Today's Enterprise Seed VC Landscape

Mar 22, 2023
Today's Enterprise Seed VC Landscape
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The genesis for our March NY Enterprise Tech Meetup Enterprise Seed VC panel was to answer “It’s been a wild year in can I survive (and thrive) in 2023?” Little did we know that less than one week before the event, Silicon Valley Bank would collapse and the tech ecosystem would catapult into DEFCON 5.

That said, our panel couldn’t have been more top of mind as 1000+ people RSVPed to hear what Jon Lehr (General Partner at Work-Bench), Semil Shah (General Partner at Haystack), Amanda Robson (Partner at Cowboy Ventures) and our trusted moderator Eric Newcomer (Author of tech and VC newsletter Newcomer) had to say.

We covered a lot of ground in our 45 minute session. Check out our recap below and the full recording:

On Silicon Valley Bank’s Collapse:

“It was an unfortunate, phycological experiment that showed how the ecosystem handles trauma.” - Semil Shah

As news of the bank’s collapse hit, our panel recounted that no one seemed to have strong information as to what was happening. While there were plenty of people who represented themselves as having insider information, it’s always important to source credible facts opposed to the chatter and noise sweeping across Twitter, LinkedIn and other media outlets.

As an estimated 60 to 80% of enterprise startups solely banked or had majority capital within SVB, many VCs, including Work-Bench, jumped on the phone with founders to strategize contingency plans to keep their funds safe and meet payroll demands. 

On Exciting Enterprise Areas of Investment:

In the last 6 months, there have been extreme budget cuts across the enterprise. That said, security remains a top priority at the board level. 

“Attackers don't care that there’s a market downturn going on. They won’t stop going after the growing spaces where companies have accessible data.” - Amanda Robson

At Work-Bench, we take a thesis-driven approach to investing in security. What we’ve found is that due to these budget constraints, CISOs are being more prudent with their security stack and are taking a more holistic view of their investments, trying to find opportunities to consolidate their stack or identify startups that can provide more strategic value for less cost than current vendors. There are also emerging opportunities related to new application architectures which incumbent security giants are slow to solve.

When Eric asked if the hype of generative AI would take over entire enterprise categories, the panel was overall hesitant to say “yes.”

According to Semil, there are four buckets of generative AI:

  • LLMs (Large Language Models) - will every Microsoft have their own OpenAI?
  • Generative / Synthetic Media - a very cool technology, but it's still unknown how this will play out
  • Vertical AI - there was Veeva for software in the pharma space; will there be a comparable vertical AI opportunity?
  • Product Distribution - existing later stage SaaS companies bolting AI onto their platforms

When VCs look at these categories, they generally ask, “Does this startup have an advantage over an incumbent that has a lot of data and resources to put behind generative AI applications? Is there an angle of differentiation?" Especially when investing at the application layer, this is a slippery slope as many incumbents are already building these layers in-house.

Most Seed funds won’t have the capital to play in the first bucket and for now, the extent of the impact of each bucket of generative AI remains unknown.

On Fundraising:

Sustainable early-stage fundraising trajectories were thrown out of whack in 2021 when VCs were throwing too much money at early stage companies, and founders too often “skipped steps” in their journeys, raising at too high of valuations relative to the progress they had achieved (and could achieve with the capital of that round).

More specifically, many 2021 Series A’s were $20M rounds at $100M valuations, which impacted Seed rounds getting priced at valuations far beyond typical, historical upper bounds. But as Series A’s more recently pulled back to $10M rounds at ~$40-50M valuations, if you work backwards, then a Seed round at a $30M post doesn’t really work if the expectation would be for a new investor to at least 2x the valuation of that Seed round.

So a warning to founders today: Better balance minimal dilution, while also ensuring that future rounds can be raised at increasing valuations (and the right implied milestones).

On another note, the panel dispelled the notion that founders will have a successful Series A fundraise if they hit the $1M ARR threshold. Especially in today's environment, VCs are evaluating startups based on time and cost vectors – how long did it take to get from $0 to $1M? How long will it take to get from $1M to $10M? How much did it cost you to get there (burning $5M to get to $200M ARR is a drastically different story than burning $20M to get to $200M ARR)? And conversely, many infrastructure software startups raise Series A’s below that threshold given the time/cost of developing such a technical product paired with other signals to demonstrate progress, ranging from open source usage to enterprise design partners.

As an ending note, Jon reminded the audience of the differences between the cash flow on the West vs. East coast:

“In Silicon Valley, there are a lot of Seed checks circulating from big name, multi-stage VC firms, and they’re often viewed as option calls. In NYC, we don’t see these big firms in enterprise Seed rounds. Instead, the bigger firms are more prevalent at Series A. This is because these big firms don't have the resources or boots on the ground to meet operators early on in the process and provide them the hands-on support needed.” - Jonathan Lehr 

If you’re an early-stage enterprise founder or operator — connect with us directly to chat about anything GTM or check out our events page to stay in the loop on all things happening in the Work-Bench community. 

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