the Series A squeeze

Valuation is a marker in time

Founder DMs. “Can we chat?”. I get on the call. It’s a seed founder who asks me to put the “friend hat” on instead of the VC that I am. They want advice.

The tldr from the one on Tuesday: “Hey man, I thought I was going to be the best thing since sliced bread, and then the market really humbled me. I have a term sheet with not the greatest terms, the fund is OK but it’s money in the bank. Should I bank this, or keep going?”

These are good companies. A few million in revenue. Manageable burn. But they just aren’t in one of the hot categories.

I have now gotten eight or nine of these calls in the last two months, all complaining about the exact same thing. VCs are mimetic. We follow in flocks into the hot categories. Right now that’s AI infra, defense, bio, or robotics. If you don’t have a little heat in one of those areas, we kind of ignore it. Founders think it’s a slight on their business. But it’s just not as interesting to us in the moment. (PS: each VC will claim to be different, including me who just led a Series A for a deeply unsexy market, but it’s still the truth)

I’m new-ish to venture but reading history none of this seems new. It’s been happening forever. Founders are just feeling it particularly right now.

So, the deal can still get done. It just won’t be one of the “hot” ones. Which means even at $3 million in revenue, your post is somewhere between $50 and $100 million. And if you can get a Series A term sheet at all, that itself is a huge win.

Numbers show it. Graduation rates from seed to Series A were once as high as 33% (in year 3), and for newer cohorts they’re trending under 20%.

Courtesy: Carta

But the founders are pissed. What the f*ck, man. I put in blood, sweat, and tears. I got my seed done easily. And now my Series A valuation isn’t even 2x or 2.5x what I raised at. Meanwhile some random AI company with $100K in revenue is raising at a $200M post. What is happening?

And the entire seed class is feeling it. This excellent essay from Nnamdi shows that the pool of active seed companies peaked in 2022 and has been shrinking ever since. Money is locked on AI, and perfectly good non-AI companies are quietly quitting.

Source: https://whoisnnamdi.com/taking-stock-of-the-seed-stage/

That sucks. For you, the deal probably won’t happen the way you think it will. Or at least not at the valuation you think it will. This is THE bitter pill.

Taking it costs you. The SAFEs convert, the dilution piles up, and you own less than you think. A flat round feels like a loss, and you carry it into the next raise, where the first question might be why the valuation was so low. Any founder who says that doesn’t hurt is lying.

Here’s what I told him. Run a quick process with the established parties who are already interested. Then take it on clean terms IF it meaningfully accelerates your ambition. It’s money in the bank, and valuation is just a marker in time. The fuel to swing really hard, the ability to play offense instead of defense. That matters far, far more than whether you got the same terms as someone else.

I know what you are thinking. A VC telling a founder to take the money is as self serving as they get. Fine. But, I’m not pushing you into a round you don’t want. I’m describing the market as I see it on the ground, not the one that screams loudly on X.

And conviction matters most. A VC writing that check is putting money where their mouth is, not aping into the next $200M company in a hot category.