blockworks.co
As crypto winter appears to thaw, investors and industry participants have begun to note interest in fundraising via extended seed rounds.
Seed extensions let startups access fresh investor capital without needing to meet Series A requirements, which grew more strict in the bear market, investors and founders say.
The in-between funding rounds also let startup teams avoid diluting their equity as a potential bull market awaits.
In the traditional VC world, a Series A tends to be the “first priced round” of a startup. Founders and investors formalize governance and preferred shareholder rights, according to Matt Luongo, CEO of venture capital firm Thesis*.
However, this is not necessarily the case in crypto, where protocols may not take the traditional path of young companies by appointing a board issuing shares. “In crypto, your Series A is often just a piece of marketing,” Luongo told Blockworks.
Read more: Funding sees first quarterly increase since Q1 2022
Luongo added that investors are currently more cautious, “backing off later-stage fundraising until the market recovers a little bit more.”
When Adam Bialy was raising for his banking-as-a-service provider Fiat Republic, he noticed elevated standards for a Series A round.
“[T]he VC landscape is undergoing a shift,” Bialy said. “The bar for Series A funding has risen significantly, a change prompted in part by the fallout from incidents like the SBF case.”
Fiat Republic announced its extended seed round on Dec. 19.
Raising a Series A during adverse market conditions can lead to less favorable terms for startups. Blockworks spoke with multiple startup founders who also said their extended seed rounds provided a way to attract operational funding without diluting their equity, which occurs when new investors are brought in — thereby reducing the founder’s ownership percentage in the startup.
One such example is the crypto project Brahma, which gained investor interest following demos of an on-chain execution and custody product called Brahma Console. Brahma, known for its role in the DeFi sector as a non-custodial protocol that manages liquidity and interactions across multiple chains and dapps, aims to simplify earning yield and deploying capital.
Alessandro Tenconi, Brahma’s co-founder, mentioned that while the company could use the funds from this round to develop its Console concept, it anticipates that a fully developed and scaled version of the product would result in more favorable conditions for future fundraising. Hence, it has strategically opted for an extended seed round.
“Our aim was to make Console a reality first…and then when needed get to a full round, which would prevent increased dilution with raising an unnecessary larger round back then,” Tenconi told Blockworks. Tenconi added that the extended seed capital let Brahma extend its runway, make new hires and perform security audits as it awaits a potential future Series A.
Interest in extended seeds may also indicate portfolio diversification on the part of funds, especially given some of the uncertainties hanging over the market.
“[T]he current market’s volatility, coupled with limited liquidity in altcoins, is making early-stage investments a strategic choice for regional diversification,” Bill Qian, Chairman of crypto VC firm Cypher Capital, said.