2023 is going to be a very risky year for seed stage startups to accept capital from multi-stage funds (unless they commit to owning 20% of the company). Explanation below.

• Multi-stage firms are now much more cautious when writing Series A checks. But they also cannot stay idle all year and are happy to make seed investments (call options)

• Even in the boom times of 2020 and 2021, multi-stage firms do not lead most of the Series As for their seed portfolio companies. Based on my experience, I estimate that only 1 in 5 seed investments from multi-stage firms end up becoming lead Series A checks

• But 1 in 5 was in the good times. Panic has now set in and the bar to raise a Series A has been raised substantially. 1 in 5 may now be 1 in 7.

<aside> 💡 When diligencing multi-stage investors, founders should ask the investor how often (in 2022) they led the Series A in companies where they had previously invested in the seed

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• You typically need 30+ investor meetings to raise a Series A. If your chance of raising from your existing investor is now only 15%, you’ll need them to make a lot of introductions to other firms as well. But multi-stage firms cannot credibly make introductions to other multi-stage firms (who will ask themselves "why should I be so lucky to be given the opportunity to invest?")

• **Even seemingly high conviction investments can be dangerous.**For example, if a multi-stage firm leads a $3M seed round at a $17M post-money valuation with a $2.4M check, the founder may perceive this to be a high conviction decision by the lead (and it may be at the time). However, $2.4M only results in 14% ownership — well below the 20% threshold most funds want for core positions. If the company does not demonstrate strong early traction, the lead may decide to not increase their ownership to 20%. Although this has always been a risk, it was less of a concern in previous years where capital was plentiful. But in a market dominated by fear, this perceived negative signaling can scare off other firms and can be fatal for the startup

<aside> 💡 Startups that are doing moderately well are at most risk. Existing investors will always want to lean in to top performing startups. But middle-of-the-pack companies face clear multi-stage signaling risk in 2023

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• Moreover, for a $1B multi-stage fund, $2.4M is only 0.24% of fund size. What looks like investor conviction (”we want to take most of the seed round and leave some room for angels”) is actually only a trivial dollar value for the fund. They can mentally write it off, leaving you high and dry.

<aside> 💡 TLDR: unless a multi-stage firm commits to owning 20% of your company after the seed round, it may be dangerous to accept an investment from them. Seed funds are better positioned to make introductions to a broad base of Series A firms, significantly increasing your chances of raising in this environment

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