Extension rounds help some startups play offense during COVID-19

Published July 17, 2020

The venture capital world is constantly changing, and its evolution can sometimes flip pieces of conventional wisdom on their heads. For example, a recent flurry of extension rounds from Silicon Valley’s hottest startups like Stripe and Robinhood seem to signal that the investment type has suddenly become cool.

Extensions evolving from unloved to hot is not the first time that a type of VC deal has gained, or lost luster. In past times, for example, raising consecutive rounds from the same lead investor was often perceived as a negative signal; why couldn’t the startup find a new, different lead investor? Today, in contrast, venture capitalists are using inside rounds to double-down on winning startups, a way of helping ensure returns for their own backers.

The recent phenomenon of extensions becoming vogue is a tale of the times, in which the best startups get to play offense, and startups that can’t show accelerating growth are left behind. Let’s explore what has changed.

A series of fortunate extensions

TechCrunch first wrote about the new extension-round trend after seeing what felt like a wave of the deals crop up. Some were large, like MariaDB’s huge $25 million add-on to its Series C, or Robinhood’s biblical $320 million addition to its Series F.

But most were smaller events like Sayari adding $2.5 million to its Series B, or CALA adding $3 million to its seed round. Even more recently, Eterneva raised another $3 million on top of its seed round, and also out this week was a million pounds more for Edinburgh-based Machine Labs’ seed round.

One reason for the growth of extension rounds in 2020 has been runway — making sure that a startup has enough. Upstarts often raise on an 18-month cadence. But because of COVID-19 and its constituent economic disruptions, many have reduced costs in a bid to bolster how long they have until their cash stores reach zero.

6 VCs explain why seed investors now favor enterprise startups

Published January 7, 2020

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today we’re digging into seed-stage companies, the vanguard of the venture market. In particular, we’re trying to understand why the ratio of seed deals now favor enterprise startups over their consumer-focused brethren. The fact that seed investors recently inverted their preferences, cutting more checks to enterprise (B2B) startups in 2019 than consumer-oriented companies (B2C) was news.

We wrote about the trend here, as regular readers will recall.

To better understand what’s going on, I spoke with a number of early-stage venture investors who recently dropped by Equity, came highly recommended by peers, and several I know personally. The goal was to get a handful of inputs from different firms to get under the skin of the trend.

What in the hell is going on in seed? Let’s find out.

Why are enterprise seed deals on top?

This morning we’ll hear from Jenny Lefcourt at Freestyle Capital, Jomayra Herrera of Cowboy Ventures, Hunter Walk from Homebrew, Iris Choi of Floodgate, Sarah Guo from Greylock and Ajay Agarwal of Bain Capital Ventures. As you can see, we picked a list of investors form firms of different sizes, theses and focus. However, each investing group either focuses on early-stage investments that include seed deals or dabbles in them.

Here’s what we want to know: why did the the majority of seed deals swap from consumer-focused startups to enterprise-focused deals?

Our investing group detailed a number of explanations, a handful of which echoed each other. To best convey their thinking, we’ll quote each investor at moderate length. If you are in a hurry, the most common point made against consumer-focused seed deals is go-to-market difficulty in the current market.

Other reasons include price, secular changes to the technology landscape, and the changing experience profile of the investing class themselves. (Minor edits made to select responses for clarity.)

Freestyle’s Jenny Lefcourt said via email that consumers are an increasingly difficult cohort to sell to, because they “became fickle with the proliferation of VC-backed, consumer-focused startups over the past few years.” As a result, consumers became “harder and more expensive to acquire and even harder to retain,” meaning higher customer acquisition costs (CAC) and lower lifetime value (LTV).