The Golden Rule, Gold Rush, & Goldilocks in The 12th "Late, Late" Edition (September '24)
In this month’s ‘Bulletin’ you will find:
From Gold Rush to Goldilocks: The Series A Market's New Reality - Dive into the evolving landscape of Series A funding where the old rules no longer apply. Discover how changing investor expectations and market conditions have transformed what it takes to secure a Series A round today, from "golden rules" to "gold rush" and now to "goldilocks" conditions in venture capital.
Craving Content Kale Over Digital Doritos - Reflect on the importance of quality concentration in our digital age. Explore the personal journey of substituting 'digital Doritos'—the mental junk food from social media and distractions—for 'content kale,' enriching the mind with insightful, thoughtful, and engaging material that drives personal and professional growth.
Together, these essays shed light on both the external market dynamics that founders and venture capitalists must navigate, and the internal personal habits that can define our clarity and success in this ever-challenging industry.
1. From Gold Rush to Goldilocks: The Series A Market's New Reality
The Series A gap in today's market is more serious than many investors might be willing to admit. Over the last few weeks, when I've asked early-stage investors (ranging from pre-seed to Series A) about their views on the current Series A market, I've received responses like "stalled," "bifurcated," "confusing," and even "competitive."
These reactions mirror the sentiment among seed investors and founders—"What the heck is going on with Series A?" No one seems to be able to confidently define the standard for a Series A raise right now. When I first entered the industry in 2015, the rule of thumb was that $1M in ARR was a solid benchmark to secure a substantial Series A round. As interest rates dropped and capital became cheaper, those standards began to dissolve, accelerating deal velocity significantly from 2016 to 2021.
Most founders have struggled to adapt to the frequent shifts in Series A criteria—from the "golden rule" of $1M for Series A to the "gold rush" of the early 2020s, and now being "goldilocks-ed" in today’s market. They are often told they are "too early," "too profitable," "targeting too small of a TAM," among other things.
Much like the other critical stage inflection point for founders—meeting standards to go public—the IPO market, last active in 2021 (a peak period for Series A valuations), has experienced a similar "golden rule" to "gold rush" to "goldilocks" trajectory over the last decade, mirroring the early-stage private markets.
This was evident at a conference I attended last week, where a tech equity research analyst shared a table illustrating the shift from a "gold rush" period, characterized by growth at any cost, to this "goldilocks" era, where investors are seeking the perfect IPO conditions:
IPO Criteria for Public Investors (Source: Jefferies & Co.)
What’s In
✅ N of 1 or #1 companies - market dominance
✅ Scaled revenue (for now)
✅ Platform not product
✅ Rule of 40 companies with growth > profitability
✅ Differentiated, durable growth benefiting from secular tailwinds
✅ Margin resilience, credible path to profitability, improving efficiency and compelling unit economics
✅ Straightforward stories (no drama)
What’s Out
🚫 Undifferentiated positioning in a competitive industry
🚫 Lack of predictability in financial model
🚫 Product not platform
🚫 Highly levered assets
🚫 Complicated, not straightforward stories
🚫 Undifferentiated growth and/or mediocre unit economics
🚫 Pricing at aggressive valuations versus public peers
Reflecting on this table, I see parallels in the Series A stage I focus on the most. Some investors have hinted that a new "golden rule" is emerging as a standard milestone for Series A, speculated to be double or even triple what was expected when I started my venture career. This standard assumes you are a software company; for tech-enabled services, marketplaces, or hardware companies, the bar may have quadrupled.
In my best John Oliver impression, I will answer: 1) How did we get here, 2) What impacts have the gold shifts had on the market, and 3) How do we solve the Series A gap?
How? Firstly, how we got here: It's well-documented that the zero-interest rate period led to a flood of capital into private markets, attracting new allocators and crossover funds from the public market seeking alpha compared to their core risk/return standards. This influx resulted in significant cash being pumped into the pre-seed and seed stages, though not at the same rate as Series A. Those founders who demonstrated growth at any cost (or perceived potential growth) received unprecedented valuations with little traction, aggressively priced versus public peers.
Impact? This influx has drastically shifted investor expectations, leaving many founders floundering. Seed founders, having exhausted internal investor support through one or two bridge rounds, still struggle to meet the new Series A standards unless they are among the few experienced founders building in hype cycle sectors like generative AI. Even experienced Series A investors express confusion about when to invest. Graduation rates for startups transitioning from seed to Series A are expected to plummet from historical rates over the last ten years. The investment decisions largely depend on a firm’s strategy, now often dictated by their fund size. A pre-seed investor friend recently relayed a conversation with a Managing Director at a large multi-stage firm, who commented that although the growth was good, they couldn’t invest without a direct narrative path to a $5 billion exit. This response led me to question whether exits ranging from $500 million to just under $5 billion no longer represent viable venture returns for some market segments. This scenario highlights an existing opportunity, where the Series A market is currently served only by opportunistic seed funds and mega funds making speculative bets on founders' life work.
What do we do? We need to clearly define what constitutes a Series A standard. This definition might vary between hype industries and others, or between enterprise and consumer sectors, or different product types. This clarity could come from more dedicated and right-sized Series A firms. The emergence of new spinout Series A firms like Theory Ventures and Chemistry Ventures is promising, but we need more. We also need firms that focus on helping founders with crucial aspects such as creating repeatable GTM motions and acquiring talent to scale effectively when the time is right.
This is the vision for the firm I aim to build.
2. Craving Content Kale Over Digital Doritos
Today marks a full year since I embarked on this committed creative journey, a milestone worth celebrating—something that, as a determined Capricorn, I find challenging because it's so easy to focus on what's next rather than what's now. In October 2023, I set out to capture and share my learnings with an ever-growing syndicate of investors, operators, family offices, and contacts at institutional LPs.
This first year of embracing my identity as a builder and creator in the venture capital sector required steadfast consistency. However, as I look ahead, I realize that reaching the next level will demand not just concentration but quality concentration.
Over the past two months, I've been evangelizing a new personal mantra to friends, colleagues, and anyone willing to listen: the elimination of all my "digital Doritos." What are digital Doritos, you ask? They're the mental junk food we consume through Instagram, Facebook, TikTok, YouTube, and even gossipy podcasts. I've noticed how much of my time—whether waiting for a coffee meeting or avoiding the discomfort of disappointment or anger—was spent distracting myself with my phone, avoiding reality to numb the pain. This epiphany aligns with recent suggestions by health experts that social media should carry warning labels.
Deciding to chase after my audacious dreams required a diet change—not of the body, but of the mind. If you're preparing for a marathon, you change your diet and training regimen; similarly, pursuing big dreams means upgrading your "food for thought." It's about swapping digital Doritos for content kale.
Instead of listening to podcasts about the latest indicted celebrity or reminiscing about sports events from 2009, I've switched to audiobooks. Instead of obsessing over whether the Cowboys will make the Super Bowl—a feat they haven't achieved since I was 11—I now delve into research studies on happiness and historical non-fiction that offers insights into the shifts in a 100-year-old political party. And instead of running with 90s hip-hop blasting in my ears, I now run in silence, taking in the scenery and allowing my thoughts to flow freely.
The result? I'm not only performing better in my runs, but I'm also retaining and understanding complex concepts more effectively. More importantly, I find myself more engaged with loved ones, friends, clients, and humans in general. I'm leveraging what I call the original social media: engaging in meaningful conversations and immersing myself in well-crafted prose.
While I am a fervent believer in the power of technology, I also recognize the incredible computer we each have between our ears.
Adopting a diet of content kale has strengthened my mind, making it more creative and more capable of deep thinking and feeling. Unlike the times I indulged in digital Doritos, which left me feeling tired and stuck, my new content choices enrich my worldview and impact how I engage with the world.
So, join me in reducing—or even giving up—your digital Doritos. Let's nourish our minds with more substantial fare.
With gratitude,
Earnest Sweat
Public School Ventures