Once upon a time, venture capital rounds followed a simplified naming convention, beginning with the first letter of the alphabet and following suit until a company exited and no longer had a need for raising private capital. Angel investment enabled ideas to get off the ground, and the rest became history.
As venture capital went mainstream, additional round names were introduced to further articulate the function of capital – Seed funding, then Pre-Seed, then perhaps Seed+/extension rounds, and so on. Essentially, companies could hold off on calling their raise a Series A until they met the timing-specific market expectations of revenue and sales milestones.
Meanwhile, relatively underfunded ecosystems like Nashville and metro areas across the Southeast and South followed a slightly different system of round names and sizes. For example, the first round of funding could be called a Series A, followed by A-1, A-2, A-3, at times structured as convertible notes accruing interest in hopes of eventually raising a priced equity raise. Angel networks shifted milestones up to de-risk investments, making it difficult for startups to attract capital until reaching $1M+ in annualized revenue.
The road that diverged in the woods for startup entrepreneurs seeking investment capital boils down to a vocabulary challenge. How could a CEO pitch a seed investor in San Francisco or New York when their last raise was called a Series A-1, even if it functioned more like a pre-seed or seed round? Oftentimes, right-sized VCs in more established ecosystems might pass on taking a call with a company based on the vocabulary alone, signaling ‘it wasn’t a fit’.
Early-stage investing revisited
What is ‘early-stage’ investing? Carta recently disclosed a chart of early-stage funding data spanning 2023 through H1 2024, organizing pre-seed, seed, and Series A rounds by metro area, ranking them based on the percentage of a total $40.2 billion deployed in that timeframe. However, a $30 million pre-seed in San Francisco and a $1.5 million seed in Nashville serve different functional purposes for both the receiving company and the ecosystem alike.
In the instance of the Carta dataset, I would much rather band capital by deal size ranges (e.g. sub $5 million, $5-15 million, and so on), and then stack rank metro areas to expose funding trends and gaps in access to capital.
I’ve recognized a specific linguistic need in the past 7 years of living in Nashville as a newcomer after a lifetime spent living and working in Los Angeles, commuting regularly to San Francisco. If we are going to increase the accessibility of venture capital across the country, we must do away with strictly conforming to the terms pre-seed, seed, and Series A when communicating cross-regionally.
Defining the functions of ‘Pre-Scale’ capital
I offer for consideration the term ‘pre-scale’ — to me, there is a functional need and purpose for capital when companies fall within a pre-scale phase of company building, a different functional need and purpose for capital while scaling, and the same follows for growth capital and approaching a major exit or IPO.
Raising pre-scale capital enables a high-growth company to launch and test assumptions to move toward scale:
1. Build and launch the initial product
2. Hire an early team
3. Perform paid tests to drive online traffic to a landing page and see which messages resonate with target customers
4. Define ICPs (ideal customer profiles) after a discovery process
5. Acquire and onboard early customers
6. Develop branded marketing and sales materials
7. Attend industry conferences, trade shows, and association gatherings
8. Cover legal and compliance costs, including financial statement preparation, audit and tax
9. Make product updates and strengthen technical infrastructure, including security
10. Make additional hires to streamline job functions and maximize the strategic use of CEO and/or co-founder time
Depending on the industry, sales cycles, gross margins, and revenue mix, one company’s milestones to reach Series A can differ significantly from another company’s. Meanwhile, market sentiment can shift, further changing the goalpost for founders to successfully raise their next round. In today’s climate, the average time between seed and series A is approximately 24 months, not taking into account the significant variance in round sizes between geographies and founder profiles.
Some of the largest outcomes for venture-backed startups came from companies that raised relatively little capital when compared to their exit value. Not having to rely on additional outside funding positions entrepreneurs in a powerful position to grow sustainably and benefit financially when it comes time to exit. The function of capital being raised should always be scrutinized prior to running a process.
Opening lines of communication locally, regionally & nationally
On the positive side, relocated talent post-COVID can help address several challenges entrepreneurs face in emerging ecosystems. New faces bring new networks and information to help advise local entrepreneurs and expand the pool of options and solutions for a given problem. Information sharing between entrepreneurs is a sign of health for any ecosystem, and arguably part of what made Silicon Valley successful.
Daytrip Ventures is committed to building a purpose-built network to connect relocated and homegrown talent, including entrepreneurs, investors, and talent. The byproduct of a network is the flow of information, collecting multi-stage, cross-sector market intelligence as time passes and the market changes. Supplying entrepreneurs with the right pieces of information at the right time can be the difference between moderate growth and breakout growth.
To learn more about us, check out: Introducing Daytrip Ventures and Silicon Valley, USA