Why Most High Stakes Cyber-Attacks Are Detectable

Cyberattacks are eroding trust in all things connected — from websites to apps to ATMs. But it doesn’t have to be this way. The crooks have gotten smart, so companies and enterprise security providers have got to get smarter. Unfortunately, most are struggling to catch up to the sea change in cyber-crime. All of the increased efficiency, productivity, interconnectedness and innovation of the digital era has been deeply undercut by a rash of security breaches. The worst part: many of the high profile cyber-attacks making headlines in recent months were entirely preventable.

In February, Kaspersky Labs reported that the Carbanak family of malware had robbed banks of as much as $1 billion since 2013. It’s no surprise that the banking industry has typically adopted and deployed the cutting edge of security technology. This is because financial institutions are obvious and perennial targets for thieves that have deep enough pockets to invest heavily in cyber-security. What is surprising is that a few spear-phishing emails opened back doors for criminals that slipped in and out of bank accounts and ATMs unnoticed for months or even years. How is this possible?

To better understand how the malware used in these attacks evaded detection by traditional security technology for so long, we dissected dozens of Carbanak malware samples using the Lastline Breach Detection Platform. In a matter of minutes, we discovered that the malware was written to bypass traditional signature-based security tools and to use stealthy and evasive maneuvers to avoid detection by first-generation sandboxing technology.

Simple malware is like a bad poker player — it often has “tells” that give away its maliciousness right off the bat: executables that blatantly set out to extract and transfer personal data, keystroke loggers, and so forth. Advanced malware has a better poker face. It hides its intent — going on loop, stalling or otherwise cloaking itself — while it is being analyzed by security tools at network perimeters. Once these stealthy and evasive programs slip into target systems, they are able to do their dirty work and take home the jackpot without raising suspicion. But, as in poker, there are often subtle and sophisticated signs of bluffing malware that make it detectable. In fact, 93% of the Carbanak family of malware we studied exhibited 10 or more malicious or suspicious behaviors. This malware family was arguably made up of bad poker players that managed to bluff their way into a cool billion dollars.

Unfortunately, the security infrastructure in banks, retailers, even governments, is aging and overly reliant on three things: signatures, deterrents and people. Cyber-criminals know this and the most sophisticated among them are getting away with an incredible number of attacks that exploit these vulnerabilities. Signature-based security systems like anti-virus scanners that aim to blacklist certain code from entering a network or device based on a database of known threats cannot keep up. The automation of malware distribution, the availability of affordable and highly effective malware for sale and the increasing payouts for criminals who are robbing organizations and individuals means that simple deterrents are useless. And when your security is reliant on hundreds or thousands of people following protocols, remembering training from years ago or intuitively flagging a phishing email when they see one, you’re in trouble.

One advanced security tool that uses behavior-based, rather than signature-based, approaches to detecting advanced threats is called sandboxing. According to Gartner, sandboxing is the fastest growing category of advanced threat defense. (This is excellent news for my company Lastline, since sandboxing is a cornerstone of our breach detection platform.) The rapid growth of sandboxing is due in part to the fact that signature-based technologies like traditional firewalls and antivirus scanners are missing malware that sandboxes can detect. But as companies wake up to these threats and implement basic sandboxes, malware authors are studying sandboxes and actually targeting them by creating environmentally-aware malware that can sense it is being analyzed.

Thus it is crucial that, in order to coax the “real” behavior out of malware, a sandbox be stealthy itself and act as if it were a target machine. If the banks robbed by the Carbanak family of malware had a stealth sandbox in place they more than likely would have detected the malware as it entered their systems and again as it attempted to proliferate. And many of the hacked retailers, Internet services, restaurants and even government agencies can take a page from this.

Cyber-attacks are inevitable, but very, very few are undetectable using available security technology combined with a strong security team and/or managed security service. For financial institutions to go months or even years without detecting these breaches is unacceptable. And I’m afraid these publicly disclosed breaches are just the tip of the iceberg.

The good news is that it’s not too late. If most past high profile cyber-attacks were preventable, most future attacks are as well. The security community has to step up its game because the crooks are all in and playing with a loaded deck.


The Case For Censorship In The New Social Age

Intellectuals for centuries have campaigned against censorship. From Ben Franklin to John F. Kennedy to Justice Earl Warren, the argument has been much the same: Censorship is antithetical to democracy. More recently, megastar Jay-Z reiterated the point in his 2011 book, Decoded, writing simply that “we change people through conversation, not through censorship.”

It’s pretty hard to argue with Jay-Z — let alone Franklin, Kennedy and Warren. But I find myself, uncomfortably, thinking more favorably about the concept of censorship as we in Silicon Valley grapple with the emergence of several social networks built around the concept of anonymity. Companies like Whisper and Secret, among several other lesser-knowns, have attracted outsized attention and funding as the next generation of social media platforms. While each has its own unique features, they all allow users to send messages to groups without names attached.

Let me first say that anonymity can be a very good thing. Having the ability to speak freely without fear of repercussions can spark honest discussion about important, delicate or emotionally charged topics. Just being able to share feelings and fears within a supportive network can be a productive mental health exercise and even connect people in meaningful and fun ways. Upstart Secret, for one, has shown strong success in the quality of discourse on its mobile app. It isn’t perfect. I mean, some of it is silly and some of it is a little mean and petty. But overall, it’s much better than I expected. In general, the content is about real emotions, real fears, real aspirations and real desires.

Part of the genuine nature of the conversations on Secret stems from the fact that users are only sharing their personal reflections with people somehow relevant to them, as they come from their personal networks (via phone contacts). Secret is more like going to a masquerade ball with your friends versus being in a completely dark room with a bunch of strangers. You sign on to Secret with a verified identity and then can exchange messages anonymously with other people to whom you are digitally connected to, and who are also on Secret. This is an important distinction and works because the lack of total anonymity on Secret forces users to refrain from sending truly offensive messages they may otherwise send if they were among strangers. Deep down you worry that people might be able to figure out who you are.

I think of Secret as qualified anonymity, and this aspect of a company’s network is hugely important in establishing both credibility and value — and why startups like Secret have a shot at real success. But it is not enough by itself.

Here comes the tough part. As abhorrent as the concept of censorship is to many people who embrace the ideals of anonymity, including me, we need censorship to keep the dimly lit corners of cyberspace safe. It is just too tempting for people under the protection of anonymity to devolve into irresponsible and immoral behavior.

We have all seen how damaging it can be to offer an unbridled platform for the worst kind of human impulses, particularly for teens. Prejudice, bigotry and sheer meanness can easily proliferate, transforming a winning concept into little more than a digital bathroom wall.

That is why any platform leveraging anonymity will have to have some group of moderators that delete inappropriate and dangerous posts in real time — and then banish those posters from the site forever. To be clear, I am only in favor of striking comments that are truly hateful or dangerous. Unpopular or controversial viewpoints that are part of honest discourse should be allowed to flow freely.

Whisper, for one, has already hired dozens of employees whose sole job is to constantly monitor the site for inappropriate content. These are important actions because they ensure consequences for behaviors that deliberately cause harm. To purists, it may inhibit free speech, but to me it’s no different than why we prohibit people from yelling fire in a movie theater when one doesn’t exist.

Neither Franklin nor Jay-Z may like it. But I believe this is the only way these anonymous platforms can survive and thrive. Otherwise they will turn into walls in a New York subway station. And we all know how that will go.

Published on TechCrunch 5/13/14


Reflections On YCombinator Demo Day: How The Seed Market Has Changed

Earlier this week, I attended the Spring YCombinator Demo Day. I’ve been attending for six years now. Each time, I’m impressed by the intelligence, ambition and the polish of the founders presenting companies only a few weeks or months old.

As I listened to the pitches, I wondered if the types of startups founders decide to build at YC has changed over time and whether those trends are lagging or leading indicators of the market as a whole. At each Demo Day, the YC team provides investors a list of all the companies pitching and I’ve kept a few. To get a sense of the broader trends in YC companies, I’ve compared the Winter 2012 class and the Spring 2014 class by sector (consumer v. enterprise), segment (ecommerce, education, social, gaming, delivery) and by revenue model (subscription, ads, transactional).

These are the trends I observed in the data:

Mild shift toward enterprise: In 2012, 48% of YC startups were enterprise. In 2014, enterprise startups were 57% of the class.

Within enterprise, there has been a shift toward industry specific Software-as-a-Service (vertical SaaS) at the expense of horizontal SaaS. Vertical SaaS startups comprised 29% of the 2012 enterprise companies and 40% of the 2014 class. To make this idea more concrete, here are two examples. VidPresso provides software to the TV broadcast industry and is an example of vertical SaaS. ZenPayoll, a provider of payroll services, serves many different types of businesses and is a horizontal SaaS company.

Platforms-as-a-Service, which enable developers to build and scale applications (Heroku), have also seen a decline in numbers. In 2012, there were 5 PaaS companies while in 2014, I counted 2. Shifting to consumer, social apps have fallen from 24% of consumer startups to 15% at the most recent demo day. Unlike the 2012 class, there were no gaming companies in 2014. Food delivery companies, education companies and consumer market places have cropped up in their place.

As for revenue models, subscription remains dominant. 53% of 2012 YC companies chose this revenue model and 56% chose it in 2014.

Also notable is a marked increase in the number of non-profits. The 2014 class graduated 6 of them, up from zero in 2012.

All in all, YC startups do seem to be shifting with the market and/or YC partners are screening for startups that are more reflective of the environment. The shifts toward vertical SaaS and away from social and gaming apparent in this class are consistent with the patterns I’m seeing in the fund raising market. Unfortunately, the data isn’t able to tell us who is setting the trend. In any case, I’ll be tracking these trends in the future and hope to be able to draw more conclusions over time.


The Four Key Steps In Startup Fund Raising Processes

Raising capital from venture capitalists at any stage can seem like a very strange, ambiguous and amorphous process. I’ve written about the way Redpoint diligences/researches a startup and its market and what questions we tend to ask at each stage. In this post, I’ll focus on the process from entrepreneur’s point of view.

When raising capital, entrepreneurs will see potential investors move through four phases of investment decision-making process: screening, socialization, diligence, and decision. I’ve drawn a schematic that illustrates this evolution above. The chart also shows a line indicating the progression from one step to the next, using data from my own investment funnels.

Screening: the first call and/or first meeting. The screening step can include associates, principals and/or one or two partners. In this phase, investors are evaluating the risks of the investment, the market size, and the industry, to determine if it’s a fit with their fund size and investment goals. Looking at my CRM data, roughly 15% of startups continue onto the next stage.

Socialization: excited by a startup’s pitch and prospects, the partner/team who met with the company will share their knowledge with other members of the firm. VCs typically ask for second meetings during socialization. In second meetings, founders repeat the pitch to a broader group within the firm, though typically not the entirety of the partnership. If the deal team resonates with the founders and the opportunity and vice-versa, the deal team begins diligence. Again, about 15% of startups move onto diligence.

Diligence: the deal team begins researching the opportunity and share their findings with the broader partnership. This includes evaluating the team, the market, product roadmap and sales pipeline. Behind the scenes, VCs call contacts in industry to refine their point of view. As the research progresses, VCs will often volley questions back to the startup, seeking clarification. Typically, the diligence process is focused on a few key questions like market size, defensibility, regulatory risk, or competition. Increasingly, investors and founders discuss deal structure and outline deal terms at this stage. After diligence, about 10% of startups continue to the final “Partner Meeting,” a meeting of all the partners in a venture firm, or the entirety of the VC’s investment committee.

Decision: This the “Partner Meeting.” Beforehand, the deal team briefs the partnership on all the diligence materials, key questions, and deal terms. Founders pitch the entire partnership. After the meeting, all the partners debrief on the opportunity. Some firms provide deal teams latitude to make decisions on their own; others have implemented rigid voting processes to seek approval for investment. Granted approval and with a term sheet in hand, VCs then must convince an entrepreneur to sign their term sheet and partner with them. In the past 2 years, I’ve been lucky to invest in three companies (Axial, Electric Imp and Looker), for a success rate of 6% in this stage, or 0.2% throughout the process.

For founders, it’s important to understand where they are in the process with investors for two reasons. First, so as not to misjudge the finish line either by running out of capital in the midst of a process or presume success at too early a stage. Second, to build auction pressure in financings to create negotiating leverage on terms. Keeping VCs in stride with each other is one tactic to accomplish this goal.

The first part to ensuring a successful fund raising process is understanding the milestones. But ideally, after this process is completed, a founding team and an investor have built a strong and mutually beneficial relationship that will last many years and throughout the company’s ups and downs.


Lessons in Enjoying the Ride: BlueKai Acquired by Oracle

Today, Oracle announced that it is acquiring BlueKai, the leading data management SaaS provider for digital marketers, and a Redpoint portfolio company.  Congratulations to the BlueKai team and to Oracle on a terrific combination.

As an early stage VC, this is the kind of investment I live for, and I’m not talking about the financial return (though that is certainly good too) — I’m talking about the ride.   From the earliest identification of a market opportunity, to the recruitment of an extraordinarily talented team, to the twists and turns along the way in finding the real business, to the acknowledgement in the end that we’ve helped shape an emerging leader in a market that matters.

Taking a moment to look back, I have a few highlights of the ride with BlueKai – similar moments most startups see in their often challenging road to success.


Seeing the opportunity early

We were lucky to have been the only VC investor in Right Media, and to have seen the programmatic display ad market happening earlier than most.  If programmatic was going to be big, then audience data would be critical to informing marketer’s ad buying decisions, maybe even more important than the page context itself.  Then in 2007 Google bought Doubleclick, Yahoo bought Right Media, and the programmatic ad race was on.  Marketers and publishers would need to leverage audience data to take advantage of this shift.

It was clear: we needed to find an audience data platform play – before someone else did.


Confluence of talent: finding the right team

I met Omar Tawakol (now CEO of BlueKai) in a search process for one of my companies and was immediately blown away.  He possessed the rare combination of technical chops, product discipline, strategic vision and salesmanship.  If you’ve met him, you know exactly what I mean.  Fortunately he declined the job offer we had discussed, and we agreed to stay in touch regarding future opportunities to work together.   I subsequently introduced Omar to Alex Hooshmand (now BlueKai’s head of product) with whom I had worked at Right Media.  I connected them with a simple, “You guys should talk!”  With a bit of cajoling, Grant Ries and Mike Bigby hopped aboard, and completed the perfect founding team to go after the opportunity.  For this market, attracting the right the team was just as important as building the right product, and in this case both were perfectly aligned.

Of course when the moment came, our answer was simple: Heck yes, we’ll invest!


Twists and Turns: Making the right calls at the right time

Three years into the ride, we realized that the audience data exchange BlueKai had developed was only one piece of the puzzle.  As liquidity continued to grow within the exchange, marketers and publishers started asking if they could leverage BlueKai’s platform to manage their own data assets.  We became convinced that this software play could be as important an opportunity as the exchange, but to pursue it would mean a shift in strategy and business model, significant team changes, and the need for additional capital to fund what was an intriguing, but unproven model.  A huge risk was in front of the team and it was a challenging, and ultimately, defining moment.


Defining a market

The BlueKai team acted decisively: quickly doing another financing, transitioning the go-to-market team from media-centric to SaaS-centric, and repositioning BlueKai as a SaaS platform for marketers and publishers.  Fast forward two and a half years, and BlueKai has defined a new marketing SaaS category – the data management platform – and positioned itself as the emerging leader in the space.  A marquee list of online marketers and publishers adopted the BlueKai DMP platform to power audience-driven marketing activities across their websites, social media platforms, mobile, the Web and beyond.  And today’s announcement of the acquisition of BlueKai by Oracle further validates the importance and scale of the market opportunity.

The BlueKai team is an amazing example for startups at the challenging and defining points in their journey.  Their story is a good reminder for founders to listen carefully to what the market is telling you, and to be bold enough to adjust course in response to the feedback.


Congratulations again to the BlueKai team – and thanks for an amazing ride.



Backing Acompli & the Value of a Veteran Team

Last year, I wrote this post detailing what I would do if I was starting my last company, Zimbra, today. I wrote about the massive opportunity for a smart company to serve the professional market with a real, thoughtful solution for mobile email. Just a few months later, I was lucky to begin working with the team answering this exact challenge: Acompli.

Today, we are thrilled to officially welcome the Acompli team to the Redpoint portfolio. Backing their Series A was an easy decision. They have an incredible, proven team at the helm of an amazing product.

Javier, Acompli’s CEO was an EIR with us here at Redpoint after he sold his last company to VMWare,  Co-Founders Kevin Henrikson and JJ both worked with me at Zimbra, and Kevin was an EIR with us as well – albeit shortly, as he and Javier quickly got to work on Acompli while here at Redpoint.

Beyond their incredible product and vision, the value of a proven team like Acompli’s is huge. In this video, Javier and I discuss the pros and cons of working with startup veterans, what went into building the initial Acompli team, and how Javier is approaching being a CEO the second time around. Enjoy, and request your invite for Acompli today!


Why Startups Face Increasing Competition In Raising Series As And Bs

Has it become harder to raise money? is a question I hear all the time. On one hand, the total dollars invested by VCs is relatively flat at just under $30B per year, according to the NVCA. On the other hand, the stories of difficulty raising series As and Bs have become a steady drumbeat.

To get some sense of the patterns, I analyzed 917 companies from seed through Series B over the past 14 years, using Crunchbase data. I’ve divided the companies into cohorts by the year they raised their seed investment. Click on the charts to view interactive ones.

The chart shows the narrow funnel seed stage companies must pass through to raise a series A. There are three observations we can make from the chart. First, the number of seed investments in the Crunchbase data has increased by 4x in 4 years. Some of this growth is better data recording, but I suspect the majority of the growth is driven by increased seed investments. Second, the total number of Series As has also increased, but it’s hard to say whether that’s data accuracy or ground-truth. Third, the total number of Series Bs is remaining relatively constant, even for the newer cohorts, like the 2012 class.

Across all these cohorts, the mean success rate to raise an A after a Seed is 27%, to raise a B after an A is 35%, and the whole way through the funnel, Seed to B, is 11.5%. Said another way, only 12% of companies who raise a Seed will raise a B.

If you’re wondering how these trends have changed over time, this next chart will answer that question for you. The x-axis shows calendar year and the y-axis shows the % of companies that raised a round. The blue line shows the percentage of companies raising an A after a seed; the orange line shows the percent of post-Series A companies raising a B; the green line shows the percent of post-Seed companies who have run the gauntlet successfully to raise a Series B. The secular decline in all of these ratios screams of increased competition.

According to analysis by my partner Jamie Davidson on typical periods between financings peaks around 9 months so the follow on rates for Series Bs should be accurate up until the 2011 class, which gives these startups more than 2 years to raise their B. Data from 2012 and 2013 will show lower success rates because most of these companies won’t be mature enough to be in the market for a B.

Despite the noisy data, it’s reasonable to conclude the financing market has become more competitive, driven by an increase in the total number of startups raising seed capital and a relatively constant inflow of capital into venture capital.

Originally posted on Tomasz’s personal blog, here.


The Mininum Size Seed Round To Maximize Series A Follow On Investment

How large of a seed round should founders raise to maximize their chances of raising a Series A? Smaller seed rounds are simpler and faster to raise because they typically require fewer investors. They may also require less dilution because of the smaller investment size. On the other hand, to raise a Series A, the startup needs enough runway to hire a team and prove certain milestones to Series A investors.

Using Crunchbase data from 2005 to 2012, I’ve plotted the follow-on rates by size of seed investment quintiles across 2906 companies in that period. Startups who raised $300k or less in their seed raised Series As about 12% of the time. Founders who raised between $300k and $600k doubled their odds of raising an A to better than 24%, and those who raised between $600k and $900k increased the probability an additional 50%, reaching 33%. After that point, the marginal capital demonstrates diminishing returns.

The data indicates that larger seed rounds substantially increase the odds of raising a Series A. This could be due to a number of reasons. First, founders with larger seed rounds benefit from more time to establish product market fit. Second, the additional capital enables seed stage startups to be more aggressive ramping the business either through marketing efforts, recruiting efforts or other tactics. Third, larger seed rounds likely have one or two institutional investors who have invested the substantial majority of the round, and given their larger fund sizes are willing and able to lead the Series A.

More runway implies better odds of success.

Originally posted on Tomasz’s personal blog, here.


The Super Bowl of Startups: Interview with DraftKings CEO Jason Robins


As Super Bowl XLVIII fades into the history books (hopefully never again to be so lop-sided a defeat), another game is quietly gaining steam as the place to be for the most avid sports fanatics. DraftKings, a leader in online fantasy sports games, has seen its customer base, daily engagement, and giveaway prize totals surge almost as quickly as the Seattle Seahawks have transformed themselves into Super Bowl champions.

Launched in 2012, DraftKings paid out $50 million in prizes in 2013 to thousands of players who excelled in weekly fantasy football, daily fantasy baseball, daily fantasy basketball and daily fantasy hockey. In just the last four months, the Boston-based upstart’s user base has grown fourfold, with nearly 50,000 active daily users and as many as one million registered players. Even better, DraftKings users spend an average of more than two hours every day on the site.

All this before the company’s new mobile app was launched a few weeks ago and new games, such as golf, were added to the existing stable of sports. CEO Jason Robins says his company is poised to blow past these impressive numbers in 2014, thanks to more aggressive marketing and a slew of product enhancements.

With just 32 employees thus far, accomplishing so much so quickly is no easy feat. In a candid interview, Robins opens up about what he believes has been key to DraftKings high-octane growth and about the unique challenges that lie head.


Q: What has been your formula for success?

A: We have spent a lot of time focusing on the brand and the customer experience. Three things have been key: For the customer, we want everything to be fun, easy to use, and engaging. We look at a lot of metrics for every feature we roll out. We see what’s working and what isn’t by testing everything with a group of customers.


 Q. Can you give an example of how that has worked?

A. In the beginning of the NFL season, we launched a feature so people could send private challenges to friends. The social aspect of fantasy sports is huge and we needed to provide an easier way for people to play against their friends. After launching the feature, we found that a lot of challenges were not getting accepted. We wanted to know why and figured out that a lot of challenges were being lost in people’s email inbox.. At the same time, many of these same people were coming to our website without knowing about the challenges their friends were sending.

So we launched a new system of notifications on our website so people could see an alarm bell that shows a challenge. As soon as we launched this feature, our declines of challenges went down—70% on the first day. We will soon launch a push notification on our mobile app, which should make it even better. If you are out and about, you will know when someone has challenged you to a game. In addition, we just launched a feature where you can reserve a seat for a game without having to pick your team right away. People know they want to play but maybe can’t pick their team at that time. So this lets them accept a friend’s challenge and then later set their lineup. We have seen another 45% drop in cancellations with that.

All this was about tackling one key metric: the cancellation rate of game challenges.


Q. What are some things that have surprised you in getting the business off the ground?

A. Sometimes we are surprised by how our users respond to new features. We launched something called Lineups, which is a way to easily manage your teams. If you create 40 different teams and have players across many games, it can be hard to manage when a key player you had on 30 teams suddenly is out because of an injury. Previously you would have to edit out that play in each game. Now you can get the guy out of your lineups automatically. We knew this would be popular but it has become one of the defining features of our product.

Another lesson we have learned is about marketing. I came from Vistaprint, which had success with digital marketing channels at an incredible level of scale before venturing into offline advertising. It took us awhile to realize that wouldn’t work for us at DraftKings. Broadcast marketing channels have been easier for us to scale than digital.


 Q. Is it difficult to build a virtual business that is so dependent on the real world?

A. The beauty of sports is that you already start with a great product. It’s the world’s greatest reality show. We don’t have to create the content. It’s already there. For us, it’s more about how to add to an already interesting experience. Our app fits in particularly well. For example, if you are at a game, it can be a second-screen experience. It opens up a lot of different ways to add on to the experience.


Q. What have been some of the biggest challenges?

A. We are a product-focused culture and we always have to make sure we continue to pay as much attention to the technology and back-end operations. We have a very complicated product with constant transactions occurring. So the issue of security is always there and we have to have a really strong infrastructure that is error free. We can’t have people lose trust.

When we roll out a new feature, we make a list of all the negative things that could happen from launching the feature. Not just bugs but product design etc. We have to have an answer for each one or we don’t roll out the feature. We want to grow fast but there’s a lot of tricky stuff on the technical side.


Q. What keeps you up at night?

A. Staying ahead of the competition on the innovation front and making sure that everything we do is high quality. I also worry about hiring and retaining the best talent. It’s a little easier because of the business we are in. People feel a lot of passion for sports. It also helps being in Boston.




Do Larger Seed Rounds Lead To Bigger Series As?

In What’s Up with the Series A, Nikhil Basu Trivedi documents the bifurcation in the Series A market. While there are a handful of startups that raise blockbuster Series As of greater than $10M, the average Series A investment size remains relatively constant over the past 6 years just around $5.3M for US technology companies according to Crunchbase data[1].

After reading his post, I wondered if a big seed round is a leading indicator of a big series A. In other words, would larger seed rounds provide enough negotiating leverage in fundraising conversations to bolster average check sizes and increase pre-money valuations?

Let’s go to the data. Below is a chart of 726 startups who raised a seed and a follow-on Series A anytime from 2005-2013. The x-axis is the size of the seed round in $k and the y-axis is the size of the Series A in $M. Each dot represents one startup.

There isn’t a clear pattern within the data but we can make three important observations. First, Series As rarely exceed $10M for companies with seed stage financing and the distribution of these financings tends to be relatively independent of seed investment size. Second, in the top right, we see a cluster of large-seed and large Series A companies, but the sample size is quite small, only 4. Third, the correlation between the size of the seed round and the size of the Series A is tenuous at about 0.25 R2. I can’t argue larger seed rounds precede larger As.

But, there is a nugget of useful insight in the data. Below I’ve charted the distribution of seed investments by size on the left, and the distribution of Series A investmens by size on the right. They are quite different.

Seed investments are uniformly distributed, but Series A investments follow a power-law distribution. Fundraising is never simple or easy, but there is a marked difference in the difficulty of raising a large seed compared to large A. Roughly 18% of startups in this data set raised a $1.5M+ series seed, but fewer than 8.5% of these startups raised a Series A of greater than $10M.

Said another way, there is 3x more capital available for sub-$10M Series As than for greater than $10M As. In contrast, the amount of capital invested in seeds greater than $1M is about twice as big compared to small seeds, which is quite likely an artifact of the rise of the dedicated seed fund and traditional VCs’ entry into the seed market.

All in all, larger seeds may not have a strong effect on the size of the Series A a startup can raise. But, at least at this point in the market, it’s becoming easier for founders to raise substantial seed rounds.

[1] The numbers I’m using here differ from Nikhil’s because in addition to geography, I filtered the industry to tech companies, which seem to garner larger investments than the average Series A.


*Originally posted on Tomasz’s personal blog, here.