A lot of good advice was packed into the Seed Series of 2019. Here is our first set of key takeaways from interviews with leading seed investors as we shift into 2020. We begin by taking a look at the early days in seed with Jeff Clavier, followed by Susan Lyne who discusses the female consumer. Then we listen as Ted Wang talks about Series Seed documentation as Eric Hippeau provides tips about supporting startups. Follow on funding is explained by Iris Choi and James Currier tells us about network effects. This is a busy time in seed.
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Seed is super collaborative. A majority of seed investors will engage with a broad range of seed funds to co-invest. Seed, the most collaborative round in venture funding, is also the funding round with the most unknowns and the biggest risk. A core role for seed fund managers is to help their companies with fundraising, so seed funds seek out the managers for follow on rounds. And early stage investors want a relationship with seed investors in order to get exposure to the best companies.
“We always co-invest. We’re big believers that syndicates add real value at the seed stage to get various skills, experiences and relationships,” said Satya Patel, Homebrew co-founder.
Founders first. Seed funds are all founders first. This is pretty intuitive as you rely on those running the business to execute.
Traction. Seed funds are largely not traction focused because it is too early to measure traction, but they like to see that customers appreciate the value proposition.
Highlights From The Seed Investors
On the wave of new funds
“I think this is a natural progression. We shared our playbook. We gave out the sense that it is easy to raise funds and build a firm. Your job is to return cash 4 or 5 times. I have a hard time seeing all 600 firms being able to return capital. If you are in the right deals, you can do well.”
On the early days in seed
“First Round and True Ventures had raised their first fund. True Ventures and First Round had a team. I was a solo GP. Mike Maples (Floodgate) started around the same time. In 2008 and 2009 we were working together as a group of five to seven firms, and syndicating deals. I remember when FitBit raised a $2 million seed round which was a big deal. That now would be considered a small seed.”
On exit ratios
“About 30 to 40 go bust, 30 to 40 return cash, and the final third return 4-, 5- or 10-x. Some companies will return the whole fund. Big exits are the power law of venture. Fitbit and SendGrid returned the fund once or twice. Those are the homeruns you need.”
On the female consumer
“I’ve always been focused on the female consumer. Women are the dominant consumer, we always have been. We are responsible for 85 percent of commerce, and not just the obvious areas – fashion and beauty, which I think people expect. Women make the final decision on what house you’re going to buy, and what health plan you’re going to use and a hundred other things. So to me, the idea of backing really smart entrepreneurs who intuitively understood the end-user, that female consumer, was going to be a competitive advantage.”
On female fundraising
“I think the issue is pretty simple. This is an industry that has always run on relationship networks. You get in to see a great VC, or a team of people because you get a warm introduction. If women are not part of your network, you’re just at a big disadvantage, but I do think that’s starting to change. We’ve seen a lot of legacy VCs add a female partner this year and I think that’s in part because there’s been a lot of noise about it, but I also think it’s because they’re starting to realize that they could be missing out on significant companies if they don’t have those networks, so there’s more of a focus. And I think with initiatives like All Raise, you’re going to see more of that.”
On the pipeline issue
“We have seen over 4,000 companies since we launched. So there’s clearly not a dearth of companies being founded by women. We haven’t actually met with all those, but well over 4,000 have reached out to us or been introduced to us. That’s really limited by the fact that we are two partners and there are companies we miss, so I know there is no lack of companies out there.”
On raising a larger fund
“The reality is the number of target companies is actually the same as our last fund. We are reserving more money for additional investments. What’s happening in the market has really changed since Aileen raised that first fund in 2012. The size of the rounds were much smaller, and companies would tend to either exit or go public much more quickly than they do today. Now that the private capital period has been extended and we have exposure to these companies for a lot longer period of time, that gives us investment opportunities that we’re going to take advantage of.”
On the Series Seed documentation
“The reason we did it was that for a long time, if you want to do a seed investment, the only document choices were the full-blown Series A documents, which were just long and there was no sort of shortcut to solving that problem. So people did convertible notes, but convertible notes came with some problems. So my goal in drafting those documents was to have something where the legal fees would be the same as in a convertible note, but you could deliver equity to the investors.”
On the platform
“Every company we invest in is plugged into this platform, and there’s essential services that you need. As soon as you raise a round, the first thing you want to do is hire more people. Because all these companies are just in the market, or about to go to market, you need to be better known, so you need communications and marketing. Then you want to make sure you do not repeat the same mistakes everyone else has made. You’ve got kind of best practices. The platform is also a communications platform with colleagues who are founders of other companies. What we try to do is populate this platform with real practical advice and resources and help that will make you smarter and make you utilize your money better; not go after customers where you should not be going and not pay more than you should for customer acquisitions, and what people have done so you don’t repeat the same mistakes. All these things seem kind of almost boring today, but maybe not as obvious if you’re a first-time entrepreneur.”
On whom to co-invest with
“Literally, pretty much everybody. Certainly all the top-tier firms in the valley or San Francisco. All the VCs in New York we have worked with at one time or another, and that is really no concentration. We are very collaborative and don’t have any preconceived ideas about who to work with or not work with, but we do like to work with top-tier VCs.”
On raising that Series A
“What we often say to our founders when they raise capital from us is, ‘This is the last capital you will see until you do something incredibly worthy of a Series A.’ ”
“A company we’ve invested in will come to me and say, ‘Hey, I’m raising a series A.’ And my first question is: ‘What is the narrative for your Series B? Let’s work backwards from there.’ So what we really care about is not just that our companies get funded, but that whoever is funding them is the ideal partner, because either they have expertise in the space or they have something extra above and beyond the capital they’re actually bringing to the company.”
On ‘hack value before you hack worth’
“There is a right time to be focused on growth as a metric. First you have to make sure you created a product that resonates with your target demographic, where they’re willing to actually engage and pay for it in some shape or form. I think that’s a perspective I have which is a little bit different than a lot of early stage investors. Because I’ve seen what it means to actually grow into operational discipline in the future, there are fundamental values that you need to have in place upfront.
“We have the concept of Intelligent Growth, where you’re not just revenue chasing. You get into trouble because you’re basically buying your customers, and then they churn. Rather, from the very beginning having something that is so fundamentally compelling about your product that your customers would be willing to pay for it and not just churn off.”
On follow on funding
“A lot of funds like to say we do 50 percent first checks and 50 percent for reserves. But because our fund size has gone up over time, our reserves are now comparable to our fund-two size. We have to be much more intentional, it can’t be an afterthought.
“Having a really great relationship with the future investors in our companies is something that’s important to us. In the same way that companies have a product roadmap, we feel very strongly that a company should have a fund-raising roadmap. We feel like it’s a mistake if you’re not intentional about knowing how much you are raising and why.”
One of the areas in which there is money to be spent acquiring companies is private equity. Selling to private equity is very different than selling to a strategic. They value growth to a certain extent, but what they really are prioritizing is your ability to get cash flow profitable.
On network effects versus viral effects
“Network effects are about defensibility and retention. Viral effects are about growth. Network effects are not about growth, it is about retention, about keeping people in. Network effects reduce churn.”
“We also want companies to grow very quickly, because fast-growing companies attract the best people and have more opportunities to do more creative stuff. Fast-growing companies means they’ve hit on something important to somebody. That is different from the sugar-coated viral growth of 2004, which people think of as growth hacking. We were very good at that, at that time. We did a bunch of that between 1999 and 2007 and invented a lot of A/B testing methodologies and a lot of viral loops. But since Facebook shut down Facebook Platform, virality has gone to near zero across the digital world.”
On supporting the creative product culture
“We need a stronger voice in this community about the creative product culture that brought us here originally and, as the waves of money culture flow over us, figure out how to create a protected area for entrepreneurs and founders who care more about the product and customer than they do about money. It is just a switch, money can be second. You need fuel to grow, to attract talent, to build the product, but that’s not the goal. And if it’s money first and creative to get the money, that’s really different. It’s really sour.”
And On Apple’s market cap
“If you look at Apple’s market cap, it was $42 billion. Then they added iMusic for sharing music, and then they added iOS; those were their first two network effect products. Then their market cap went up by 10 or 15 times. Before that they were selling hardware and software.”
Main photo courtesy of Frank Vessia via Unsplash.