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Seed rounds disrupt Series A

In the beginning, venture capital created the Series A.

Now, young companies raise an expanding variety of early rounds; so many, it is hard to keep track.

Seed, pre-seed, post seed, angel, seed prime, seed extension, A prime: The nomenclature for initial institutional, and non-institutional, capital has changed strikingly in a decade. Who even thinks “friends and family” anymore?

All this is due in large part to the enormous amount of money that has flowed into venture capital over the past five years.

An estimated 750 seed funds now actively invest, with $36.6 billion having poured into seed and angel deals over the same years, according to data from PitchBook and the National Venture Capital Association. The early generation of pioneering seed investors, such as Felicis Ventures, First Round Capital, True Ventures, grew up and went on to raise larger funds, leading to larger financings.

The result is a funding market with a new set of definitions. Today’s seeds now look like yesterday’s Series As, with deals of $2.5 million to $3 million and valuations of, say, $8 million pre. Pre-seeds, likewise, resembled yesterday’s seeds, scraping together $500,000 or so on valuations of, perhaps, $4 million.

Series As, for their part, look more like expansion rounds, with $5 million to $10 million or more raised and investors who insist upon companies further along the development path before they write checks.

It is a market in flux, and one that is reshaping the face of venture. Seed companies typically now have a product in the market, or at least in beta, and even pre-seeds can boast of early versions of products. At Series A, an abundance of selection allows investors to be even choosier.

The consequence of this trend could be far reaching.

For one, there is a blurring of the line between seed and Series A, with sometimes the same investors taking part and using convertible notes. All this raises the potential for a significant disruption of the traditional Series A ecosystem, with seed investors now in the pole position, and the Sequoias and Benchmarks of the venture world facing more competition for their rounds.

It is an important distinction with Series A remaining the choke point for early-stage funding.

Seed deal volume has more than doubled over seven years, but Series A rounds have increased by about a third. The Series A investment model, with its hands-on nature, has shown it doesn’t easily scale.

An argument can be made this creates an opportunity for well-managed capital at the post seed, or early A, area. It also might suggest a shakeout among seed funds…and seed companies, too.