For a founder, the first few million dollars you raise are likely to be the messiest in the history of your company. For some they come in a single round, meant to last you 12, 18, 24 months – a straight trajectory towards the milestones you’ll use to raise a Series A. But for most it’s a lumpy mixture of bootstrapping, friends and family, hackathon prizes, angels, incubators/accelerators and venture capital which combine over a period of months or years.

Accordingly it doesn’t surprise me that we’re seeing an increased number of companies raising a “second seed” – that is, an additional $1-2 million matching a similar total sum raised previously. I don’t think these rounds are evidence of a Series A crunch or anything quite so structural. There have been a tremendous number of seed companies funded in the past few years and trajectories are hard to predict. Some number of those early ventures require (and deserve) additional investor support before they are ready to raise the institutional A that they modeled.

While Homebrew is quite often the first money in (and certainly the first VC round), we don’t dismiss out of hand the idea that a company raising additional seed financing could be a wonderful investment. However as we saw the inbound volume increase we needed a framework to understand the opportunities in order to make good decisions of how to spend our – and founder – time. In reviewing the types of second seeds we were seeing, Satya and I broke them into three segments, two of which we have little interest in and one which whips me into a full-on funding lather (pause so that reader can create visual in their head).

Too Cold: Smart Team Still Wandering in the Desert

The founders have a pedigree and the problem space is a big one, but the team just hasn’t managed to nail a true MVP (let alone product<>market fit) and needs more funding to continue building. Maybe they’re just two months away from a launch. There’s always something tantalizing just. around. the. corner. They can sell investors really well but if you go deeper, it’s just not clicking. The first million was a party round and now those investors aren’t really responding and never really pushed the team to get beyond the problem definition from the original pitch. Given our model of making 8-10 lead/co-lead seed investments per year, getting behind this team doesn’t mean throwing $200k in, betting that at worst it’s an acquihire, but rather having the conviction to write a $700k+ check. Not a good fit so when we see these we typically pass quickly.

Too Hot: Early, but Delayed, Traction

Ooh, these are tough ones. This startup usually has a chart that’s up and to the right, but with just 2-5 months of data because it took them longer to find product<>market fit than they originally anticipated. The best Series A investors are telling them there’s lots of potential here but would want to see 6-9 months of data to better assess cohorts and repeatability of whatever seems to be working. So the team is off to find some more money beyond the 25-75% that current investors are willing to re-up for.

It hits our inbox and there’s a lot to like. However after going down the path on these a few times we’ve actually become less excited about entering at this midway point. First, it can be really hard to tell whether growth is actual traction or just a mirage. Second, the existing investors have already built a relationship and influenced the cadence of the company, whereas we like to have a chance to see the journey from the beginning. And third, the founders and current investors often overestimate the value of what’s been created so they’re seeking a meaningful step-up from the seed round (for example, an uncapped note at a small discount to the A Round). As a result we’re declining the majority of these conversations unless we really understand the market vertical and the founders are familiar to us.

Just Right: Team Delaying an A to Bet on Themselves

Every once in a while we find the second seed opportunity which is JUST RIGHT. It involves a team which may already be able to raise an A Round, or is trending towards one, but after assessing their startup, has decided to put some more money in the bank and push out the next raise. Maybe they want to hit some quantitative milestones which will give them better terms. Or, even better, they have some hypotheses to test out and prove before they feel comfortable committing to an extended plan. Our investment in ManagedByQ kind of looked like a Just Right.

In fall 2014 the Q cofounders Dan and Saman were already fending off Series A VCs who wanted to start poking at their data. But despite the inbound interest, they felt Q wasn’t ready. Operationally they sought to ensure they could scale supply to meet the demand they were seeing. And after launching in NYC, the team wanted to really understand what it would look like to expand into other cities – the speed and cost of success. So we led an additional financing which gave them time to accomplish these goals — in fact to exceed them by launching into Chicago before the A Round was even completed. And as they recently announced, this momentum and confidence helped them put together a plan they felt great about — to the tune of a $15m Series A!

While these situations are rare – and sometimes we need to source them proactively – man, it’s exciting to see. Not Too Cold. Not Too Hot. Jussssssst Right.