20VC The Three Types of Seed Round Today, Why Seed Has Never Been More Competitive, Why Pricing Has Never Been Higher, Why Boards at PreSeed Can Be Helpful & How Too Much Cash Too Soon Can Harm Companies with Ed Sim, Founder @ Boldstart

In this episode of "20 VC" with Harry Stebbings, Ed Sim of Boldstart Ventures discusses the evolving landscape of seed investing and the emergence of 'inception investing.' Sim breaks down the three types of seed rounds: discovery (less than $2 million), classic ($3-5 million), and Megatron jumbo (over $5 million), emphasizing the importance of being a seasoned founder with a prior exit for larger rounds. He argues against excessive funding in early stages, pointing out that constraints can drive innovation and efficiency. Sim also notes the current market dynamics, including inflated valuations and the necessity for venture funds to adapt their strategies to maintain ownership and relevance. The conversation touches on the impact of macroeconomic factors on investment climates, the importance of disciplined investing, and the potential overvaluation of AI startups amidst the hype. Harry and Ed also discuss the role of venture capital in company growth and the need for strategic exits. Throughout, Ed advocates for a rational and ownership-focused approach to venture investing, aiming for Boldstart to continue its specialized, early-stage, hands-on support for founders.

• Discovery rounds are typically less than $2 million in funding.
• Aimed at first-time founders who are exploring a new market.
• Provides initial capital to validate the market and begin product development.

The point is the three rounds are there's a discovery round, which in my opinion is less than 2 million.

This quote by Ed Sim establishes the concept of a discovery round, highlighting its purpose to support early-stage exploration by first-time founders.

• Classic rounds range from $3 to $5 million in funding.
• This stage of funding is for further development and scaling after the discovery round.
• The amount allows for more substantial growth and operational expansion.

So it's usually like maybe a first time founder exploring a new market. It'll graduate into the next round, which would be a classic, and a classic round in my opinion, would be three to 5 million.

Ed Sim describes the progression from a discovery round to a classic round, indicating the increased funding and the purpose of further market penetration and business scaling.

• Megatron jumbo rounds involve funding greater than $5 million, typically between $6 to $10 million.
• Usually raised by seasoned founders with a history of successful exits.
• Multistage firms often encourage supersizing these rounds to accelerate growth.

And finally, this is the Megatron jumbo round. Greater than five, it's usually a six to $10 million round and it's almost always a seasoned founder with a prior exit.

Ed Sim introduces the concept of Megatron jumbo rounds, highlighting the significant funding amounts and the typical profile of founders who secure such investments.

• Inception investing involves engaging with founders before company incorporation.
• Helps founders iterate and battle-test their ideas, and pre-sell initial hires.
• Leads to a more efficient startup launch with funding and team in place from the beginning.
• Inception rounds can vary in size but often align with the founder's needs and vision.

I call ourselves an inception investor, and in my opinion, the world's gotten way too complicated with pre seed, seed and what have you.

Ed Sim explains Boldstart's approach as inception investors, simplifying the early-stage investment landscape and focusing on the earliest stage of a startup's life cycle.

• The venture capital market has seen excessive capital raised in recent years, leading to a decrease in growth-stage investments.
• Founders with significant prior success can attract large rounds at high valuations.
• There is a trend of early-stage funds adapting to the market by participating in larger rounds for exceptional founders.

It's gotten really hard to venture. I mean, people raised way too much capital over the last three or four years.

Ed Sim discusses the challenges in the venture capital market due to the overabundance of capital raised and its impact on investment strategies.

• The concept of precede and seed rounds has evolved, with median ages of companies at these stages increasing.
• Founders, especially repeat ones, may prefer to skip precede rounds to avoid additional dilution and streamline funding.

I think precede presupposes that you need a seed round.

Ed Sim critiques the traditional precede and seed round structure, suggesting that it may not be necessary or desirable for all founders, particularly those with prior experience.

• High valuations for early-stage companies, especially those founded by ex-employees of successful tech firms, are becoming more common.
• Concerns arise about the impact of too much capital too early on a company's development and talent acquisition.

You have person leave stripe or leave OpenAI or hugging face, and they raise 20 on 100.

Harry Stebbings expresses concern over the trend of high valuations for companies founded by individuals from notable tech firms, questioning the sustainability and implications of such practices.

• Operating with financial constraints can be beneficial for startups, encouraging efficient use of resources and strategic growth.
• Some founders intentionally raise less capital than they could to maintain pressure and focus.

I want to test them to make sure that they are okay and that they want to operate with constraints around them.

Ed Sim emphasizes the importance of testing founders' willingness to operate within constraints, suggesting that it can lead to more disciplined and focused growth for startups.## Discovery Round

• The discovery round typically involves less than 2 million dollars in funding.
• It is often for first-time founders exploring new markets, such as WebAssembly (Wasm).
• The round is used to flesh out a potentially large but early market.
• The expectation is for the company to progress to a classic round.

"There's a discovery round, which my opinion is less than 2 million. So it's usually like maybe a first time founder exploring a new market, maybe like Wasm, webassembly markup language or whatnot."

This quote explains that the discovery round is a smaller funding round aimed at new founders entering emerging markets, and it serves as a starting point before advancing to larger funding stages.

• The classic round ranges from 3 to 5 million dollars and is preferred by Ed Sim.
• Founders in this stage could raise more but choose to be constrained, aiming to build a lean team and operate efficiently.
• Companies in this round are usually not at their inception but have raised a precede round and are about 2.7 years old on average.

"And a classic round, in my opinion, would be a first or second time founder... I'm going to take four to $5 million, I'm going to build a mean team, and I'm going to operate."

Ed Sim expresses his preference for the classic round, where founders take a moderate amount of funding to build a focused team and grow their business.

• The jumbo round typically involves funding greater than 5 million dollars, often between 6 to 10 million.
• It is usually pursued by seasoned founders with a history of successful exits.
• These founders are often iterating on a proven idea and may be reinventing an existing market with a large total addressable market (TAM).
• Multistage firms may encourage founders to raise more money in this round to rapidly scale the business.

"This is the megatron jumbo round. This is greater than five. It's usually a six to $10 million round. And it's almost always a seasoned founder, like an en that I mentioned earlier with a prior exit."

The quote describes the characteristics of a jumbo round, which is a significant funding stage for experienced founders looking to scale their next venture.

• There is a worry that founders do not consider the long-term implications of raising large sums in jumbo rounds.
• If the business does not progress as expected, it can be challenging to raise additional funds at a similar valuation.
• Raising a smaller amount initially allows for more flexibility in future funding rounds.

"What worries me is people don't think longer term on the jumbo rounds and say, we're just doing a ten on 50, just base case."

Harry Stebbings expresses his concern that founders may not be considering the potential downsides of raising too much money too quickly, which can lead to difficulties in later funding rounds.

• Traditional seed funds used to be between 25 to 100 million dollars, but this model is no longer viable due to increased competition and the need for larger investments.
• To compete effectively, funds need to have the ability to lead rounds and provide meaningful capital at every stage, from discovery to jumbo rounds.
• Ed Sim suggests that a fund size between 150 to 250 million dollars is more appropriate for the current venture climate.

"I'll give you some different math. I think in order to win right now, in today's venture climate, you've got to compete with angels, you've got to compete with precede, you've got to compete with seed, you've got to compete with multistage, billion dollar firms."

Ed Sim explains that successful venture funds must be competitive at all stages of investment and have the flexibility to provide significant funding when necessary.

• There is a debate about whether enterprise SaaS is still a viable investment, considering the high entry valuations and public market dynamics.
• Ed Sim counters that there is still significant opportunity in enterprise SaaS due to accelerating IT spending and the ongoing migration to cloud services.
• He believes that disciplined investment and ownership strategies can lead to substantial returns.

"Enterprise it spending is refucking, accelerating right now... And I'm just saying the cloud stuff, we're still only 25% to the way of migration from on prem to cloud right now."

Ed Sim argues that the enterprise SaaS market continues to grow, offering investment opportunities despite concerns about high entry valuations.

• Capital efficiency is crucial in venture investments to mitigate the effects of dilution.
• Ed Sim emphasizes the importance of maintaining ownership through subsequent funding rounds, which can be achieved by using opportunity funds.
• Dilution can significantly reduce ownership percentages, but careful planning and additional investments can help preserve stakeholder value.

"Yeah, well, capital efficiency matters, period... So that's number one. And to that point, you will never find Bullshart, for example, finding companies where they're raising 20 or $30 million, and two thirds of that money goes to Nvidia."

Ed Sim highlights the importance of investing in capital-efficient businesses to avoid excessive dilution and maintain a significant ownership stake.

• There is a view that precede investors should not take board seats, as it may be too early for such involvement.
• Ed Sim challenges this notion by emphasizing the need for investors to have control and the ability to support founders from the very beginning.

"There's a special place in vc hell saved for precede investors to take board seats. Am I wrong?"

Harry Stebbings questions the practice of precede investors taking board seats, suggesting it may not always be appropriate. Ed Sim's response implies that active involvement from the start can be beneficial.## Pre-Seed and Seed Funding Dynamics

• Ed Sim discusses the appropriateness of board formation and detailed reporting depending on the funding stage.
• For smaller rounds (pre-seed), less formal structures are needed.
• For larger seed rounds, proper rounds and board setup are advised to prepare founders for future governance.
• The importance of a trusting relationship between investors and founders is emphasized.
• The cadence of communication should be tailored to the founder's needs and the company's stage.
• Founders should reach out proactively with clear requests.

"If you're raising five hundred k to a million, that's what I think of pre-seed, then, yeah, you don't need a fucking board." "If you're doing a classic round of you're raising three to 4 million, I like to tell the founder that, hey, you should probably not do a series of safe notes here because you never really know what you own, especially on conversion."

Ed Sim argues that for smaller funding rounds, formal structures like boards are unnecessary. However, for classic seed rounds of around 3 to 4 million dollars, he advises against using a series of SAFE notes due to the uncertainty of ownership upon conversion and suggests setting up a proper round and board for better preparation for future governance.

• Ed Sim believes in a flexible and founder-friendly approach to investor involvement.
• The best founders are expected to know when and how to seek guidance.
• The frequency of board meetings and investor communication should be customized.
• Investors should add value and not impose onerous frameworks on founders.
• Keith Rabois and another successful investor have contrasting views on the value of frequent founder-investor interactions.

"The best founders, in my opinion...ping me when they need me." "Putting onerous frameworks around founders where you need to talk every week or two weeks or whatever, or having every monthly board meeting cases, there's no set rule."

Ed Sim's perspective is that the best founders are those who communicate with their investors when necessary, without the need for rigid, frequent check-ins. He believes that investor involvement should be flexible and based on the founder's preferences rather than a strict schedule.

• Ed Sim emphasizes discipline in investment, particularly in the context of AI.
• He cautions against chasing trends and highlights the difficulty of making money in AI.
• The focus should be on solving problems uniquely, with AI as an enhancement, not the sole defining feature.
• Data moats and incumbents in AI, like Adobe, are recognized for their strategic positioning.

"I think this whole AI thing, frankly, I think AI is the most transformational thing that we're ever going to see in a long time. However, I still think it's really fucking hard to make money there." "Chasing anything with AI in their domain or an AI thing I think is insane."

Ed Sim acknowledges the transformative potential of AI but remains skeptical about the ease of profiting from AI investments. He criticizes the trend of indiscriminately pursuing AI-related ventures and advises a more discerning approach, focusing on unique problem-solving.

• Ed Sim questions the sustainability of high valuations in seed rounds amidst uncertain macroeconomic conditions.
• He discusses the resilience of seed investing to macro externalities and potential impacts on valuation trends.
• The conversation touches on the historical context of investment bubbles and the need for discipline.

"I don't even know what the fuck a 20 on 100 post is anymore. Frankly. I think at the end of the day, dude, it comes down to being disciplined, right?"

Ed Sim expresses skepticism about the current high valuations in seed investing and stresses the importance of maintaining discipline in investment decisions, especially in light of uncertain macroeconomic factors.

• The potential for increased M&A activity is discussed, particularly for overvalued unicorns.
• There is a suggestion that some growth investors might prefer to exit at 1x to reinvest elsewhere.
• The conversation covers the challenges of M&A for companies valued below and above one billion dollars.
• Regulatory hurdles and the market's reception of M&A deals are considered.

"I think we're going to see a lot more M&A's coming ahead right now." "There have been a lot of companies and there's what, thousand plus unicorns out there right now. Not all of them will go public."

Ed Sim predicts an uptick in M&A activity, especially among overvalued unicorns that may not go public. He suggests that some growth investors might opt for exits at current valuations to reallocate capital, indicating a strategic shift in response to market conditions.

• The conversation explores the state of the growth investment market, including recent declines in valuations.
• There is a discussion about advising founders on navigating compressed prices and fundraising strategies.
• Ed Sim shares insights on the importance of choosing the right investment partners over maximizing valuation.

"Yeah, the numbers, the overall numbers itself, in terms of growth round valuations, yeah, they're fucking down big time." "We want you to get the best partner who believes in your business in the longer term at a fair price."

Ed Sim acknowledges the significant decrease in growth round valuations and advises founders to focus on securing investment partners who are committed to the long-term success of their business rather than pursuing the highest possible valuation.

• The discussion touches on the lessons that should be learned from past investment cycles.
• There is a critique of the tendency to chase high valuations and the importance of historical perspective in investment.
• The conversation highlights the need for investors to act in ways that align with their fund's strategy and position.

"You and I both know there's some lessons that we should probably learn from the last two years."

Ed Sim and Harry Stebbings reflect on the importance of learning from previous investment cycles, suggesting that some investors may not have fully absorbed these lessons, as evidenced by ongoing aggressive investment behaviors.## Disciplined Financial Management

• Excessive cash can lead to a startup's downfall at any stage.
• Missing financial targets can create a death spiral, particularly if recent hires feel they are not seeing the expected return on their investment in the company.
• Pressure increases when financial targets are missed, affecting the morale and performance of the team.

"There's a death spiral that can happen if you miss a quarter or a quarter or two, and just the pressure goes up and the last batch of hires, who are usually the largest percent of your business, if you are in hypergrowth mode, are feeling like they're underwater."

The quote emphasizes the negative spiral that can occur when a startup fails to meet its financial projections, leading to increased pressure and potential dissatisfaction among employees who were hired during periods of rapid growth.

• Ownership is crucial, but it must be balanced with valuation considerations.
• Preemptive funding rounds may not allow for sufficient performance evaluation between rounds.
• The current market trend shows fewer preemptive rounds, allowing more time for due diligence.

"Ownership always matters, by the way, on these exits, particularly in a world of lower multiples. But you've got to be careful about how much you lean in."

This quote highlights the importance of maintaining ownership in startups while being cautious about how aggressively to invest in subsequent funding rounds, particularly in a market with lower valuation multiples.

• A significant win was leading the funding round for a company called Customer (spelled with a K).
• Investing in companies challenging incumbents requires patience and additional product development.
• Success with Customer informed future investment strategies and reinforced the need for foundational elements before pursuing a vision.

"My biggest win to date and win I'll call a realization, was kind of leading the rounded inception with customer with a k."

The quote reflects on Ed Sim's most notable investment success, which involved leading an early funding round for a company that eventually sold for over a billion dollars.

• The biggest mistake was participating in too many preemptive funding rounds without enough risk mitigation between rounds.
• The lesson is to evaluate the need for additional investment critically and avoid overcommitment.

"Leaning in too much, too quickly without enough signals changing things from those rounds."

The quote acknowledges the error of investing too aggressively in quick succession without adequate evidence of progress or de-risking between investments.

• The venture capital industry is highly competitive and has an abundance of capital chasing opportunities.
• There is a desire for more rationality in investment decisions, especially at the inception stage of startups.

"It's gotten so fucking competitive out there, man. It's insane. And there's too much money out there chasing things."

This quote describes the current state of the venture capital industry, characterized by intense competition and an oversupply of investment capital, leading to potentially irrational investment behaviors.

• Being first on the cap table is advantageous.
• Ownership stakes are important for returns, especially with lower multiples.
• A new generation of venture capital firms is emerging with different approaches to the industry.

"Being first on the cap table really makes sense in terms of making money in any environment with multiples compressed."

Ed Sim advises that for LPs, securing early positions in startup investments is beneficial for returns, especially in a market with compressed valuation multiples.

• The reopening of IPO windows is tied to interest rate signals from the Federal Reserve.
• Lower interest rates could lead to higher valuation multiples for companies, but not to previous peak levels.
• Investment strategies should be adjusted according to more conservative future valuation multiples.

"Mr. Jerome Powell signaling to the world that interest rates are under control now and the air has been taken out of the balloon and the interest rates have to go down."

The quote suggests that a key factor for reviving the IPO market would be a signal from the Federal Reserve that interest rates are stabilizing or decreasing, which historically has been associated with higher valuation multiples for companies.

• Boldstart Ventures aims to maintain its focus on inception-stage investing.
• The firm plans to add more operating partners to support early-stage founders.
• They are cautious about growing too large and losing the ability to make strategic investment decisions.

"I want to be in that inception round. I don't want to lead A rounds. I don't want to get so big where I feel like I have to put money to work to make bad decisions."

Ed Sim expresses his desire for Boldstart Ventures to remain focused on early-stage investments and avoid the pressure to deploy capital that comes with managing a larger fund, which could lead to less strategic investing.

• Harry Stebbings is recognized for his interviewing skills and deep knowledge of the venture capital industry.
• The continuous learning process from interviewing is acknowledged as beneficial for developing personal investment theses.

"Harry, you have such a special talent for interviewing people and asking questions and you're so deep in your knowledge and I think that you learn from every person you interview."

The quote compliments Harry Stebbings on his interviewing abilities and suggests that the insights gained from these interviews contribute to his understanding and perspective on the venture capital sector.