Seed founders should consider these factors before partnering with multistage funds

Right now, in late 2023, the IPO market is halted, and late-stage deals rarely happen because funds and entrepreneurs cannot find common ground on pricing. The seed-stage arena has become more attractive for larger multistage firms because exit opportunities and late-stage funding are few and far between. Multistage funds have channeled funds into early-stage startups and will continue in 2024.

As a result of this increased demand, seed-stage valuations are breaking records, and deal sizes are growing, driven by multistage firms making big moves into seed-stage startups. This increased activity does create many downsides for founders and their companies, raising essential questions: Is the allure of name-brand firms, access to larger pools of capital, and sometimes higher-than-market valuations always a blessing, or does it come with hidden costs and strategic implications that may come back to haunt them?

Without multistage firms, we wouldn’t have multi-billion-dollar companies, and our society would miss out on many big ideas. But when it comes to pre-seed and seed-stage companies, in most cases, seed founders shouldn’t accept capital from multistage funds; instead, they should take money from firms specialized in seed and pre-seed rounds.

Why you shouldn’t take money from a multistage fund

They don’t have a rational incentive to give you hands-on support and time

One primary consideration is the level of hands-on involvement a founder can expect from a multistage investor. For example, a $1 billion multistage firm that invests $2 million in your company will provide a different level of hands-on guidance and support than specialized seed funds and angels. You’d represent 0.2% of their portfolio. The incentive for deep engagement is just not there. You’d either be competing for the partners’ attention with companies where they put eight- to nine-figure checks or end up working with a more junior investor who’s likely less experienced than GPs of seed firms.

Seed-stage companies will better benefit from the close collaboration and mentorship that pre-seed and seed-focused funds and angels can provide. These investors can be intimate partners on growth strategies, market nuances, regulatory challenges, and PR and communications. They won’t hesitate to tap into their network to send you customers/advisers and foster valuable partnerships.

Individual angels on your cap table with operational experience can help you navigate the challenges of early-stage growth and avoid common pitfalls. These folks will be your superpower to reach the next level.

Seed-focused firms only get markups and outcomes when you raise a Series A, so they work harder to help you secure the next round. They won’t compete for your Series A allocation and will provide better access to Series A investors in their network. They will be incentivized to open more doors and to help you secure a better valuation (while a multistage firm will be optimized toward ownership and getting a lower price on the next round).