Connect with us


The Rise of the “Sapling Round” in Technology Startups



Sapling Round

I was in the valley last week meeting with over 23 investors (primarily seed and series A stage). From Andreessen-Horowitz and Accel to Sigma ventures and True ventures, we had a chance to talk to partners who are looking at over 2000+ deals every year to invest in less than 10 (in the case of older funds) to over 50 (in the case of a16z).

While there’s lots of talk in the valley about the series A crunch and its impact on startups, I wanted to bring to attention a new (to me at least) trend that is consistent among all valley technology startups.

It is the rise of the “sapling round” of funding.

The sapling round is when a company raises between $250K to $2.5 Million, syndicated among  5-15 investors, and is largely (over 75% in the valley) a convertible round.

It is a round that is raised between the seed and the series A round.

The reason why this round is becoming more prevalent is a combination of the rise of startup incubators and accelerators and the constant “raising of the bar” among series A venture investors.

Typically the incubator puts in the first “seed” round of about $25K and provides access to another (in some cases) a $75K through its partners. In case the startup does not go through an incubator, they raise a seed round from angel list or friends and family to the tune of about $250K or less.

Then the startup goes through a 3-4 month program and before or at their demo day looks to raise another $250K to $1.5 Million in a convertible note.


1. Series A investors have raised their bar for what constitutes their round. All of the investors I spoke with would put $2M to $5M in the series A.

Sean of Emergence Capital, whose firm focuses only on SaaS companies, said he has seen in the last 11 months little over 150+ companies in SaaS with over $1 Million in revenue and they have only funded 2. Another early stage consumer Internet VC mentioned they looked at over 50+ companies with between 2.5 Million to 10 Million active users (not yet making revenue) and invested in none yet.

One of the larger firms that does Cloud infrastructure investments and Big data only has seen over 20+ companies with a complete management team, over 20+ paying customers and great market traction to invest in 1.

2. Companies are realizing that “traction” alone is insufficient (in most cases) to get money from the series A investor. While product + traction will still get you a seed round, the later stage investors are looking for revenue and growth in revenue as the primary metric. There are exceptions, but they are rare.

3. Startups are realizing that its taking 12-18+ months to get to that series A, so they are raising more convertible rounds and bridge rounds until they hit those series A milestones. Even in the valley getting to $1+ Million in revenue in less than 18 months for a product startup is rare.

What does this mean for startup entrepreneurs?

1. Most entrepreneurs are in “forever raising” mode until their series A. One even called it “passively always raising” or PAR for the course. They are looking to gain one investor at a time, in chunks of $25K or looking for micro VC or super angels to put in $100K+

2. The teams are lean for longer. According to Ali at Azure Capital, most of them were at 5-10 employees shacking out of a co-working space even at $1Million in revenue.

3. There’s a big push towards breaking even with the sapling round funding, so there’s a constant battle in the entrepreneur’s mind between growth and profitability. One is considered a “safer option”, while another (growth) is what the sapling investors and series A are looking for.

What trends do I see going forward in 2013?

1. The rise of the “priced” sapling round. While most seed round are priced (6%-10% for $25K from the accelerator), and series A rounds are priced as well, the sapling investors are stuck in the middle with a convertible note. That’s definitely going to change next year as they also try to maximize their earnings.

This has major implications on startup funding. If the sapling round does get priced, then it is officially, series A. Which means the current series A investors will become series B. This is consistent with the theme that its taking less money to get to start a company and even less money to get to $1 Million in revenue, than before, so seed rounds and series A rounds will be smaller than they were 3-5 years ago.

2. Early stage VC’s will continue to raise the bar higher, forcing most startups to go for the safer option (breaking even faster, profitability) in 2013, which will lead to the “lifestyle” business discussion popping up, all over again.

3. Many convertibles will convert, without a series A, as sapling investors will try hard to look for buyers of their portfolio company among mid-sized companies in their attempt to get an exit.

P.S. The term “sapling round” was coined by one of the founders in the accelerator, Bhaskar who was at our lunch discussion yesterday when we were reviewing the implications of this trend on our startups.

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Creating Artificial Constraints as a Means to Innovation




Artificial Constraints

Many of the entrepreneurs I know have created new innovative startups thanks to real constraints they had. For example, I was hearing AirBnB’s Brian Chesky, on the Corner Office podcast and he mentioned that when he and his cofounder were trying to get some money to get started and the only way to keep afloat was to “rent” their air bed they had in their room. That, then led to Air Bed and Breakfast, which is now AirBnB.

This was a real constraint they had – no money to “eat” so they had to make it happen somehow.

I have heard of many stories of innovation where in the protagonists had real constraints of either financial, technology, supply, demand, economic, social or any number of other characteristics.

The interesting story that I have also recently heard of how Facebook has “pivoted” from being a desktop offering to getting a significant part of their revenue from mobile is how they were given the arbitrary constraint of only accessing Facebook via the mobile phone.

So there are ways that you can create “artificial” constraints to force innovation to happen.

Most larger companies and some smaller ones as well, have to constantly find ways to create artificial constraints – to find a way to innovate and be more be a pioneer.

While some constraints are good – lack of funds at the early stage for example and lack of resources, there are entrepreneurs that are stymied by these constraints and those that will find  a way to seek a path to go forward.

I think this is a great way for you to think about innovating in a new space. If you have constraints, find a way to use it to your advantage.

Continue Reading


The Great Mobile App Migration of March 2020




Mobile App Migration

Over the last few weeks as many in the world have been in lockdown, there has been a temporary “mobile app migration” happening. There are new apps downloaded and they replaced existing apps on the “home screen”.

While some of these apps are likely temporary use, for e.g. I have 6 “conferencing apps” – Zoom, Uber Conference, Webex, Google Hangouts, Blue Jeans and Goto Meeting. That is because of the many people I have conference calls with – each company seems to have chosen a different web conference solution.

Other apps seem like they will have staying power – Houseparty, for e.g. which has games, networking and video conferencing all built into one app to keep in touch with friends and relatives.


The apps that have moved away from my “home” screen, which I expect will come back once the crisis will be behind us include – Uber, Lyft and all the airline apps from Delta, Alaska and United.

Continue Reading


Perseverance with the Ability to Pivot on Data: 21 Traits We Look for in Entrepreneurs




Perseverance with the Ability to Pivot

There are 5 key inflection points I have noticed which makes founders question their startup, to either make a call to continue working on their startup, pivot to a new problem or quit their startup altogether.

It is at these points that you really get to know the startup founder and their hunger and drive to be successful. I don’t think I can characterize those that choose to quit as “losers” or “quitters” because of many extraneous circumstances, but there is a lot of value that most investors see in entrepreneurs who face an uphill part of their journey to come out on the other side more confident and stronger.

These five inflection points are:

  1. When you have to get the first customers to use and pay for the product you have built after you have “shipped” an alpha / beta / first version. Entrepreneurs quit because they have not found the product-market-fit – because the customer don’t care about the product, there is no market need, or the product is really poorly built, or a host of other reasons.
  2. When you have to start to raise the first external round of financing from people you are not familiar with at all. Entrepreneurs quit because while it is hard to get customers and hire people, it is much more harder to get a smaller set of investors to part with their money, if you do not have “traction”, or “the right management team” or a “killer product”.
  3. When you have to push to break even (financially) and sustain the company to path of being self sufficient. Entrepreneurs quit at this stage because they have now the ability to do multiple things at the same time – grow revenues and manage costs, and many of them like to do one but realize it is hard to do that without affecting the other. So, rather than feel stuck they decide to quit.
  4. When you have to scale and grow faster that the competition – which might mean to hire faster, to get more customers, to drive more sales, or to completely rethink their problem statement and devise new ways to grow faster. Entrepreneurs quit at this point because they are consumed by the magnitude of the problem. They overassess the impact the competition will have on their company, give them too much credit or focus way too much on the competitors, thereby driving their company to the ground.
  5. At any point in the journey, when the founders lose the passion, vision or the drive to succeed. Entrepreneurs quit a these points because they have challenges with their co founder, they don’t agree with the direction they have to take, or encounter the “grass is greener on the other side” syndrome.

While I have observed many entrepreneurs at these stages at  discrete points in time, I have also had the opportunity to observe some entrepreneurs in the continuum, and I am going to give you my observations on 3 of the many folks I have known, who, have quit.

Perseverance separates great entrepreneurs from good ones
Perseverance separates great entrepreneurs from good ones

One went back to college to finish his MBA after getting a running business to a point of near breakeven, another found the business much harder than he originally thought he would and got a job at a larger company and the third was just unable to have the drive to go past 11 “no’s”‘ from angel investors.

Over the last 8 years, if I look at my deeper interactions with over 90 entrepreneurs, who I would have spent at least 100+ hours each, I would say that of the 24 people that are not longer in their startup, the one thing that stands out among the ones that persevere is that it is not “passion” or “vision” at all.

It is the inherent belief that they are solving a problem that they believe is their “calling”. They also don’t believe that there is any other problem that’s worth solving as much, even though there may be easier ways to make money.

So most of my questions of entrepreneurs to test whether they will pivot or quit are around why they want to solve this problem (which I am looking to see if they know enough about in the first place) versus any other one.

The answer to that question is the best indicator I have found to be the difference between the pivots, the leavers and the rest.

Continue Reading