29 March 2016

The new seed round

Tina Baker
Partner | UK

In January 2016, Tech.eu reported there was a massive uplift of seed and series A rounds across Europe. According to the research, the biggest increases were seen at €500K or lower (pre-seed or seed) and in rounds between €1M and €5M. Tech.eu reports that compared to one year ago, deals tripled in this bracket – from two to 76 in 2016.

This is exactly what we’ve been seeing over the past several years — a proliferation of small Seed rounds between €150K and €500K. In addition, the two other trends from our vantage point are a shift in the size of Seed and Series A rounds and an increase in “Acqui-hire” trade sales.

So, what’s with all the seed rounds? Well, a classic Seed round (up to €500K) hopefully gets you to a minimal viable product (MVP) and maybe some traction. You still need to show the product works and attracts customers because that’s what an investor wants to see, but the Seed round is aimed at helping you get there. So the classic Seed round lets an investor get in for a small amount of money to see if the idea is worth pursuing. Typical investors are smaller-sized VCs or Angel investors many of whom are looking to receive tax breaks. We also see former founders who have exited and want to invest.

And in the UK, the tax breaks on offer (the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) make it extremely attractive for investors and almost “de-risk” the investment (either a 50% or 30% tax credit on the investment amount and no tax payable on the gain).

Since 2010, the funding amounts of Seed rounds has changed. It used to be that you would never see a seed round over €1 million but these days they have been super-sized and we have see rounds go up to €1.5 million and in some cases even higher, with initial seed classified as Seed 1, and Seed extensions of similar sizes (sometimes at the same valuation) classified as Seed 2 and Seed 3. Some companies have raised up to €5 M as “seed”.

On the super-sized Seed front, we are also seeing prior Series A rounds that were in the vicinity of €3 M to €5 M being reclassified as “Seed”, with a larger round becoming the Series A. And the size of Series A has been increasing. It used to be up to about €8 M (€10M max), but we have seen recently Series A reaching €15 million and higher.

On the trade sale front, an Acqui-hire is an acquisition where the buyer doesn’t want the entire company, but wants the team and maybe some of the technology, thereby leaving behind potential liabilities and simplifying the acquisition process for the buyer. With so many companies out there, rather than fail, they sell off to larger competitors and founders go to work for the acquiring company (which would typically happen in a trade sale).

We are seeing many of these deals between €500K and €3M.

Tina Baker Partner | London

Category: Blog