In my post on our annual meeting, I noted that NFC saw a material opportunity to invest after seed rounds and before the A.
After recently traveling to Seattle, San Francisco, Denver, and speaking with venture firms and CEOs around the country, the thesis articulated below and in prior posts seems more valid than ever. The Series A is a HARD round to get done and the quality of the traction and related metrics Series A investors demand of startups requires more time and progress than most Seed rounds allow.
In order to attract national capital, however, there appears to be a minimum traction threshold required to secure interest. With the average Series A now $9m in proceeds at $27.5m pre, startups looking to secure national capital are needing to provide quantitative metrics that allow for firms to normalize endogenous risk via business model analysis. For example, in SaaS, a mature model, we see that companies need to be ~$2m in ARR with well characterized LTV, CAC, Churn, etc metrics. If those metrics are met, national firms are interested. Why quantitative filters? It is hard to evaluate teams, products, and strategies from afar independent of material revenue and KPIs, while local firms are well positioned to do so.
Getting to the metrics above, moreover, takes healthy amounts of seed capital, and Pitchbook now sees the average firm raising two rounds of capital before the major VC round. We think that it takes $2-4m in seed capital to achieve the required minimum operating performance necessary to attract a national firm to a regional deal.
The implication is that companies are going to run out of money before they reach the A round qualifications and that, often, the local market seed capital is either tapped out at that point and/or looking for independent validation that the company is on the right track.
Hence, the need for seed extension capital - where we like to play and where I see new firms being created to take advantage of the growing gap between seed capital and the trailing metrics that support a successful A round.