Rotman recently observed in a tweetstorm.
With so much capital sloshing around the industry, it's no surprise that financial services for venture firms are growing. Startup Pipe, for example, which provides upfront cash for software companies with recurring revenues, also provides this service for VC firms that have recurring management fees. Expect more to come.


Business leaders who understand that success rests on superior customer experience are always seeking better ways to unite their teams in order to best serve the customer. That means weaving support and service teams throughout the entire organization rather than pushing customer care into its own silo.

Learn more

Inside Track

  • Who were the most active seed investors since the pandemic? Not who you might think. Yohei Nakajima ran the numbers.
  • Want to build your startup brand? From building CEO relationships with reporters to PR agencies to Clubhouse chats, this piece by reporter-turned-VC Christina Farr has some good tips that apply to any tech startup.
  • Post-pandemic, many are considering how to create jobs and innovation outside of traditional supercities. Scott Kupor gives recommendations for local officials on how to tap into the trend. They include considering local and state regulations and taxes; universities and private capital; and federal R&D and tax incentives.

Need to Know

  • VC funding blows up again. Global venture funding hit a record $125 billion in the Q1 2021, while U.S. venture funding more than doubled year-over-year to $62 billion — almost $40 billion of which came from mega rounds of $100 million or more.
  • The SEC scrutinizes SPACs. John Coates, acting SEC director, tried to throw cold water on the idea that SPACs can project future revenue and earnings years ahead, while IPOs can't. That distinction may be wrong. Meanwhile, at least 15 companies with zero revenue have listed this year or said they would.
  • An onramp for Latinx investors. LatinX VC has created an eight-week program to prepare people to become an analyst, associate or senior associate at a VC firm.
  • How to build a venture fund portfolio right. A $100 million fund investing in 20 companies can't cut $5 million checks. If VC math is hard, a product from Tactyc helps juggle inputs such as fund size, total targeted companies and average check size.
  • A new argument over crypto. VCs were debating Peter Thiel's point that China may support bitcoin to undermine the U.S.
  • From Protocol: Megan Rose Dickey talks to Genius Guild's Kathryn Finney.
  • This week in VC history: Nine years ago, Facebook, preparing to go public, announced a deal to acquire Instagram for $1 billion. Right before the acquisition, Sequoia led a funding round for Instagram at a $500 million valuation. It was thought to be pricey at the time by some, but Facebook ended up more than making its money back on the deal. By 2018, Instagram was worth an estimated $100 billion as part of Facebook.
  • Your weekend reading: A skeptic's take on Neuralink and other consumer neurotech.

Five Questions With...

Armory Square Ventures's Somak Chattopadhyay

Somak Chattopadhyay is managing partner of Armory Square Ventures, a seed and early-stage firm based in Syracuse and New York City.

What a big issue that your partners are talking about at your Monday partner meeting?

Lately we have been thinking through how our companies in nontraditional tech hubs can best recruit and retain talent post-COVID. We used to say that a company is based in Buffalo or Columbus or Pittsburgh. But as companies virtualize their workforces, it's hard to say where the company is truly based. This presents new challenges in attracting people who care not only about building a market leader, but finding ways to transform their local communities.

What's an interest or obsession of yours that most people don't know about?

I am a classically trained violinist and obsessed with all types of music from classical music to hip-hop and jazz. My favorite composer of all time is Johann Sebastian Bach. I have been listening to his melodies and fugues since I was a child, playing them solo and in orchestras. I had the chance to visit his home in Leipzig, Germany, a few years ago. That trip remains one of the highlights of my life. Today, Bach is a balm for my soul. When I am facing a challenge at work that I can't get my head around, I turn on Bach for a few hours and usually an answer or two emerges from the meditation. I still can't get over how prolific he was and how refined his music was. He was generations ahead of his time.

What's one way you changed working in 2020 that you plan to keep going forward?

I turned a lot of in-person, one-on-one meetings into group Zoom calls. Entrepreneur presentations used to take much longer. First, someone from our team would meet a team in person, then there would be follow-up calls and meetings, and then perhaps a company might reach our investment committee for consideration. Today, our whole team can meet a team remotely on Zoom, have a single follow-up or two and go straight to our IC. That has streamlined the time we spend on each company and allowed more team members to participate in the deliberative process.

What company or startup sector is the most underrated right now?

I think ed tech remains a huge opportunity for investors, and still has a lot of room to grow through new innovation. The pandemic showed us how broken our education system is. We are not graduating enough skilled workers to fill the jobs in the tech sector but we are at the same time seeing record amounts of unemployment especially in young people aged 16 to 24. My college roommate, Sal Khan, is doing some incredible work through Khan Academy. I do think that there are many other for-profit models that can help fill the skills gap in the country and also help address inequality in our society.

What's a challenge you've had to overcome in your career? Do you have a tip for others?

When I was growing up, I was deeply concerned about what others thought of me and I was also incredibly fearful of rejection. Over the last few decades, I have become far more focused on being an independent thinker and do not take rejection personally. One tip I highly recommend to all entrepreneurs and investors is to consider developing a mind-body practice through yoga and meditation. I started a yoga practice in 2008 and I can honestly say this has played a large role in helping me stay grounded and focused on my decision-making as a fund manager.

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