The Beauty of Seed Extensions

I won’t get tangled up in the thought process behind hair extensions, but let’s comb through the increased use of seed extension rounds in the startup world today. (Thanks for coming…here all week).

Seed extension rounds (I’m defining as rounds raised after a traditional $1Mish seed round, not the round after Friends and Family) often get a bad rap. The rise of these rounds is not only attributed to current supply/demand imbalance of startups/investors (the overused “Series A Crunch” moniker). More and more these days, we see teams that are executing well and choosing to raise a seed extension round.

Note to startups: funding doesn’t always go in a straight line from Friends/Family to Seed to Series A. Teams focus too much on raising the almighty Series A. I hear this all the time: “We are raising a seed round now before raising the A round in 9 months.” Yes, at some point you want to raise enough capital needed to properly scale the business — there are indeed risks of raising too early or too late. But instead of constantly fretting about how to make the Series A a beauty, insanely focus on building your product and selling to customers and things will prove themselves out for all to see.

Here are some scenarios where seed extensions can be good things (gasp) for a company:

1. Team could raise an A but trades less cash now for less dilution later. In most cases, I love to see this. This typically looks like a bit larger round ($2-3Mish) than the $1Mish seed round, and includes insiders and new outside investors. The team stays lean and is confident that it can execute its plan to set itself up for a larger future raise at a higher valuation.

This is a logical extension of optimizing cash and dilution that a successful team constantly faces. One day we will hopefully move into a frictionless financing market where this optimization will be more tunable than our current discrete (and painful) financing model.

2. Team executing well, insiders bullish, need 6 more months of cash. We like this as well, as the team needs additional capital and is close to a larger raise, but just needs another 6 months of runway to prove it is worthy of such a round. This team could raise a smaller A if they wanted.

This scenario is a raise of typically the same size as the seed ($1Mish) and is mostly insiders with maybe 1 new outsider. Different than #2, where the team could actually raise a full Series A, this is driven by cash needs.

3. Quasi Extension/A Round But Calling it Series A. I’m probably stretching it here, but I’ve seen some of these lately in companies that need a good amount of capital to scale. It is more of a “Mini A” (and no, we don’t need any more verbiage around new titles for funding rounds thank you).

This is not the full fledge Series A that a company could raise (say 50% less than applicable scaling capital at company stage), but serves to a) bring in an outside investor to set up a larger next round that they would hope to lead and b) price the earlier convertible notes (if earlier rounds are not priced). The Company’s B round would then serve to scale more aggressively than the A (but done by not giving up as much dilution for founders as in the A).

All this mumbo jumbo serves to show every company is unique in their cycle of fundraising. It is hard to even write a post like this because I can think of many successful companies that have bootstrapped for many years or scaled silly fast. The net is that startups scale in different ways, so be careful to think too much about it or fret when you’re path looks different than others.

As long as you keep successfully building the team, product and vision, then funding will find you.