Both Sides of the Table - Latest Comments in VC Seed Funding is Dead, Long Live VC Seed Funding!

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Astor Place — Tue, 15 Dec 2009 16:17:01 -0000

It's 100% 'disruptive' for sure. Without openly discussing my product at the moment since I cannot right now, I'm sort of like a person in a position where the world is using gramophone LPs while I possess an 'MP3-filled iPod'. Although this is the case, it still takes time to 'convince' people who still have no clue how MP3 would rule the industry which may seem amusing a few years down the road. I can also make it useful immediately without waiting for the rest of the world to adapt to it.

Yes, I did approach other VC's. But the truth is it would take much longer to build the company and networks from scratch than to collaborate with an existing portfolio company with years of experience and connections. It would benefit me too, rather than me competing with him and maybe pushing him out of business. It could trigger a defense mechanism of frivolous lawsuits from companies that won't accept that technology moves forward - not backwards. Besides, I think diplomacy is a better gesture than the 'thrill' some business owners may have of leaving a trail of broken companies behind... I am in business and feel no joy when others fail, although it doesn't block me from doing my own thing.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sat, 12 Dec 2009 14:03:30 -0000

Yes, probably too brash. Better to approach them saying you have a disruptive technology but not saying that their portfolio company is screwed. If your product is truly innovative and disruptive why not take it to other VCs rather than the one who has something to lose by your presence. Good luck.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sat, 12 Dec 2009 14:01:36 -0000

Your assertion isn't correct. It's not impossible to raise funds pre-revenue. Usually you need to start off with angel investors but many seed investors will invest pre revenue for the right idea / team.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Astor Place — Fri, 11 Dec 2009 10:52:21 -0000

So basically, its nearly impossible to get investments for a fully new project with no revenue history? Such a pity... I have friends working on some very interesting software projects that sound more promising to me than a lot of projects I find in VC portfolios. This means innovative people like this have zero chance to move forward unless they have their own source of funds?

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Astor Place — Fri, 11 Dec 2009 10:47:52 -0000

I just contacted a VC about their portfolio company. I have a product which would make their portfolio company's product obsolete, so I proposed a possible collaboration. If my product reaches the market they would stand the risk of losing half of their annual revenues within a three year period.
Was my suggestion brash?

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Ruth Voughn — Tue, 03 Nov 2009 12:21:21 -0000

Great post, highly interesting and very explicit. Keep up the good work. For more interesting news and startup reviews simply click http://www.vcgate.com/Start...

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Derek Licciardi — Wed, 28 Oct 2009 11:05:31 -0000

That's certainly been my experience to date. If you look at angelsoft.net's VC and angel companies, you'll find that almost all of them are post seed investors. Angelsoft.net has a category for "concept only" and "working on prototype" stage companies. Those two categories are routinely left off the list of companies any given VC/Angel group will invest in.

Consider the dilemma. I can sit here and tell you that my idea is the greatest idea since sliced bread but most VCs will say great, where's the prototype or are you cash flow positive yet? I had one group from Nashville, TN that checked the "concept only" box tell me that they expected to exit in two years and only invest in companies much farther along that didn't require additional rounds of funding. Even when the VC/Angel says they invest in anything, they may only be casting a wide net, giving lip service to the stuff outside their pattern of investing, in hopes of not missing the next Google.

What if your prototype needs more than what one person can provide? We're developing a next generation massively multiplayer game. Creating a prototype that clearly defines how we are different from say World of Warcraft requires a minimum level of functionality from a small but diverse team of people. I'm in need of art, programming, sound and writing and while I can do some of that work, I'm not good enough at all of it to build a passable prototype that won't get summarily dismissed. (I have no artistic skills in me at all) Hence, the need for a small seed round of funding.

I have yet to meet people in the midwest that are willing to help get a company such as mine off the ground, the first investor if you will. If your prototype can't be built by one or two people in a garage after your real job hours then there's simply no way your business gets off the ground. Perhaps the midwest is so conservative and I'm in the wrong place; I don't know. Where's the VC/Angel money that is simply there for these high risk very early stage companies? I'm afraid too many ideas simply die on the vine because the owners were not lucky enough to get in front of the right investors. Why hasn't this sort of investing been institutionalized? The process of finding an investor right now seems incredibly inefficient. All of the different types of investors are mixed in together making it incredibly difficult find the right type of investor, to the point where if you do find one, you can only think that it was pure luck and persistence that got you there. There has to be an easier way.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Allan — Tue, 20 Oct 2009 17:24:15 -0000

Nice post - really looking forward to that next post on referencing VCs. Thanks for curating a useful blog.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

davemc500hats — Tue, 20 Oct 2009 07:24:43 -0000

energizer bunny... LOL :)

great post mark & interesting set of perspectives to discuss.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Mon, 19 Oct 2009 18:48:46 -0000

My view, you always raise the highest quality money you can. If you're first time and you can't get the A team but you're convinced you have a great idea then you look at your lesser options. Only scenario where I wouldn't take the money is when the terms are so onerous that being successful doesn't add enough to you as an individual. At that point I tell people to find another idea (or possibly another profession). Thanks for your question.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Mon, 19 Oct 2009 18:46:57 -0000

You make some good points. On convertible debt I would note that it is in the entrepreneurs best interests PROVIDED THAT it doesn't mean you chose a less quality investor to get debt. Otherwise I'd take a priced round from the right angel / VC. I think it is almost always in the investors benefit to price it and frankly I personally believe it's the fair thing to do.

If anyone wants to know more on this topic please click on the "Pitching a VC" tab above and I wrote two posts on angel funding.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Mon, 19 Oct 2009 18:44:09 -0000

I've seen it first hand! And you guys somehow still find the time to run industry events. I need to work on my time management skills ;-)

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Mon, 19 Oct 2009 18:43:09 -0000

All great points. Thank you. I think point 4 is important and I didn't mention, the grouping of angel groups has made it easier in some cases for entrepreneurs to get access to a diversified group of angels taking away some of the angel risks.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Alan Warms — Mon, 19 Oct 2009 12:26:55 -0000

As an entrepreneur, I was happy to do a seed round that was convertible debt - why? Because it was true seed in that I was just starting the business, and I didn't want to take any dilution at that level of value. Doing the convertible aligned my interests with the VC because the more progress I made, the higher the Series A pre value and subsequently the higher the value the convertible came in at (which was a discount to the A). My attitude is always the market is the market - if you can't raise cash you shouldn't raise cash.

One item I put in my deal was a 30 day exclusive negotiation period after which it opened up. Key for me in any case was a long history with the VC - so it wasn't a cold deal in any case.

I don't understand the main objection about "what if the initial VC won't fund" the key is to make sure you have the right to go out and be able to say, "I got a term sheet but wasn't happy about it." The fact is if the initial VC won't fund under any circumstances there's a very good chance the deal should be killed - and if you as an entrpreneur don't agree you should always be able to raise Angel and buy the VC out and you're no worse off.

Great post!

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Howard L Morgan — Mon, 19 Oct 2009 10:21:32 -0000

Mark:
Excellent post. I wanted to strongly second the notion that we can and do (at FRC) stay very engaged with our companies using modern tools - email, blogs, wikis, etc. We also find that the community of all our seed stage CEOs (and CTOs) help each other through several mechanisms we've created. So some of the workload is crowd sourced. This lets us do as many deals as we have without (we hope) giving less help to each of them.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

chrissheehan — Mon, 19 Oct 2009 08:08:59 -0000

Mark, a good balanced blog on the subject.

As someone running an active, large angel group (with wonderful members like Dharmesh Shah) and a couple of small VC co-investment funds, I’d make the following points:

1. Many VCs in my experience do some level of seed investing. However, most VC firms “sweet spot” is later in the company building cycle. This is due to increasing fund sizes over the last 10 years, making it is harder to write small checks and devote the time to seed/early stage. Its also a function of comfort zone; seed/early stage investing/company building requires different risk tolerance and often skills, as you navigate very uncertain waters.
2. Often (not always), the larger VC firms seed deals tend to be with entrepreneurs they know and have made money on before. The seed deal may/may not involve help incubating the business in their office. Nothing right or wrong with this; just an observation.
3. Overlaid with the above trends, the cost of customer discovery/validation along with product development has dramatically come down for many web based and tech enabled businesses. (Maybe not necessarily so for really hard engineering problems, like building the next gen database, router, network security discovery tool, etc)
4. This has widened the seed/early stage capital gap. In response you see angel groups morphing their models to build a brand, reputation, and sustainability to service this area. That is what we have done at CommonAngels; another example on the west coast would be Band of Angels.
5. In addition, you have seen a new set of VC firms raising < $200M, sometimes considerably less, with the stated strategy of investing in seed/early stage. FRC, True, USV, Maples, etc are all examples. Very good firms who will work actively with seed stage entrepreneurs.
6. The larger firms are all thinking about what their seed stage strategy should be; this is nothing new, its just that we are in a particular point in the cycle where more attention is being directed at this. Some are increasing their seed deal velocity, others formally announcing programs. Both Chris and Mark’s comments are relevant and accurate, and I advise entrepreneurs to think carefully about the pros/cons of taking money from these programs. Personal relationships are so important.

Chris

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sun, 18 Oct 2009 23:23:59 -0000

for sure.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

Chris Yeh — Sun, 18 Oct 2009 21:45:12 -0000

I love the idea of calling the First Round Plus Prorata Capital (FRP2C)!

If you can convince a great VC to devote the time to a seed stage deal, I think it's a great idea. It's just been that historically, bigger VCs that did seed deals took the option approach, as opposed to the high-involvement approach.

If you can get a good seed/A investor who is willing to put in the time AND will stick with you in tough times, that is truly the best of both worlds.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

shukilehavi — Sun, 18 Oct 2009 21:21:29 -0000

Mark, I totally agree!
With that said , I reserve my right to challenge your opinion over cold beers someday :-)

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sun, 18 Oct 2009 19:37:37 -0000

If Ad.ly sold for under $10 million I'd be disappointed but if that's what management wanted it would happen. And hopefully the next company this amazing group of entrepreneurs builds they'll first come to me. VC is a long-term business built by earning trust over time from skeptical people who have either been burned before or know people who have.

That said, if the company was killing it and the team wanted to sell I would also look for other options to make it win-win to not sell early.

re: Eagles, yes, I'm embarrassed. It was a very disappointing showing.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sun, 18 Oct 2009 19:35:08 -0000

Hey Shuki, you know I love you and what you guys are doing, but I respectfully disagree. You guys have a PHENOMENAL set of investors so I understand why you feel the way you do, but I would point out:

1. Having 20 people can make administration hard and can lead to problems in down markets when 4 or 5 want to participate and many people move too slowly.
2. Having 20 people can scare away potential future VCs who worry about the downside of having too many individuals involved. I just received a call from an angel a couple of months ago trying to get my support to help her sue her company because they were doing another round of financing during difficult times. She didn't want the company to raise more capital and she didn't want to put it in herself. Not that I blame her, but it is experiences like this that scare away some VCs.
3. Getting too high a valuation from angels can be poisonous. If you don't grow into your valuation you can run into problems getting professional money later. VCs are reluctant to want to come in and cram down your uncle, aunt and father-in-law. So sometimes when they hear that a prerevenue company did a $10 million post money angel round they just don't even bother putting time into evaluating the company.
4. Control is important, but so is advice on how to build out the company. It is a finely balanced tension, I know. You want control but you want sparring partners. The best VCs allow you the room to run and operate.

But ... you guys rock so I'm sure you're not feeling my points personally. I just don't want other readers to not hear both sides of the argument. Thanks for your contributions to the debate.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sun, 18 Oct 2009 19:28:28 -0000

When I founded my first company in 1999 there were almost no resources. And worse many entrepreneurs didn't share information with each other. I'm a big fan of having VentureHacks, VC blogs and even The Funded. It keeps everybody more on their toes. I think transparency is always like democracy - it's not always perfect but it's the best way of organizing.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sun, 18 Oct 2009 19:26:46 -0000

Well, I think you would have been right 2 year ago but First Round raised a new fund and my sense is that their strategy is to follow more of their deals than they did in the past. Maybe we should call them First Round Plus Prorata Capital. They recognized that they had so many great early-stage deals that they didn't want to get diluted on them.

I agree that it's not VC vs. angel but rather the individuals investment track record and that of the firm. My firm, for example, doesn't have a historic record of seed deals until I joined but THEY DO have a reputation for not quitting companies easily when things get difficult.

If I were still an entrepreneur my preference would to raise from someone who could do the next round provided they didn't have a reputation for bailing out unnecessarily. That way if you hit an unexpected nuclear Winter you've at least got capital on your sidelines.

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sun, 18 Oct 2009 19:22:39 -0000

First, to do more seed deals you need a new model. It can't be the typical VC approach of seeing you every 45 days or so at a formal board meeting to get an update on your progress. With modern tools of communication I'm pretty regularly in touch with my companies and the board meeting is a change for longer-term strategic planning or getting a group of investors harmonized.

Clearly you can't have unlimited numbers of investments, but as I point out First Round Capital and True Ventures seem to be able to manage in this new model. Check out their websites and you'll see a large portfolio.

WRT signaling if the VC doesn't follow, let me not mince words - it's a problem. But I wanted to point out that where it was previously almost a deal breaker for me I've come to realize that it's more nuanced. I'm looking at a GREAT company right now that has been orphaned by it's seed VC. I think they just never built the right model and don't have the right interests to support the company. I have to imagine a few other VCs are starting to think like me - I'm never that clever that I'm out in front ;-)

Re: VC Seed Funding is Dead, Long Live VC Seed Funding!

msuster — Sun, 18 Oct 2009 19:18:20 -0000

I think the most dangerous is what you call the dis-involved. You have the signaling problem you mention above and they're not helping with the business or fund raising. A VC that tells you that they took an option in you and it's up to you to progress and raise money is worse the having a retail bank lend you the money. Obviously the middle ground isn't perfect, but it's better than no help!