The Billion-Dollar Seed Isn't The Deal You Think It Is
A recent surge in billion-dollar seed rounds has led to speculation that the venture model has been rewritten, but data suggests that this is not the case. The author, Ellie McDonald, a principal at Bison Ventures, argues that large first rounds in biotech have produced a…
Intelligence analysis by Llama
The author disputes the notion that the venture model has been rewritten, citing data that shows large first rounds in biotech have produced a handful of strong outcomes, but a long tail of modest ones. The author argues that capital intensity is not a moat and that raising a massive first round does not inherently make a company more likely to generate venture size returns for its in…
Imagine you're at a lemonade stand, and someone offers to buy the whole stand for a lot of money. You might think that's a great deal, but what if the stand is actually worth much more if you just keep running it? That's kind of what's happening with some of these big seed rounds. The companies are getting a lot of money, but it might not be the best deal for the investors in the long run.
Analysis
A $60B Vote of Confidence
The recent surge in billion-dollar seed rounds has led to speculation that the venture model has been rewritten, but data suggests that this is not the case. The author, Ellie McDonald, a principal at Bison Ventures, argues that large first rounds in biotech have produced a handful of strong outcomes for first-check investors, but a very long tail of modest ones. This trend is not unique to biotech, as the author notes that the same pattern holds true for other sectors, including AI. The author cites data that shows that only 20% of companies that publicly raised $100 million or more in their first financing round generated returns that justify the asset class. Of those, only a few delivered what the author calls a venture-like return: 10x MOIC or better for the first-round investor. The author argues that this distribution will improve with a few well-placed AI outcomes this year, but even there, the return math is nuanced for first-round investors. According to reports, first-round investors are looking at 30-40x returns at OpenAI's projected IPO valuations, which is a fantastic outcome, but also a fraction of what early institutional investors made on the generational outcomes of prior eras.
Why Cursor?
The author notes that the companies people now hold up as AI winners started small, only further reinforcing the point that the venture model has not been rewritten. Cursor's first round was less than $10 million, ElevenLabs' was $2 million, Legora's was $11 million, Sierra's was $25 million, and Cohere's first round was $5 million. Today, every one of those companies is valued north of $5 billion and generating hundreds of millions in revenue. The author argues that this is the more representative data point, rather than the exception of Project Prometheus at $6.2 billion.
The Road Ahead
The author concludes that raising a massive first round does not inherently make a company more likely to generate venture size returns for its investors. Sometimes it's a necessary cost of doing business, but the venture math is unforgiving. High entry prices leave less room for the upside to accrue, regardless of the underlying opportunity. The author argues that the playbook that has worked across every prior technology wave is to buy meaningful ownership in capital-efficient companies at prices that leave room for the upside. This playbook doesn't make for dramatic headlines in 2025, but it's what the historical data, from Google to Uber to Cursor, consistently vindicates.
Key points
- Large first rounds in biotech have produced a handful of strong outcomes for first-check investors, but a very long tail of modest ones.
- Capital intensity is not a moat, and raising a massive first round does not inherently make a company more likely to generate venture size returns for its investors.
- The playbook that has worked across every prior technology wave is to buy meaningful ownership in capital-efficient companies at prices that leave room for the upside.
If the trend of AI companies starting small and growing to be worth billions continues, it could lead to a new wave of successful startups. This could also lead to more opportunities for investors to get in on the ground floor of these companies and potentially see high returns.
If the trend of high entry prices leaving less room for the upside to accrue continues, it could lead to a decrease in the number of successful startups. This could also lead to a decrease in the number of opportunities for investors to get in on the ground floor of these companies and potentially see high returns.
