Marc Andreessen posted a tweetstorm last week and he talked about how to think about seed financings and how they lead into Series A and Series B rounds.
Feature request for Twitter: Please make it possible to permalink to and embed a tweetstorm. You can call this the @pmarca feature.
I replied to item 6/ of his tweetstorm:
@pmarca I assume Seed is to build product and get to PMF, Srs A is to build business, Srs B is to scale business
— Fred Wilson (@fredwilson) June 14, 2014
I feel very strongly that seeds should not be as large as they are these days and they should not be used to fund anything other than building product and finding product market fit.
It is possible to raise a large seed that, in theory, could fund all of that, plus a lot more. And all entrepreneurs are encouraged and interested in taking as much capital as they can given the dilution that they can stomach.
But I’m old school. I think of building a startup and funding it as walking up a flight of stairs. My partner Albert prefers the videogame (leveling up) analogy. Both work. I will stick with stairs.
The first step you need to climb is building a product, getting it into the market, and finding product market fit. I think that’s what seed financing should be used for.
The second step you need
to climb is to hire a small team that can help you operate and grow the business you have now birthed by virtue of finding product market fit. That is what Series A money is for.
The third step you need to climb is to scale that team and ramp revenues and take the market. That is what Series B money is for.
The fourth step you need to climb is to get to profitability so that your cash flow after all expenses can sustain and grow the business. That is what Series C is for.
The fifth step is generating liquidity for you, your team, and your investors. That is what the IPO or the Secondary is for.
That is a very simple view of the world. Very few companies will walk up the stairs easily and hit each one perfectly. Shit happens. And we all know that and can deal with that.
But I will tell you that the companies that have performed best in all the portfolios I’ve been involved with over the years have climbed those stairs more or less like that.
I don’t think its a good idea to jump over the first three steps and land on the fourth even if you have the legs (and funds) to do that. It is risky. If you don’t land it right, you can slip and fall. And its hard to get up if you do that.