20VC: The Three Types of Seed Round Today, Why Seed Has Never Been More Competitive, Why Pricing Has Never Been Higher, Why Boards at Pre-Seed Can Be Helpful & How Too Much Cash Too Soon Can Harm Companies with Ed Sim, Founder @ Boldstart

23:49So I'm just pushing you here for fun. These are not my opinions obviously, but I tweeted yesterday There's a special place in VC hell saved for pre -seed investors to take board sees. Am I wrong? Yeah, so look I don't know what pre -seed is first and foremost because if you're raising 500k to a million That's what I think of pre -seed then yeah, you don't need a fucking board But here's what I do. Well, I go the other way. Founder, we're working for you from a cadence perspective. Number one, number two is if you're doing a classic round of your raising three to four million, I like to tell the founder that, hey, you should probably not do a series of safe notes here because you never really know what you own, especially in conversion.

24:24You want to actually do a proper round. And here's what we'll do. What we'll do is we'll put a board together. But you know, as I said, we are going to have our regular dialogue based on the cadence that works for you because usually the first six months, they're just heads down building. I'm not going to be helping them build their product. Harry, I'm investing in them to build the product of the future. That's their job. They will reach out. The best founders reach out to us and know exactly what to ask for. Know exactly how to ask for it. Know exactly what. And then what I say is, let's start doing a quarterly cadence for the board.

24:50I just want text. No fucking pretty images. But what I want to do is prepare you for the day, you know, a year from now, a year of six months in, so 18 months from funding, that when you have a board, you at least have this cadence going and we're actually prepping you for that pace to go. So it's more of preparation stage than anything else and it also depends on the founder. The best founders in my opinion are ping me within me. They'll send me a text, they'll send me WhatsApp, they'll send me I message, they'll hit us up and slack. But putting onerous frameworks around founders where you need to talk every week or two weeks or whatever or having every monthly board meeting cases, there's no set rule.

25:23It really depends on the company, the founder, their experience and the point is you've got to develop a really trusting relationship with that person. I saw that by the way. I was like, who does weekly or biweekly? How's it just like? That was... So I was so funny, the key to Reboy responded to that. So what's the core has been doing for the last 50 years? Thought, thought, thought. And then I had another message from another GP, probably one of the most successful and most last 10 years, that said, if you're founded, there's not one to weekly cool with you, you clearly are not adding much value in a shit.

25:53Here's my perspective. Look, we take board seats for the most part, but once again, if they're smaller, really much smaller around, there's usually no need for it, and you have their relationship, right? And they're gonna reach out to you. I don't want a backzone that doesn't think we can help them in add value and they're not going to want to take my money Either right. So that's why I stick focused in my swim lane I'm not devying and doing biotech or like health tech investing. It's just not my not my area of expertise Ed we're seeing my macro not looking great. We're seeing interest rates potentially going higher We're seeing global conflict with I mean the world is not in great shape And we're talking about going to 20 on 100 seed rounds is seed immortal to macro or externalities or will this shake down to the seed markets eventually do you think?

26:37I don't even know what the fuck a 20 on 100 post is anymore, frankly. I mean, that's just, I think at the end of the day, dude. It comes down to being disciplined, right? I don't know. I think that there's some lessons I haven't been learned in, and I'll just go on my rant. I mean, I think this whole AI thing, frankly, I think AI is the most transformational thing that we've, that we're ever going to see in a long time. However, I still think it's really fucking hard to make money there. This is a place I totally agree that where data modes matter anyone could take a API call to open AI and test things out I mean if I can look at Adobe they've done an amazing job kind of going after that space So I think chasing anything with a dot AI in their domain or an AI thing I think is insane However, I do think there's some opportunities there But I'm not gonna be funding these things at a hundred posts.

27:21That's what's regularly happening now I'll love to hear your thoughts here. You're pricing a ton of AI LLM next -gen stuff and I just think that this is just like I saw in an internet bubble. Everything had a dot com on it back in 96 because I saw that, I lived through that shit. There are going to be some massive companies built no doubt, but it's not going to be built chasing a portfolio of a hundred posts across the board. I would say I now see 85 % of all deal flow now. Purely is AI for us deal flow. What does that mean to you, right? Because I just did an analysis of my portfolio, okay? and I just said, okay, currently in the portfolio of our companies that are running from funds 4 through 6, 55 % of our portfolio companies have an AI related offerer today.

28:03And within the next 12 months, 80 % of the portfolio will have an AI offering. And in my opinions, does that mean I'm an AI investor? Well, if you want to call me an AI investor, you can, but I don't really think of myself that way. I always think about, we're problem are you solving first? How are you doing it uniquely? And oh, by the way, if you're adding AI very cool that, you know, let me know kind of how people will pay for it and why it's going to be better, but versus the A .I. company. I think honestly, the people best suited to win are actually your canvas styles of the world, who actually do have all the data, but none of the incumbent regulatory downsides of being a public company.

28:38I think it's your high growth pre -IPO companies. I agree. 1000%. Did you see Sneak? I don't know if you talked quite a bit about Guy recently, but Sneak has a sneak deep code A .I. Guy actually had bought a company four years ago with his own machine learning expertise. Totally, but also he probably couldn't have done that deal in terms of buying the company or moving at speed if he was a public company. It's not possible when. Exactly. And he wouldn't be able to do it now either because he did it when AI wasn't hot. So I think M &A is going to go to shit, by the way. I think anything sub -a billion is not meaningful enough for M &A teams and Corp.

29:11Dev teams to actually engage with. And the ending over a billion is going to be incredibly audacious to get over the line from a regulatory perspective. Do you agree or am I overly negative? I think we're going to see a lot more M &As coming ahead right now. And I'll tell you the kinds we'll see, right? There have been a lot of companies and there's what, 1000 plus unicorns out there right now. Not all of them will go public. Many of them are overvalued right now. And guess what? They're probably some growth investors sitting around saying, you may have five to seven years of runway. But if I can get my money out right now on the stack rate and I get my money back and investors, by the way, down the stack will get their money back.

29:45And by the way, founders will probably make money. Let's just say if there's an opportunity to go do that, that would be a brilliant opportunity for people to maybe exit out, take their 1X and they can go reinvest it somewhere else. And I'm talking to lots of growth investors who are kind of looking at saying, man, you know what? If I can get 1X out after a few years and actually reinvest that stuff into something else at a better price, or I think that the realization of holding on these people in the market. That they're not getting that deep because the founders are sitting on this pilot cash going, I'm not having your money back.

30:16And they're going, proxies. No, it depends. It situations like a loom where they had, that was a great exit for the founders. Look at those numbers. Fucking incredible, dude. God bless them. So it cleared the press stack. Even though the last round investor came in at a much higher price than the headline valuation, it was a huge win for the founders. So I'm pouring in situations like that where in the past you probably heard stories about VCs not wanting to get one X back Well, guess what? You're gonna see some smarter investors be like, you know what? Maybe I'll take that money up the table now and put it somewhere else and the founders in that situation killed it They should they put a great business.

30:52I love the tax grunge afterwards I joked a positive spin on it. I'm like I'm not fucking surprised He put a positive spin on it. I messed him off. There's been like water. Yeah, yeah, incredible And so yeah, and so people then say the investors failed. Well guess what? Maybe they didn't, right? Maybe they actually maybe they actually were like maybe that was a great opportunity for them because they can go Reinvest into some other things with it and it's a huge win for the founder. So I think those growth kind of funds that put the money at the peak I think the one to deliver one X or slightly above or probably do very well will be above You know because there'll be a lot of ones that are underwater is my opinion.

31:27I do want to discuss the growth on because like we and we've spoken about the frothy nature of seed today. Growth seems to have died though. Do you agree or do you actually think that there's resiliency in the growth market too and that we're overly negative on that? Look, first of all, I've been doing this long enough. This is your 27th for me, where things are never as good or as bad as it seems. And the echo chamber is stronger than it's ever been with social media and everything else. But my point is that, yeah, the number is the overall numbers itself in terms of growth round valuations. Yeah, they're fucking down big time.

31:58Number two is the valuations from growth rounds. I think, you know, if you look at CARDA's data, I think the series C was down from 475 to 375 already or 275. Something crazy like that. So yeah, they're getting crushed, but however, there's still pockets of opportunity where people are going from one to three to four million in the infrastructure space that I see to 10 to 12 kind of on the forecast, and they're still raising at 250 to 400 now. And that's kind of an early growth round. So yes, the majority of those things, The data says yeah growth growth is taking a hit and it is but there are pockets everywhere where people are paying up for things What are you saying to your founders like the founders that are going out to raise and they're like shit That's a really compressed price like 275.

32:41I thought we were more the 500 Are you saying it's a new world take it or you saying hey take another 5 10 million from us and push it out 10 to 20 months or 18 months whatever that is and the markets might be different then yeah So I have a couple thoughts. One is that when the markets are pretty hot, we got ahead of it. We got a lot of our companies funded with a lot of capital. I think the bigger challenge we might have is that there's some companies that have too much capital. We had to work with them to get more efficient. For the ones going from C to A or A to B, I was doing the math. I think we got a 16 next round done from our last annual meeting from a year ago to now.

33:18So we did get a lot of rounds done in the heat of the market. We even got a crypto infrastructure round done in an up -around $10 million a round done in this market. That founder, founding team, by the way, happened to go from zero to 1 .4 million of ARR from a standing start in 16 months. But the point is that the best founders now aren't, as we tell them, let's not worry about what the best price is, because the best price could once again set you up for performance issues down the line. We want you to get the best partner who believes in your business in the longer term at a fair price. I think the days of founders being obsessed about the highest price possible, I think for the most part are over.

33:55And I think the smarter founders want to actually get fair prices above average prices, but they also know that A, they don't want to take it way too much capital, which means more delusion. And they also don't want to set the bar too high because they see what's happening in the exit markets right now. You limit your options to create value when you take money at too high a price. You're not going to be able to sell your business because someone's not going to pay multiple from that. I grew with you and I get you in some ways, but then I was being to a fan of the other day operating Guess what in the AI space and then I get you high, but I need $10 million like we need a lot of compute I'm not planning that AI compute game right now So I do understand the need for those founders to go out and raise capital and go do it in the way that they need to But you know, I'm just saying that history rhymes you and I both know there's some lessons that we should probably learn from last two years Is it an issue?

34:45Lessons that we should learn because I'm looking at some of these I sent you that deck for the ridiculous round. And this was from Pedigree investor who's been through cycles at one of the best firms They're lessons. You should know better They're lessons that we should have learned that seemingly haven't as I said certain firms that have lots of capital to work checks like that a 10 -line dollar check maybe a complete option check for that firm You know or maybe they're almost fully invested right now And so I don't know what the reasons are but everyone along the stack has to do something that makes sense for them.

35:18I mean, just from my perspective, you won't be finding me participating in $2 ,800 million inception rounds from a seed firm, but the multi -sageers are doing it across the board. These are option checks, still option checks for them. My biggest lesson from the last few years was actually just to sell at some point. We were always told lean in, lean in, bullshit. You need to lean out strategically over increments over time. That was a big lesson for me. What was the lesson for you in hindsight you wish had done differently? I would say that the biggest lesson is not much different from you. Two lessons that I think about.

35:51One is, no matter how disamplined you are, we talked about too much cash can kill startups, right? At any stage, no matter what, right? As I said, there's a death spiral that can happen if you miss a quarter or a quarter or two and just the pressure goes up. And the last batch of hires who are usually the largest percent of your business. If you're growing and if you're in hypergruff mode are stealing like they're underwater, right? So that creates lots of issues from that perspective. So that's number one. Number two would be ownership matters always, but also you have to balance that out with valuation as well.

36:26So I'll give you an example. There are so many preemptive rounds happening over the last few years where every six months people raising rounds, that usually there hasn't been enough data points to merit coming in on the next round or the round after. And the company hasn't performed enough for you to de -risk yourself in between rounds, because let's say you got three rounds done in 12 months. And there should have been situations, perhaps, where we shouldn't have gotten into every single one of those rounds because maybe it wasn't de -risked enough between the time you closed around and to the next round.

36:56I think moving forward, since there are less pre -emptive rounds, there is more time to understand, has this been to risk enough? Is this an appropriate time to lean in even more to actually do your pirata or get more ownership? So that's kind of, well, I'd say, ownership always matters, by the way, on these exits, particularly in a world of lower multiples, but you've got to be careful about how much you lean in. Two final ones, Narasacea says, what's your biggest investing win and how did that impact your mindset and what's your biggest loss or mistake and how did that impact on mindset. My biggest win to date and we know called a realization was kind of leading the rounded inception with customer with a K and that was like an eight or nine pretty I think.

37:39Basically wouldn't let the founders out of the room wanted to give Brad and Jeremy the check right there like hold on let me incorporate first and this was their third startup right this was one of the ones where you're in the room you meet them you got the energy like yeah fuck yeah you got to do this right so fast forward there's some tough times what we learned in that process was that someone going after an incumbent at that point time was end -usk. It takes longer, you know why? Every time we're about to sell something like shit, you need more product. So to go after incumbents, you actually have to build more.

38:05So it took us longer. And we had to give them a bridge round between the A and the B before we eventually sold it to. There's not a reported price, but let's just say it was over a billion according to the news. And that was my first kind of really big win. So no matter how big of a vision you have, you still need at least the table stakes of checkbox of four things that they may need before they even believing your vision. So it takes longer. So that's one. And that has implied kind of some more investments now because there's a lot of founders coming back and reimagining things. So that's what happens in enterprise.

38:34It's the same shit getting rebuilt every 10 or 15 years in a different way with a different pitch. Second thing I'd say is my other potentially big win right now is sneak. I mean, it hasn't been, you know, exited yet. But, you know, we had funded Guy in the first company, right? When he sold his company to Akamai and I bothered Guy every quarter. It's like, when he's starting and when he's starting the next thing. And eventually he was like, I got an idea. And I was like, first two ideas are okay. The third one I'll give you, check right now. That was sneak. And, you know, those are some hard times, right?

39:02In terms of he was creating a new category. So that's a different kind of play. Creating a new category, category creation takes a long time too. It took him two and a half years, two and a half to three to guess first million of ARR. And there are some times where it was really fucking slow. But there's the signs were there. The proc love was there. The proc just cranking along. The pipeline was building. Just wasn't converting. So it just takes time. The biggest mistake I made probably would be, you know, as I said earlier, is that when companies do preemptive rounds and preemptive round after round after round in a short period of time, I never fault myself for the first check, right?

39:35Because you have to believe in the first check. Now you usually never fault myself for the second check. But the third or fourth, the third check, perhaps, yeah, that should be an opportunity. You were like, you know what, dude, you own enough, lean back a little bit. So ownership matters, but you have to be careful kind of the pricing and everything else and you can read between the lines here and that one But that would be leaning in too much too quickly without enough signals changing things from those rounds So those would be the two balanced answers. I want to do a quick fire on when the ads are I'm gonna say short statement You're gonna be immediate thoughts.

40:05That's not okay. Yeah, so will 99 % of money going into AI startups today go to zero venture money That is. I'd probably say 80 % of it will. I don't even know what the fuck an AI startup is. But let's just say, the money chasing all these LLMs, there'll be a lot of money vaporized for sure. What would you mind to change about the world event, you add? Man, it's gotten so fucking competitive out there. Man, it's insane. I think that, and there's too much money out there chasing things, and I think there's a lot of irrationality right now. I mean, as I said, I'm looking at the inception rounds, right?

40:38I laid out a framework from zero to six, zero to eight, zero to ten. But you're getting $30, $40, $50 million inception around stun. And I think it's just poker, man. And it's huge people's brains and memories. So I just wish there was some more rationality around whatever and everything that everyone was doing. What do you advise LPs today looking at the landscape, trying to get a grip on it, trying to understand what's going on? Well, look, I think being first on the cap table really makes sense in terms of making money in any environment with multiples compressed. I think too, I think ownership is going to matter.

41:12And I think three is, I think there's going to be a new generation of firms coming around that are building different businesses and different VC funds and trying things differently. I think that there's some legendary brands out there and I am so impressed with how long they've been around and the teams that they have, but I think there's also, given that the industry expanded a lot, the question for them is going to be who's going to be the next generation of of funds out there that are going to win for a long time. What will crack open IPO windows, do you think? We mentioned in Scott, the Insta .com didn't, Clavius added it in with it.

41:44I think it's very simple, Mr. Jerome Powell, sibling to the world that interest rates are to control now. And we're gonna say the air has been taking out of the balloon and the interest rates have to go down. I mean, there's a direct correlation ahead. So my friends at JPMorgan gave me a chart that at its peak, I think, any company growing greater than 40%, and there's an inverse relationship to interest rates and forward valuations. 35 times forward. Do you know today that number is at 6 .8 times forward as interest rates kept hiking up and the five -year historical number is 13 .9 times. So, do I think we're going to move back to where it's 35 to 40 for companies greater, going greater than 40 % never again?

42:26Do I think 6 .8 might be the low point? Yeah. Is it the five -year kind of average of 14? Yeah, let's just say it's somewhere between 10 and 14. So you've got to build your business and your investment strategy and your ownership strategy around looking in a world where we get 10 to 14 for the best companies, Ford, next year's numbers. And if you could do that, then I think you'll have an opportunity to make a lot of money. If we project it out, why do you want bold stocks being 10 years at? Like when are we, you think about fun design? What do you want bold stocks to be? I think we're pretty much the same that we are now.

42:55I mean, I think what we're gonna do is that, you know, where we have four operating, four investment partners, We've got an operating partner and out of London who you may have met with she worked with guy It's the X -Has employee for so we're gonna continue add more operating partners to help really these deception stage founders Get there faster and it's been working like a charm We have a few others identified that we're gonna bring to the team We're gonna stay where the market is in terms of we want to be in that inception round I don't want to lead a rounds. I don't want to get so big where I feel like I have to put money to work to make bad decisions I had to tell you this we only did last year we announced our two -do funds, which were our largest ever, we only did three net new lead deals in the back half of last year because we thought the markets were going a little crazy.

43:37We were seeing a lot of incremental ideas and big ideas. And then in this first part of the year already, we've done seven net new and we have an eighth one we're about to do. So we'll be up to 11. And that's not because we're chasing AI or anything like that. It happens to be because we have a lot of founders that we've known for a long time. Second and third time founders is coming out of the whip work, you know, ready to get going. So I want to stay in that range. Whatever you call it, 10 years from now, I hope it's kind of inception investing. I want to be in that place and no bigger. I don't want to be an asset manager.

44:06It's really hard to deliver returns in this market, the bigger you get. Dude, I love chatting to you always. I can't thank you enough for this and this has been such a pleasure as a always band. Harry, you are a fucking just, you have such a special talent for interviewing people and asking questions and you're so deep in your knowledge. And I think that you learn from every person you interview, you've interviewed the best and I could see that your mind is irring. So you're learning but you also have your own thesis that you're working on. I'm very impressed. So I just want to tell you that I'm watching you real time, fucking learning and I love what you're doing.

44:38I have to say that show was so much fun to do. For me personally, I so much prefer the more conversational episodes. Let me know what you think. I want them to be the best for you. They have to be your go -to listening material. So let me know on Twitter, Harry Stabbings. Likewise, as you can watch the full episode on YouTube by searching for 20BC. I always love to see you there. But before we leave you today, we have to talk about Canva. Canva is on a mission to empower the world to design. That is why they've introduced Magic Studio. Magic Studio brings together the best AI -powered tools for you and your team to help you redefine the way you design.

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