Thought experiment: you run a VC fund investing into seed rounds. Should you invest into expensive seed rounds or cheap ones?
Obviously the cheap ones, some say. Your entry price is lower, you might be able to buy more equity upfront, and they are likely cheap because they are not in high demand. Find the diamonds in the rough!
Others say pay up for the expensive ones. They are pricey because the founders are better, the ideas are more likely to succeed, and the growth ahead of these credible companies is so large that who cares about your entry price? You'll be sad you fought over pennies when they make billions.
Answer is...both work!
𝗗𝗮𝘁𝗮 𝗳𝗿𝗼𝗺 𝟱,𝟳𝟬𝟬 𝘀𝗲𝗲𝗱 𝗿𝗼𝘂𝗻𝗱𝘀 𝗿𝗮𝗶𝘀𝗲𝗱 𝟮𝟬𝟭𝟲-𝟮𝟬𝟮𝟬:
Unicorn companies (worth at least $1B) appear most often in the the highest valuation seed rounds (in the 75th-99th percentiles).
Companies who grow to be worth 50x their initial valuations are found...across the spectrum! But slightly more in the lowest valuation tier.
Valuation tiers are judged relative to the year of the seed round to account for the market changes over this 5-year period.
So the mega-funds who have a model built on the assumption that they can find and push capital into massively valuable companies are making a reasonable choice to shop in the expensive seed round aisle.
And the emerging funds who believe in betting on founders first at low entry prices are making a reasonable choice to shop in the ignored, overlooked, cheap seed round aisle.
Big remaining questions for each strategy:
On the high end, will the eventual exits for these expensive seed rounds be so large as to account for their initial valuation spikes? Some seeds start at $100M these days.
On the low end, will there be a healthy exit market for companies that top out below $1B in valuation? Will the PE / other tech buyers be there?
Final note - look at the distribution of outcomes here. In the best of time, it's ~5% of companies that go on to achieve these lofty goals. So wherever you're shopping, founder selection is of paramount importance.
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