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Uneasy Bedfellows: Seed Investors and Late Stage Venture Capital

Uneasy Bedfellows: Seed Investors and Late Stage Venture Capital
By Keith Teare • Issue #297 • View online
This week The Generalist covered Coatue while Paul Graham Tweeted that he has never read a business plan or a balance sheet. The contrast between the investment stages could not be starker. Are seed and growth investors partners, enemies, or frenemies?

When Paul Graham tweeted that he has never read a business plan or balance sheet we can assume there is some poetic license. But we can also assume he is making a point. And when he follows up by saying that the valuation of a company at the seed stage is not a primary focus when compared to the decision to invest or not it’s clear he has a different point of view to later-stage investors. He quotes potential returns of 1,000x whereas late-stage investors focus on returns above 2-3x.
The Generalist’s profile of Coatue, founded by Phillipe Laffont, emphasizes how disciplined, analytical, and data-driven Coatue is in determining what to invest in, and at what stage. Not Paul Graham’s world.
These two contrasts are typical of the differences between two asset classes that need each other but barely recognize each other.
Looking at the source of unicorns, SignalRank’s GPRank™ data shows that the top 30 seed managers have equity in 265 of them. A total of 429 investments. This compares favorably with larger growth stage allocators like Tiger Global, Andreessen Horowitz, and Sequoia.
Not only do the top GPRank™ seed managers collectively over-produce unicorns compared to their peers. They invest earlier and so enjoy much higher multiples of invested capital (MOIC).
This is the bedrock on which growth investors sit. Like a relay race, the seed managers had over the baton to the next stage investors for the next part of the journey. Without the seed managers, the growth opportunities would be significantly different.
And just like the best artists or musicians or teachers are simply good at what they do, so too are the best seed managers unusually good at filtering through large numbers of companies and finding their way to an outsized group of winners.
But seed managers are often under-appreciated. Institutional allocators often cannot allocate to seed due to the fact that the fund sizes are too small for the institutions.
Later stage investors are prone to resist the participation of seed managers in later rounds or seek to lower their right to maintain their investments in a company. This sets up a win-lose dynamic between two stages of the venture ecosystem. It leads to bad sentiment and poorer outcomes for the seed managers.
This bad sentiment is a mistake.
Seed managers need growth investors to help maintain the momentum of their fastest-growing companies and clearly should welcome these investors into their portfolio companies. The asset value embedded in the cap tables of the companies Coatue and others invest in is a big part of the seed managers’ upside. And institutions should be able to allocate to seed as an asset class.
So how can seed managers and later-stage investors work together better? And how can institutions place capital into the fastest-growing seed-funded companies? More in this week’s video.
Uneasy Bedfellows: Seed Investors and Late Stage Venture Capital
Uneasy Bedfellows: Seed Investors and Late Stage Venture Capital
Profile of the Week
Coatue: An Agile Colossus
Paul Graham's Week
Paul Graham
I have never read a business plan or a balance sheet.
Paul Graham
Valuation matters far, far less than the decision of whether to invest or not. The spread between bargain and outrageous startup valuations can't be more than 5x, in a world where the best investments can return 1000x.
Venture Change
Do we HAVE to Sell this Great Company? PE and VC Funds Increasingly Utilizing ‘Continuation Funds’
SEC Proposes New Rules to Protect Private Fund Investors - Lexology
Sequoia Capital is launching a $500-600 million crypto fund to invest in tokens
Gambling is Big
Sports betting in America is exploding
Facebook in Decline
Apple broke Facebook’s ad machine. Who’s going to fix it?
Mark Zuckerberg’s metaverse will require computing tech no one knows how to build
Meta’s (FB) Nick Clegg Promoted as Zuckerberg Steps Back From Policy - Bloomberg
Essays of the Week
Framing and Self-Sovereignty in Web3
Startup of the Week
What BlockFi’s $100M settlement with the SEC means for future of DeFi lending – TechCrunch
Tweet of the Week
Lee Edwards
A lot of people misunderstand what a VC website is even for.

Nobody googles looking for VC websites, and any VC firm that wants SEO dealflow isn’t worth finding.

90% of VC firm website traffic is direct. There are three primary audiences: LPs, founders, and other VCs.
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Keith Teare, Palo Alto, California