Congrats, You Closed Your Seed Round. Now What?

Most likely the “post-seed funding gap.” Here’s how to navigate it.

Securing a seed round is an exciting step for your company. You’ve hustled for months and have finally managed to lock down a lead and fill it in with some great follow-on investors.

What you’re facing next might be even harder than you’ve realized though. As venture capital checks have gotten fatter and more infrequent, fewer companies are making it from their Seed to their Series A rounds.

Photo by Alex Radelich on Unsplash

I recently had the opportunity to interview James Conlon from Bullpen Capital about what he calls the “post-seed funding gap.”

As he puts it:

“It’s never been easier to get early-stage funding, but at the same time, it’s never been harder to get to the next level after that.”

The post-seed funding gap is the valley in between a Seed round and a Series A round. This has historically been a much smaller step, but the past few years have seen this gap explode. This is an existential crisis for all types of startups, as more companies are being left in the dust.

Getting a Series A is a Zero-Sum Game

There isn’t enough venture capital to go around for everyone. In fact, access to the pool is shrinking. The number of Series A and venture deals are dropping, as funders invest larger dollar amounts into fewer companies.

As CB Insights and PwC show, VC deal count is on the decline. Source: https://www.cbinsights.com/research/report/venture-capital-q4-2018/

This is in stark contrast to the number of new companies being born. According to Conlon, there has been “an explosion of seed deals that are all racing through the funnel trying to score Series A money.”

The cause of this early stage explosion is largely due to technological progress. It’s much easier now to launch a company than it was 10 years ago. Cloud computing, democratized fundraising, and lean startup methodology are all helping more startups realize significant traction from small investments. Basically, the barriers to entry for starting a company are lower. A large supply of early-stage companies has translated to a large demand for later-stage venture capital funding. VCs have responded by raising the bar on their standards.

Bridge Funds Filling the Gap

Some investors have stepped in to fill the gap. One such is Bullpen Capital, which brands itself as a “dedicated post-seed fund.” This means they invest somewhere between $3–5 million in companies that have “raised between $1–2 million in seed capital, have found product/market fit, and have a near-term scaling milestone they need to hit in order to secure their next funding round.” They’re industry-agnostic and instead focus on stage. For them, that means companies growing “up and to the right” but not quite at the Series A levels.

There are a lot of these companies, and some traits make them more likely to get ignored by venture capitalists. Getting to a Series A is especially hard for companies that don’t quite fit the traditional Silicon Valley mold, or as Conlon calls them, “off-by-one” companies. This could mean the company isn’t located in a tech epicenter, the founder doesn’t have an elite pedigree, or the industry is out of favor with venture capitalists. The common theme is that these companies are less likely to catch the eye of large venture firms. Firms like Bullpen are stepping in to get them on the right track though.

A Case Study: SpotHero

SpotHero, a Bullpen investment, is a Chicago-based startup that is a marketplace for garage parking. The CEO, Mark Lawrence, was a “blue-collar guy shaking hands with garage-owners and doing the hard work to lock up the supply side of the market.” It wasn’t “sexy” enough for Silicon Valley investors, who instead backed flashy Valley-based startups. While SpotHero was initially left in the dust on their Series A round, Bullpen helped bridge the gap with a $4.5 million round. Not only did SpotHero go on to raise $20 million in their next round, but they pulled in $40 million just two years later.

An Analogy to Make Sense of it All

Sometimes sports analogies can help, and in the case of the post-seed funding gap, baseball is a good reference.

Bullpen’s name has meaning. The founding crew was connected to Chad Durbin, a former Major League pitcher who spent time in the Phillies’ bullpen. In a meeting one day, Chad learned a little more about Bullpen’s model and said: “you do for startups, what I do for starting pitchers.” As a middle relief pitcher, Chad bridged the gap between a starting pitcher and a closing pitcher. It was the underappreciated messy middle, but it was vital for success. As a post-seed VC firm, Bullpen does something similar by bridging the gap between Seed funders and Series A funders.

Don’t call it a “bridge” round though. As Conlon’s business partner describes it, a bridge is for distressed companies that are looking for short-term funding to try out one more idea. A post-seed round is for post-product/market fit companies that are trying to accelerate growth before raising a Series A.

Another Tool in the Belt

Venture capital is a constantly shifting industry. Norms and standards change over time. As a founder, it is vital to understand where one’s company is at in its cycle and what its best options are for success. Understanding and navigating the post-seed funding gap are essential skills for modern-day founders.

More Advice for Founders from Conlon

When to Raise Funding

With regards to timing fundraising, Conlon says:

You can control when and how much you raise, but that’s about it. The price and the terms are all dependent on outside factors that you can’t control. As a founder then, you want to time your capital intakes to milestones you hit that matter to the next round of investors, because you have then de-risked the deal enough that they’ll give you a good price. If you keep timing capital intakes to good milestones, then you’ll end up owning more of your company.

Traction is a moving target though, so talking to advisors and VCs over time is the best way to find out where they are at.

Traits to Bring to the Table

On founders that Conlon likes to invest in, he noted three things:

  1. Tremendous market knowledge and a chilling command of numbers. “If you’re not data-driven as a CEO at this point, then it’s tougher to keep up.”
  2. Founders native to the market. “They’ve lived and breathed the problem they’re solving.”
  3. Having a chip on your shoulder. To paraphrase the late great Bill Campbell:

There are CEOs who want to make money, that you never invest in. There are CEOs who want to win, that you sometimes invest in. And there are CEOs who want to be right, that you always invest in.

Founders should be stubborn, but open-minded to outside evidence. That’s why it’s so important to be data-driven. Numbers are hard to refute.

Living in South Philly. Venturing for America. https://twitter.com/DylanShooska

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