The Three Types of “Second Seed” Rounds:
Too Cold, Too Hot and Just Right
For a founder, the first few million dollars you raise are likely to be the messiest in the history of your company. For some they come in a single round, meant to last you 12, 18, 24 months – a straight trajectory towards the milestones you’ll use to raise a Series A. But for most it’s a lumpy mixture of bootstrapping, friends and family, hackathon prizes, angels, incubators/accelerators and venture capital which combine over a period of months or years.
Accordingly it doesn’t surprise me that we’re seeing an increased number of companies raising a “second seed” – that is, an additional $1-2 million matching a similar total sum raised previously. I don’t think these rounds are evidence of a Series A crunch or anything quite so structural. There have been a tremendous number of seed companies funded in the past few years and trajectories are hard to predict. Some number of those early ventures require (and deserve) additional investor support before they are ready to raise the institutional A that they modeled.
While Homebrew is quite often the first money in (and certainly the first VC round), we don’t dismiss out of hand the idea that a company raising additional seed financing could be a wonderful investment. However as we saw the inbound volume increase we needed a framework to understand the opportunities in order to make good decisions of how to spend our – and founder – time. In reviewing the types of second seeds we were seeing, Satya and I broke them into three segments, two of which we have little interest in and one which whips me into a full-on funding lather (pause so that reader can create visual in their head).
Too Cold: Smart Team Still Wandering in the Desert
The founders have a pedigree and the problem space is a big one, but the team just hasn’t managed to nail a true MVP (let alone product<>market fit) and needs more funding to continue building. Maybe they’re just two months away from a launch. There’s always something tantalizing just. around. the. corner. They can sell investors really well but if you go deeper, it’s just not clicking. The first million was a party round and now those investors aren’t really responding and …