Sramana Mitra: Talk to me a little bit about trends that you see in your deal flow. So if you look back on the last 12 or 18 months of deal flow, what are the highlights?
Preeti Rathi: When I think about that, one thing that I’ve seen is this winner-take-all phenomenon that we’re observing. Earlier, it used to be a trend only on the consumer side. Increasingly, it’s true even on the enterprise side. Because of that, too much money is chasing a few deals whereas a lot of deals end up starving. That’s one thing we’ve seen.
Another one is, seed deals are just getting larger and larger where you have more dollars getting poured into each seed deal. But the total amount of seed deals has gone down. Just to give you some numbers, if you think about the average amount of seed funding a startup had in 2010 was about $1.5 million at most.
Last year, the average seed funding was at $6.3 million. So, it’s like the classic series A is now a seed and series B is a series C. That’s another thing which has become really big in the last couple of years. One more interesting phenomenon has been that in a lot of seed deals, companies actually have revenue. In fact, more than 50% of companies at seed stages now have revenue. This is a very big change from back in 2010 where less than 10% of seeds would actually have revenue.
Sramana Mitra: Well this is something that we’ve been promoting aggressively. It’s bootstrap first, raise money later. So if you actually start your fundraising with adequate validation and even paying customers that puts you in a much better negotiating position.
I just want to follow up on what you said about the seed rounds really bloating up because there are too many VC’s chasing the same deals and wanting to flush them already at the seed stage with capital and the seed bloating up to $6 million. What about ownership? If you take $6 million in a seed round, what does that do to your ownership?
Preeti Rathi: So, let me just talk about us. How do we think about seed investments and seed ownership? When we invest in a seed company, we aren’t really that strongly focused on how much we own. It doesn’t mean we would be okay with a 2% ownership. But at series A, we like to lead or co-lead. So, the ownership requirements are stronger there. We would say “We need 20% in ownership at series A.”
But at seed, we don’t really have such a requirement. Our primary objective of making an investment at seed stage really is, “We think this is going to be a really strong company. We want to be the one who has the chance to get our first shot at investing at series A.” I think one of the big reasons that the seed rounds are getting bloated is also because there’s so much competition now at series A. For the really good deals, people want to get started with a partnership as a company.