There's a bifurcation happening in seed funding, where the big, multi-stage firms are raising larger and larger seed funds to compete on dollars and the seed funds are becoming more specialized to compete on expertise. NFX is hoping to win over founders by doing both.
The venture capital firm plans to announce a new $450 million fund Tuesday as the arms race in seed funding continues. The fund size puts it as one of the largest out there, beating out Andreessen Horowitz's $400 million seed-specific fund announced in August and just short of Greylock's $500 million reserve announced in September.
"There's funds trying to be the world's best at the seed, and the world's best at the [series] A, and the world's best at the [series] B. They're all our friends and they're great people, but they're doing a lot of stuff," said NFX general partner Pete Flint. "We only want to be the world's best at the seed, that is our singular focus and we have no other business model so we're going to make it work."
NFX started in 2015 with a focus on placing seed investments in startups driven by network effects (hence the name). Its bets include now-public companies like DoorDash, Poshmark, Lyft and Twist Bioscience. The goal with the new fund is not only to double down on network-effects businesses, but to continue to grow its own flywheel of startups helping each other as part of its portfolio. The firm said it expects to invest in an additional 70 companies with the new cash.
The fund size will help NFX compete with heavyweights like Greylock and a16z when it comes to dollars, but Flint thinks the firm also has an advantage in the seed specialist side. The rise of investor-operators has also put pressure on seed funds as founders are choosing to take money from solo capitalists and fellow CEOs over traditional venture firms. "The founders are going to investor-operators and everyone knows that," serial entrepreneur Hiten Shah had previously told Protocol.
Flint likes to consider his team as part of that category, but with an institution behind it and a sole focus on its investments. The NFX team includes former operators like Flint, who co-founded Trulia, and James Currier, who has founded four different companies. Israel-based general partner Gigi Levy-Weiss is a two-time CEO.
"I think founders are absolutely right that they should be looking for investor-operators," Flint said. "I also think that this job is a pretty serious job as well. Having someone who is leading a round, but also leading a company is probably not a great idea."
As part of the firm's third fund, it's also adding Omri Amirav-Drory as a general partner. It had previously signed on Morgan Beller, one of the creators of the Facebook-backed Libra cryptocurrency project (now known as Diem).
While NFX is more of a generalist firm, Flint said that it will be leaning into Beller's crypto expertise and Amirav-Drory's background as founder of NFX-backed Genome Compiler to invest more in the intersection of biology and tech.
With the new fund, NFX isn't changing investment strategies beyond rounding out the expertise on the team, Flint said. The firm wants to continue to be the first institutional check into a company and lead the rounds, whether it's at the pre-seed or seed funding level, although where exactly that level is in a fast-moving market that's seeing the price of seed rounds explode is hard to know. "We could put a number on it but I think it'll probably be out of date next week," Flint joked.
"I'd say it was clear as of six months ago that you'd see pre-seeds at a sub-$10 million valuation," he added. "But I think there's this really gray area between what pre-seed and seed is right now, and, frankly, I think that's okay."
While seed rounds may be larger today (and potentially still ballooning in size), Flint said the decision to go bigger with a fund isn't a reaction to the price of rounds, but the size of the opportunity for startups right now.
"This is a golden age in startups like we've never seen before. It seems COVID [created] this sort of societal change that, really, startups like to operate in and fill the unmet needs that happen today," Flint said. "Talent is coming out of these big companies and then you're seeing capital come to match that activity."