03 December 2016
Stages of funding in the intelligence era
This is a supplement to the article Growing up in the Intelligence Era
Cloud computing reduced infrastructure costs so much that companies could build a minimum viable product (MVP) on angel money. However, companies then needed more money to beat out the many, angel-funded startups and reach ‘escape velocity’. Series A funds left the angels to take on technology risk, waiting until a company had an MVP and early customers before investing a large amount to take on execution risk. This required bigger funds and thus smaller rounds became uneconomical for Series A funds.
The shift to the Intelligence Era forces Series A investors to rethink their criteria. Companies need more than an MVP to beat other startups; they need data-driven features, unique data from their initial customers, excellent design to capture data, data scientists with machine learning skills, refined strategic positioning and product marketing. These criteria create a new set of risk reduction points required by Series A investors that cannot be met with just angel funding. Thus a new stage has appeared and a new set of value-add, institutional seed funds have appeared to help startups reach these less understood risk reduction points.
Over the past decade, this evolution had blurred the stages of venture funding, but clarity is starting to develop at the start of the Intelligence Era. Here are the new definitions of each stage of investment.
- ‘Pre-seed’ capital comes from Angels, AngelList Syndicates, and Micro VC funds (< $50M) investing up to $1M on a convertible note without a well-defined lead investor. This stage may also include self-funding or non-recurring engineering contracts.
- ‘Seed’ capital comes from funds typically larger than $50M but smaller than $150 investing $1–2M in a syndicated $3–5M round. Zetta invests at this stage.
- ‘Series A’ capital comes from funds typically larger than $150M investing $5–10M in a $5-$15M round.
This brings a change in the expectations of investors. We are seeing investors outright ignore SaaS companies with solid traction in favor of companies that have a strategic position in the market granted by their ‘intelligent’ software. See our article, “Growing up in the intelligence era,” for more about how to sequence fundraising, product development and data strategy in the intelligence era.