Benchmarking Funds At The Seed-Stage
By Roger Chen (@rogerbchen)
CB Insights recently published an article titled "Attention Seed-Stage Founders: Which Micro VCs Have The Highest Follow-On Rates?" that discusses the general performance of institutional, seed-stage VC funds (CB Insights calls us Micro VCs) and benchmarks these funds based on their Series A follow-on rates. For founders, this isn't an ideal method for comparing funds, but the lack of transparency around deal terms and fund returns means this is as good of a proxy as any to compare potential investors to partner with.
Their findings were quite surprising. According to CB Insights, the average follow-on rate for Micro VCs between 2010-2014 (after netting out acquisitions prior to additional funding) was 20%. This means that founders who jump through all the hoops of raising their first round of institutional funding have only a 20% chance of closing a follow-on Series A round. The seed numbers for traditional VCs that also invest at later stages were very similar at 19%.
These findings made us review our own portfolio to see how Genacast Ventures stacks up. Using the criteria outlined in the article, our seed-stage investments since inception have had a Series A follow-on rate of 75%. By removing those companies funded in 2015 and onward that still have cash reserves, the follow-on rate jumps to 92%.
The article also attempts to assess the quality of follow-on rounds by counting the follow-ons from smart money, defined by inclusion in CB Insights' list of the top 20 venture capital firms. According to CB Insights, "Attracting follow-on financing from top traditional venture funds, which have large bases of capital and high historic success rates, undeniably increases the long-term probability of success for a startup." Against these criteria, our portfolio companies topped the list again with a smart money follow-on rate of 58%.
There are a number of reasons why I think our approach to the seed-stage shows strongly against these metrics, some of which we will break out in more detail in following posts. At its core, we strive to be hands-on partners for entrepreneurs in the formative years of their companies, and the focus of our companies on long-term value creation seems to have struck a chord with the market.