Is the seed-stage 'factory model' — packaging companies to predictable metrics for staged financing up through Series A/B/C — durable, or has it structurally broken down?

Sam Lessin · Aug 11, 2023

The factory model of seed investing — packaging companies to predictable metrics and handing them up a production line of Series A/B/C investors to pop out $10B outcomes — is dead and not coming back

It was predicated on the idea that technology and platforms like AWS let you predictably manufacture merely good companies; that turned out to be false, since those manufactured companies got crushed once they went public

Scope: distinguishes manufacturing 'good' companies from rare breakouts like Facebook; admits his own firm was in plenty of these companies

4:31 20VC Roundtable: NEW FORMAT: Why the Seed Investing Model is Broken, How to Make Money at Seed Moving Forward; Who Wins and Who Loses, Why Venture Value Add Platforms are BS and Failed and Why There Will be an IPO per Week in H2 2024

Sam Lessin · Aug 11, 2023 · hedged

If the middling manufacturable outcomes disappear, the entire staged financing system breaks down and venture returns to hunting rare off-theme thousand-baggers rather than running a playbook where everyone does pretty well

Given the failure rate and overpricing, the middling manufactured SaaS-type outcomes coming out the back end no longer clear, and the staging system depends on those outcomes existing

Scope: conditional on middling manufacturable outcomes going away; excludes occasional breakouts from the argument

9:45 20VC Roundtable: NEW FORMAT: Why the Seed Investing Model is Broken, How to Make Money at Seed Moving Forward; Who Wins and Who Loses, Why Venture Value Add Platforms are BS and Failed and Why There Will be an IPO per Week in H2 2024

Sam Lessin · Aug 11, 2023

Y Combinator is the purest expression of the venture 'factory' model, and that factory portion of venture is the dead part going forward

YC turned company formation and fundraising into a packaged, opaque-playbook-made-legible assembly line ending in demo day; because every company comes off the line looking identical, there is no signal in it for an investor

Scope: about the factory/packaging layer specifically, not the capital side

32:59 20VC Roundtable: NEW FORMAT: Why the Seed Investing Model is Broken, How to Make Money at Seed Moving Forward; Who Wins and Who Loses, Why Venture Value Add Platforms are BS and Failed and Why There Will be an IPO per Week in H2 2024

Jason Lemkin · Aug 11, 2023

Today's seed environment is not fundamentally worse than 2017–2019; the core investing model still works if you reset back to the pre-late-2019 vibe, even if it is bespoke

The core deals and core investments are unchanged; only surface features like crazy valuations are new

6:43 Core seed investing model still works just reset to pre 2019 norms

Frank Rotman · Aug 11, 2023

A healthy reset means four discrete derisking stages (seed, A, B, and a private-equity-like C) with 20–30% of companies failing between each stage, and seed and angel investors who have never seen this environment are in for a rude awakening

Efficient derisking necessarily produces failure rates; the assumption that valuations only go up and companies always get funded is over, so companies must get far enough fast enough or the money won't be there

7:20 Efficient derisking requires discrete stages with high failure rates between them

Jason Lemkin · Aug 11, 2023

Packaging seed investments for the next round — helping hire a VP of sales and socializing the deal with specific Series B investors — is a legitimate and valuable part of the seed investor's job, not a bad thing

He did exactly this from 2013 with unknown outsider companies like Pipedrive, Algolia and TalkDesk, spending 30% of his time socializing a 'plate of things' with Series B partners even though the market was smaller then

8:53 Packaging and socializing deals for follow on rounds remains legitimate value add

Sam Lessin · Aug 11, 2023

The seed model has to be selling very expensive money where the payoff is being enormously right occasionally, not an efficient standardized market.

The idea that seed became big and efficient enough to compete on consensus deals is exactly the factory model that is breaking down.

12:01 Seed investing must price as expensive money for rare huge wins not an efficient market

Sam Lessin · Aug 11, 2023

Good firms will stop doing the 'plug into the factory' deals — where you buy in knowing how Sequoia marks it up — and will no-bid anything without huge asymmetry.

The money has always been made on deals with fundamental conviction at low prices, where a low price signals nobody else is bidding; the factory-markup game is going away.

14:23 Good firms will abandon markup driven factory deals for genuine asymmetric conviction

Sam Lessin · Aug 11, 2023

The model of seed as de-risking one or two key bets to unlock a Series A no longer works; seed money should instead be used to build a profitable business so every later raise is optional.

He is no longer willing to consistently bet that there is an efficient capital market downstream of him; the real de-risking should be having a business that works.

19:53 Seed should fund path to profitability not a derisking bet for series a

Frank Rotman · Aug 11, 2023

Generic accelerators often give companies the wrong advice for their industry, leaving investors to overpay and then undo the damage

A factory running hundreds of businesses a year can't understand nuances like fintech regulation; much of the growth is manufactured from unscalable things to produce an up-and-to-the-right chart for demo day, and the hygiene and learning order are wrong

34:06 Generic accelerators give industry mismatched advice and manufacture fake traction