Paul Kedrosky at Infectious Greed talks about seed funding in a post titled No-one Does a Second Seed Fund.

Most “seed investors don’t raise a second seed fund. They raise a larger fund… they don’t get stuck in the low fee, low return, over-distracted world of seed financing a second time. And therein, of course, lies an opportunity or a problem, depending on your disposition”.

In the comments Paul elaborates on the incentives that cause a firm to leave seed funding behind: 1) Between seed funding and Series A not a lot of value has been added and the seed equity gets substantially diminished; and 2) The difference in returns from a larger fund with a similar return are too large to ignore.

This skewing of incentives means that raising a second seed fund is a definite problem, for a traditional VC. It simply doesn’t make sense for them to reenter that stage.

It is, however, an exciting opportunity for other venture firms - those who aren’t following the traditional VC playbook. It gives these new VCs an opportunity to develop a strong reputation in early stage investing, lowering the cost of equity. Their non-traditional VC services will help the venture validate the product and business plan - this will help address the first problem that Paul discusses (”significant value hasn’t been added to the firm between seed and Series A”).

I suspect that as the venture industry changes over the coming years we’ll see less and less traditional VCs enter the seed funding game. It simply doesn’t make sense for them as they face competition from firms following a new strategy. This is good for start-ups. Those firms who need to rely on the traditional VC formulas will be increasingly forced to participate in funding during the later start-up stages, where they are best suited to assist (scale).

[Bonus: started to break in new shoes in advance of Hamilton’s Around the Bar at the end of March. Is there a better feeling than 8 blisters and 1 blister that itself has a blister? If you’re not a runner you just wouldn’t understand, but it is a great feeling.]

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