Rolling Closes And A Twist On Exploding Offers

By now, we all know seed stage fundraising doesn’t happen in rounds – seed funding is a process — and it’s dragged out for many weeks, many months, and sometimes years. Founders and companies issue notes for debt which converts to equity when a round is priced by a bigger fund (most often), and those notes are usualled “capped” at some price. Likely, you’ve read about this before and/or can find more information on the intricacies of notes and capped rounds on the WWW.

I stumbled upon a lesson in raising Haystack. Because the fund is very small (like, really small) and because the LPs are mostly just individuals I know personally across the country, I can also raise the fund in a rolling model — though I can’t “split caps.” What I initially found — like a founder raising money — is that oftentimes people can wait a bit before committing to see who else comes in. No problem, but after a while, I realized it could encourage behaviors that are counterproductive.

So, instead, when someone approaches me about the fund, and there’s mutual interest, I politely mention that from the time we discuss any details, I give the person about one month to decide. It’s enough time to ask questions, poke around the web to learn about me, and to make a decision. I have now most certainly informed people after their month is up that I will happily save their name for the next fund. No harm, no foul — but I retain control and peace of mind. It sends an important signal.

Seed-stage founders could do something similar in an era of rolling closes. Instead of meeting millions of early-stage investors like me and trying to herd us like blind mice, why not put a clock on the offer? There’s so much seed funding going around, don’t worry about saying “no” to someone. It’s simple — you meet someone who inquires about your business. They dig in a little and explore. You gently suggest that your company policy is to give early-stage investors about 4 weeks from time = 0 to decide. After that, it moves on to a different “cap.” The key here is that one has to be totally comfortable with just walking away from an investor — and I’m writing this to underline the fact that oftentimes it is entirely OK to do so.

A founder I know well struggled for 8 months to just get $500k. Brutal struggle. Now, he’s in YC. When word spread, he had plenty of offers, of course. But, many of those people early didn’t invest, and he let them hang around the hoop. Now when those folks ping him, he’s quoting a higher cap. Time is money.

Deal Sharing Dynamics Among Early Stage Investors

A friend on Twitter recently requested a blog post, and I thought it was a good idea. He wrote: “would love nuanced seed stage view on dealflow and the sharing dynamics amongst early stage firms/super angels.” Well, here you go, with the caveat I can only (1) explain what I do, as that’s what I know, and (2) generalize a bit on what I observe, though can’t say so with absolute certainty.

I try to invest at two points in a company’s cycle. One, very, very early, too early for even the microVC funds to get involved. Two, when a round has come together, and I meet the founder who has allocated some space for individuals like me, even though a firm is leading. I’m happy letting the market dictate things for now, and this gives me a good deal of latitude to write different check sizes and swing early or late depending on the specific case.

In situations where I’ve decided to invest (whether early or toward the end of the round), I’ll ask the entrepreneur if there’s room left and if I can help fill out the round. Some times, the founder will be all set; other times, they’ll say, “sure!” In those cases, I first email the LPs in Haystack, as I’ve initially committed to the company out of a joint fund, and on occasion (though it’s rare), someone will like the option to invest more directly. Then, after 24 hours, I will email a specific list I’ve created of angels, microVCs, bigVCs, family offices, and foundations that I all know personally. There are about 45-50 people on the list. The criteria for being on the list is simple — do I know the person and would I feel comfortable sending a founder to them in the event there was mutual interest in meeting. (I’ve only had to remove one person from the list.) There are also cases where syndicating on AngelList makes sense, as I’ve written about earlier.

The reason I elected to create this email list is that because I’m investing so early, there’s not much data to work off of other than the fact that I’ve vetted the opportunity in some way. So, instead, I just email the list and everyone on the list gets the email at the same time. They’re free to act on it if they choose, or simply ignore it. Very lightweight. On rare occasions, something will be very tailored to another investor I know, and in those cases, I’ll personally reach out to that investor, but I’d say that’s happened less than 10 times.

After doing this email sharing list for about a year, it’s been interesting to see some patterns emerge. Most people don’t reply, as I’m sure they’re inundated with dealflow these days. Some people habitually love to meet new founders, and some bigger VCs like to meet to build a relationship early. Some people who follow-on an investment write back to say “thank you” or give feedback, and some just move on to the next thing. A few people will share back in sort of a reciprocal way, and some won’t. I don’t have any expectations around it because, at the end of the day, I go early and direct with founders and it’s all about getting them the right investors and dollar amounts once I’ve committed.

For those who nerd out on VC happenings on Twitter, you may notice lots of “small A” rounds ($2-5m level) getting done by the same cast of syndicate microVC firms quite often. I’d gather many of them share deals based on years of working together and relationships. Companies that raise these new “small A” rounds need runway to breathe, and when you unpack how these microVC firms are capitalized and their check sizes, it makes sense they collaborate often and work together on forming rounds. I’d also imagine, however, that there’s lots of jockeying and “hey, can you make room for me?” texts and emails going on to get into deals, and if something heats up in this environment with strong signals (say, the right branded investor, getting into YC, and having something unique), that company could raise way more than they need…there’s an oversupply of money for those companies, so they have to choose and or cut down peoples’ allocations. This is part of a challenge facing microVC stage, which I’ve written about earlier.

Ultimately, I’m more of a wallflower to all of this. I’m still learning. Sometimes I time things well or move early enough, and sometimes, I’m a shade too late or just not making the cut to get into a deal. This is also why I spend time speaking and writing about what I’m interested in, with the hopes that some founders will reach out to me, even if early, to talk and brainstorm. I may miss things this way, but for now, it provides calmer waters to swim in.

Apple, Marketing, and Black Culture

I watched a few videos of MLK yesterday before going to bed yesterday, on MLK day. They were queued up in my email and social feeds. This year on MLK Day, I noticed more people sharing videos and images of MLK, much more than in the past. Maybe with better and cheaper data coverage, more phones everywhere, access to YouTube and other image galleries, and social networks allowing not only more customized distribution but also different channels (and therefore content) to capture our attention. I think most people who could took some time off yesterday to be with friends and family, and I also wouldn’t be surprised if they watched an MLK video that was shared or read up on some shared articles.

Then, I noticed someone shared the homepage for Here’s the screenshot, below. Apple is a company that has soul, in the sense they put meaning into their products. Now, not everyone may like that approach and this is also marketing, but it’s effective marketing:

Screenshot 2015-01-19 19.29.44

It reminded me of the 2014 Holiday Season ad by Apple that showed a young, black girl using an iPhone and Mac products to upload old audio from her grandmother and then using Garage Band to remix the sound. The result is a gift for her grandmother that reminded me of the Private Press segments used in DJ’s Shadow’s album, “The Private Press” — click here to hear a sample of that. Powerful, powerful sounds.

It wasn’t too long ago that race and Apple was in the news. Remember when news started to leak that Apple would buy Beats by Dre? Everyone had an idea about the angle, the rationale — some liked it, some thought it was dumb. Most shocking to me were the sneers when it was floated Dr. Dre could be an executive at the company. Well, why not? Funny that was even an issue. But now look back at some of the best Beats commercials out there — I picked this one from Colin Kaepernick (see below). This is what Apple is also interested in, expanding from fanboy culture into different products (like headsets) to put their sensors into (like Apple Watch, etc.).

And, then, I was reminded of Tim Cook’s October op-ed in Bloomberg BusinessWeek, where he shared his own situation but also tied that struggle with the struggle of minorities in general, writing:

Being gay has given me a deeper understanding of what it means to be in the minority and provided a window into the challenges that people in other minority groups deal with every day…I don’t consider myself an activist, but I realize how much I’ve benefited from the sacrifice of others…We’ll continue to fight for our values, and I believe that any CEO of this incredible company, regardless of race, gender, or sexual orientation, would do the same. And I will personally continue to advocate for equality for all people until my toes point up.

All of this, in just the last 4-6 months. It isn’t discussed often, and maybe it’s marketing, too — but there’s a pattern here, and a clever one at that. Apple is using powerful images, quotes, videos, and other forms of media created by black artists and orators. And, while it’s great PR, I also believe it’s quite genuine and surely consistent. The company is obviously intentional with how it interacts with the public at large. Many companies may try this kind of PR, but they wouldn’t be able to pull it off. When you step back and look at the language in the letters, the imagery and messages on their site, the cultural strategy in acquiring Beats, and the 2014 holiday video spot, the threads tie together tastefully to portray a different side of Apple not often covered in the tech blogs.

Running A Fundraising Process

A concept that’s come up often lately in conversation revolves around “running a process” in fundraising. Even though I’m a small number on the cap table for any company I work with, my #1 goal is to help the team evaluate existential risk, which usually comes down to funding risk. Eventually, some get to the point where they’re ready to go for the next investment round. It’s an exciting time, but the change in game dynamics from seed to institution is so drastic, I see lots of founders getting tripped up, wasting precious time, enduring extra mental taxes, and most tragically — losing control.

The CEO position is about control. The most successful founders I’ve seen (with respect to being efficient at fundraising from bigger institutions) run a process. They have a game plan tied to a calendar. It’s like Bill Belichick who coaches the New England Patriots. They have a start date, and an end date. They over-communicate their timelines to prospective investors (in a friendly way). They’ve already socialized things before the process even begins. They send subtle reminders. And, they’re unafraid to cut off a discussion if diligence takes too long or investors are hovering around but not digging in. Their entire body language, email language, and overall communication style oozes “I am in control.”

The cost of not creating and executing a process can be brutal. What should take a few weeks could take months — or worse, end in a bridge situation with existing investors. It’s hard to regain any deal momentum (should one be lucky to have it in the first place). It can sow doubt and worry among current team members, e.g. “Hey, do you think ___ can actually raise the next round?” It can even dampen future discussions if the company has to go back to a firm where the process wasn’t there or fell apart. Investors are implicitly looking to invest big money into who they perceive to be leaders — leaders with a plan. There’s no playbook, so the trick is to create one’s own playbook.

I’m not theorizing here. I’ve seen this happen a bunch now. There’s a pattern. This is likely one thing (not the only thing) that starts to separate the haves from the have-nots. Plan accordingly.

How I Use Twitter Lists

I’ve been talking a bit more recently in private conversations and a few tweets about Twitter lists, and I was surprised that people would ask me “How do you use them?:” or more interestingly, “What are they?: Ugh, Twitter UI regression. There’s a long history around “Lists” that isn’t worth going into, but essentially, Lists are user-generated lists of accounts — either public or private — that provides a different feed to the user, separate from their main feed. For instance, someone can create a list that includes @justinbieber without having to explicitly “follow” @justinbieber.


It’s a bit confusing. Twitter Lists are a power user product, and I’m sure many people who use them do so in different ways, so I’ll share mine briefly:

  1. I keep about 4 public and 4 private lists:
  2. One of the private lists is max of about 100 accounts of friends, colleagues, or feeds I don’t want to miss — for me, it’s the max number of accounts I can really pay attention to without feeling overwhelmed. Most of the time, I’m in my main feed just seeing what’s most recent in the last hour.
  3. I will scan the other lists if I have time, but it’s really a scan. Could be a few seconds. I don’t visit the web directly much more — I see the web through Twitter. And, as that increases, creating lists (like I recently did around cyber attacks) helps me quickly get up to speed on what’s happening. Think of it like the print WSJ front page that has those two columns of headlines on the left — lists are those, but entirely customizable.

Ultimately, Twitter lists are a great feature, but they’re hard to access and use (it’s even hard to build a list, to be honest — it takes time), and just like DMs before it, or the newsfeed in general, the overall decline in information density on Twitter web is why I don’t use Twitter native products anymore. On mobile, I use TweetBot (great list views) and TweetDeck in the Chrome Browser for my laptop, which also has great list views. I’d probably be blind without lists.

Challenges Facing The MicroVC Model

Lately, I’ve been thinking there are some real threats to the microVC model (say, sub $50M funds). This isn’t to say some won’t do very well — and especially the recent news from Dan Primack in FORTUNE about the first Lowercase fund, which will soon be the stuff of legends and, scarily, isn’t done collecting returns just yet. So, Sacca took about $6-8M and turned it into well over $1B.

Could that happen again? It could, but the glut of small funds (full disclosure — I am part of this problem!) need to show returns to survive. And, therein lies the rub — returns. There are some things going on in the early-stages that threaten the return profile of funds, such as:

  • Pro Rata Rights: This has been discussed at length over Twitter, on the blogs. Dave Lerner has a good summary here. Essentially, early investors who are granted pro rata rights often are asked to relinquish them at the next round of financing. In my experience, this can be about 18% dilution per round. If the model of a fund is driven by returns from the outlier (should a fund be lucky to have an outlier), the lack of strength in retaining pro rata can directly impact IRR and overall fund performance.
  • YC Alumni and YC Itself: A company can take $120k or so from YC, find product market fit, and go right to a large VC firm. I’ve seen it happen a few times. Amazing companies in those examples. Elsewhere, the strong network effect described by Elad Gil in his post allows this new and growing network to fund current students from alumni tithings, except here the investments are direct and can be quite meaningful. Going from seed to A to B for a YC founder or alum as an investor could show unrealized markups of 20x in about a year (I’ve seen this). The point here is — they have access before the micros.
  • Crowdfunding: This has been written about often. A good source here is Matt Witheiler’s blog “Bits of Cents.” Briefly, founders can use crowdfunding platforms like Kickstarter to test demand, take a range of pre-orders, and then go right to a big VC if there’s a strong team, market, and evidence of consumer demand.
  • Syndicates: This is a form of crowdfunding on AngelList, but worth mentioning separately here. Even raising $500k right now can take lots of time, and while it’s not totally easy, the money is everywhere. If an individual investor with a Syndicate wants to just put in $25k and has enough in the Syndicate to fill out the round, the founder may elect — in the interest of time — to just take the money, the one line item from AngelList, and go forward. Here, speed is the issue — instead of meeting a bunch of micros, just take the initial money and see what happens.
  • Big VCs and Companies With An Appetite To Go Early: VCs are incubating companies. They’re doing seeds in great teams because they have bigger funds and money needs to be put to work. A great team will be funded. Oh, and big companies are playing, too.

The common thread here is to isolate groups, dynamics, or vehicles that have access to early-stage deals before micros can get in (or want to take the risk). There are some glimmers of hope for microVC, however. One, small funds can be more nimble, creative, and cobble together returns as it’s easier to return smaller funds. Two, the “Sacca Effect” will surely ripple not only among GPs (it may have already), but also LPs who will start to see the hidden potential of strategically placed micro funds. And, three, the microVC firms are getting bigger (some of them) and now leading rounds around $2-3M, which is new Series A. I go back and forth on this myself. Sometimes, I think investors can get trapped in seed, yet sometimes I think, this is where all the important relationships get formed.

The Story Behind My Investment In eShares

For most of the second half of 2014, I tried to find early-stage companies doing interesting things with smart contracts. I was lucky to find one (still very early), and I’ll write about that more later in the year. Then, another thought occurred to me — this is what eShares could do. So, I searched AngelList, saw a mutual friend invested, asked for an intro, and emailed back and forth with Henry until he agreed to meet.

It took about 4-6 weeks to meet. When I walked in, he said they closed their round with a larger investor (which is why he was so quiet) but had a bit of room left for a few individuals. I waved my hand. He laughed.

For anyone who has had to deal with startup stock certificates, shares, and dispersing (or receiving) funds upon a triggering event, there’s a lot of complicated, messy, and oftentimes confusing rules and procedures. In the abstract, I’m sure we all understand the pain. While many people want this stuff on the block chain (vis a vis smart contracts), it may take time for the technologies to mature to the point where a company like eShares verifies the certificates and transactions, not entirely peer-verified. eShares has that chance to win the ledger business.

Months after investing, I was talking to Henry offline about stock certificates, and tweeted this out. That tweet, surprisingly, turned into a firestorm, ended up in a great blog post by Henry on Medium (over 50k views), Fred Wilson wrote about it, and TechCrunch covered the issue thereafter. That has the makings of a real problem startups (founders, employees, investors) face collectively, and eShares may just be the right idea at the right time to help solve it.

Post-Seed Conference Wrap-Up (and Videos)

About a month ago (thought it feels ages ago!), as part of my work as a venture partner with Bullpen Capital, we helped organize the inaugural “Post-Seed Conference” in San Francisco (Vator and Venture51 were co-sponsors). It was a blast, and despite the rainy weather and non-SOMA location, over 400 founders, operators, investors, and members of the tech and business media attended to cover the event.

I wanted to wrap-up the event (yeah, a little late, but…) with three brief takeaways: (1) There are more seed investors and firms, and therefore, more seeded companies; but (2) there aren’t more traditional funds, so while a good number of seeded companies find product-market fit, they often find the larger, institutional, and traditional venture capital funds, many of whom would rather make larger bets on (often) de-risked companies; so, as a result, (3) there’s a great opportunity to select those companies in the “Post-Seed” stage. A new stage? No, a small A round done seed-style — and help them go from start-up to scale-up and raise a super-sized A round.

Finally, I have the full videos (see below) from the event (and pictures, if you’d like to download). First, click here to see videos of panels which include Josh Elman, Hunter Walk, Mike Walsh, Gil Penchina, Connie Loizos, Eric Newcomer, Alistair Goldfisher, Villi Ilchev, David Siemer, Patrick Chung, Ryan Swagar, Ash Patel, Duncan Davidson, Ryan Floyd, Larry Marcus, and many more.

Second, I wanted to highlight (below) the four Keynote Fireside Chats at the event. I watched all of these backstage (except for the one I was on stage) and they were all stellar. First, Cory Johnson from Bloomberg West TV sits down with Chris Dixon from Andreesseen Horowtiz and walks through Chris’ career as a founder and angel investor, as well as Dixon’s comments on today’s seed investing climate; next, I sat down with Naval from AngelList and talked about Uber in India, the talent crunch today, Syndicates on the platform, and more; Bullpen founder Paul Martino kicked off the event with none other than Keith Rabois from Khosla Ventures — any interview with Keith is worth watching, especially this one where he talks about his unconventional investment pace as a big VC, his new company HomeRun, and more; and finally, Vator founder Bambi Francisco sat down with her old friend, Peter Thiel, for a long, honest, wide-ranging discussion on startups today, investing, and education. (I’ll write more about these videos soon.) I hope you enjoy these and if you’re an early-stage founder trying to navigate the waters of financing today, hopefully these conversations will provide some insight into today’s market conditions.


Common FAQs

In conversations with friends in the community over the last 4-6 weeks, the same questions seem to come up, so I thought maybe I should just blog a quick “FAQ” in case many more people are also interested in the same topics — alert, this is all highly subjective, and usually what I relay to others in person, so I’ve just written it down here — much of it could be wrong or misguided. Fair warning:

“How should I think about investing in startups?”

Many people have fallen into liquidity over the past few years. Now, what to do with is? I’ve been approached by tons of friends, peers, etc about this. Here’s my general response, then followed up by something specific I believe in: Talk to friends first who have experience with wealth management. At some point, you may elect to put aside a small percentage for investing in startups. Think about whether you’d like to do that directly or through another fund. It’s really hard to know what investor or what fund is going to catch the best investments. The past is not necessarily indicative of how the future will shake out (with respect to funds), yet in most funds who are fortunate enough to return funds, there’s usually one investment as an outlier which drives all the returns. There’s a lot of randomness and luck and I’m not sure how safe investing in this category is, so just do so if/when you’re ready to roll the dice. (For those who want to start funds, just be prepared for a lot of legal stuff and accounting stuff, and usually those things are uneconomical (ie foolish) when dealing with a small fund. However, raising a bigger fund is not easy, either, and requires some kind of track record.)

“How should I get started writing, blogging?”

It depends on whether you’re (a) actively trying to build an audience or (b) writing for yourself first and sharing it with the world. Most people, when asked, will say (b) but when you dig into it, they really mean (a). So, the first step is to be honest with the pursuit. There’s nothing wrong with (a). If you’re trying to build an audience in technology and startups, get onto Twitter and Medium and keep it short, precise, different, and smart. Easier said than done. If you’re more motivated by (b), then just start writing about things that you care about and sharing it (briefly) with the world. Keep pieces short, unless you want to go deep. Assume people have short attention spans. If you look at the best, most-read people in tech and investing blogging today — Fred Wilson, Om Malik, MG Siegler, Chris Dixon, Marc Andreessen, and Mark Suster — the one thing they all have in common is: They’ve been writing forever, constantly, never stopping. It’s more like a disease or habit than something one just does.

“How does one crack into venture?”

I laugh a bit here because I don’t consider myself having cracked into the industry. I usually point people to this short video discussion I had with David Hornik, it’s a 5-min clip that’s worth watching. To paraphrase him, he said the best way to get into venture is to pick something else you’re interested in and do that (and be great at it), and then maybe some day you’ll crack in. A mistake I made was to try to go in directly, way before I was ready — if only I had known then ;-)

Beginning New Conversations On Twitter

Over the last week, I’ve been posting about minorities in tech, startups, and investing. The core issue here is while most investment capital for startups resides in the Valley and SF and while most deals originate through referral networks, using curated lists on Twitter could (theoretically) help foster conversation outside traditional networks — especially with folks who are not often represented.

Since then, Intel announced a huge $300M diversity fund initiative, and Fred Wilson wrote about what folks in investing and startups can do to help. Last weekend, I created a public Twitter list called URM, for “underrepresented minorities” in tech, startups, and investing — Kristy Tillman (@KristyT) from Boston helped out a ton! She created a hashtag for this called #URMList. You can check out and subscribe to the list here. What’s cool is that there are already more people subscribed to the list than on the list (for instance, Marc Andreessen, Fred, my colleagues at GGV, and many more now follow the list) — though I want to keep adding more and more people. I received almost 50 different emails from folks with ideas on how to get investors to engage with #URMList on Twitter:

  1. People who are on the #URMList likely don’t know each other. The list is public. Please subscribe to it even if you’re on the list.
  2. Please keep sending me suggestions and twitter handles for more people to add to #URMList.
  3. Second step in this plan was for me to create another public Twitter list of SF/Valley investors (plus a few others) who engage often on Twitter. Here it is, subscribe here.

So, here’s the next thing I’d suggest people do — begin conversations with people on each list, both the VC list and the #URMList. I’ve started to a bit when I’m on desktop using TweetDeck. There are about 200 members on #URMLIst and I know 2 of them personally, and the rest I’m just listening to. I think it will take lots of time to find overlapping interests, but Twitter isn’t going anywhere and either are any of us.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2015 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus