Silicon Valley startups are rediscovering the benefits of being profitable

Second time is the charm.
Second time is the charm.
Image: Erik De Castro / Reuters
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Startups, like many of their founders, are experiencing an extended adolescence. More startups than ever before are opting for “second” seed rounds, the early-stage financing companies use to get started.

The number of startups taking a second tranche of seed funds rose from 34 in 2010 to more than 830 in 2016, according to analyst Tomasz Tunguz at the venture firm Redpoint. Second seeds now comprise about 33% of all seed rounds based on Tunguz’s analysis of Crunchbase data aggregating investment rounds from more than 100,000 startups in total over those seven years.

Once relatively rare, the round’s growing popularity is likely due to the rising bar for Series A funding, as well as the increasing number of cash-conscious startups led by founders who want to extend their initial financial runway before attempting a bigger fundraising round that dilutes their ownership, says Tunguz. Although the total number of seed rounds has been declining in recent years, the median size for a second seed round has more than doubled to over $1.2 million since 2010 (and first round sizes have remained around $400,000), reports Tunguz.

Entrepreneurs say there’s a second explanation for the popularity of second seeds. VC-backed companies, even if they don’t turn into unicorns, are becoming an alluring asset class all their own. Investors seeking productive places to park their cash have begun to see startups with encouraging, if not explosive, revenue as an attractive asset. While still risky, seed-stage startups offer returns from steady dividends in the short term and potentially big money in event of a sale in the long term.

“Second seeds are really investments in real businesses and they still have the option value on a future best-case scenario to knock it out of the park,” says one startup founder who requested anonymity to discuss his investors’ motivations. He completed a top-ranked accelerator and raised more than $1 million in a seed round 2014. “We’ve been on a march to profitability since then, and people view us as an asset class now that’s much more rational,” he says—which means they’re getting investment from VC’s simply looking to back a profitable business.