Right now, late In 2023, the IPO market grinds to a halt and late-stage deals rarely happen because funds and entrepreneurs can’t find common ground on pricing. The early-stage arena has become more attractive to larger, multi-stage companies because exit opportunities and late-stage funding are few and far between. Multi-stage funds have pumped capital into startups and will continue in 2024.
As a result of this increased demand, early stage valuations are breaking records and deal sizes are increasing, led by multi-stage companies making big moves to startups. This increased activity creates many downsides for founders and their companies, raising fundamental questions: Is the allure of name-brand companies, access to larger pools of capital and sometimes above-market valuations always a boon, or does it come with hidden costs and strategic implications that may haunt them?
Without multi-stage companies, we would not have multi-billion dollar companies and our society would be missing out on many great ideas. But when it comes to seed and startup companies, in most cases, founders should not accept funds from multi-stage funds. Instead, they will have to get money from companies that specialize in seed and pre-seed rounds.
Why you shouldn’t take money from a multi-level fund
They have no reasonable incentive to give you hands-on support and time
A primary consideration is the level of hands-on involvement a founder can expect from a multi-stage investor. For example, a multi-level $1 billion company that invests $2 million in your company will provide a different level of hands-on guidance and support than specialist funds and angels. You would represent 0.2% of their portfolio. The motivation for deep commitment just isn’t there. You’d either be competing for partners’ attention with companies where they’re making eight to nine figure checks, or you’d end up working with a more junior investor who’s probably less experienced than the seed company GPs.
Seed-stage companies will benefit much better from the close collaboration and guidance that pre-seed and seed-focused funds and angels can provide.
Seed-stage companies will best benefit from the close collaboration and guidance that pre-seed and seed-focused funds and angels can provide. These investors can be close partners in development strategies, market nuances, regulatory challenges and PR and communications. They will not hesitate to leverage their network to send you clients/consultants and promote valuable partnerships.
Individual angels at your table with operational experience can help you navigate the challenges of early-stage development and avoid common pitfalls. These people will be your superpower to get to the next level.
Seed-focused companies only get signups and results when you raise a Series A, so they work harder to help you secure the next round. They will not 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 help you secure a better valuation (whereas a multi-stage company will be optimized towards ownership and getting a lower price in the next round).
