This summer, like the ones before it, I try to work with early-stage teams who are gearing up for their Series A. With so many seeded companies these days, most everyone is trying to get to their A, and most won’t make it. That is what the data shows. In trying to help some teams prepare for Plan A or Plan B, I’ve recently written “So, You Want To Raise Your Series A?” and “Being Creative When The Series A Doesn’t Arrive.”
It was all started with the tweet above. The tweet led to the post, and after James from Bloomberg BETA texted me and said “No, no, we should do it.” So, with friends at BETA, they are generously hosting an event focused exclusively on this topic for entrepreneurs: “So, You Want To Raise Your Series A?” You can get on the waitlist here. The room isn’t huge so we can’t accommodate everyone live, but we will be capturing the video and audio from the event so that everyone can consume it at their leisure. (An extra “thanks” to BETA for organizing that.)
Event is Aug 13 from 10am to noon in SF. Click here for more details. We can’t guarantee a slot for everyone given the room size, but you can always watch it or listen to it later. And, we have a killer lineup of speakers — Hunter Walk of Homebrew, Rebecca Lynn of Canvas, Brian O’Malley from Accel, Josh Elman of Greylock, Maha Ibrahim from Canaan, and Roy Bahat from Bloomberg BETA. The goal of the event is singular — to engage in a long public discussion about what seed-stage companies should be doing to prepare to give themselves the best chance to score that elusive Series A term sheet.
Equity Crowdfunding: Get thee to AngelList, or see if Funder’s Club or a similar vehicle would be interested.
Second Seeds, Seed Extensions: Hunter Walk from Homebrew wrote a post on “three types of second seeds” a while back, as usual a good, quick primer for what founders should expect and how investors perceive these rounds. While there are diamonds in the rough to be found, and while we can argue every point about why these happen more frequently, at the end of the day, the reason these rounds are hard is for one simple reason: Losing momentum is a bitch. Momentum is very hard to capture in business, and going out for a seed extension or second seed
Going Right For M&A: This is a hard one because so much of being a founder is determination. I recently met with a founder who has a great product and team, was seeded nicely, but that will not (in my opinion) ever raise a proper A. I told him to sell, recoup, and then get ready for the next startup. I was nervous to convey this to him, as I recognize the sensitivity of the situation, but he listened and eventually remarked that many of his advisors and a few VC friends hinted at the same thing. Now with some dough in the bank, he can start those M&A discussions, take care of his cofounders, and be a sober steward of the lives he’s steering in his current company.
Debt? For some companies which have revenues and/or sales bookings but need some runway, if the numbers add up, there are lots of firms who specialize in debt issuances, though these should be explored carefully as the terms and ratchets are
Going For The Pivot: A few years ago, I wrote a post called “Reinvention and Re-rolling the Dice,” which was inspired by this tweet. In an age of hyper competition in startups with few or no barriers to entry (and often little technology advantages), a lot of startups are unknowingly gunning to be #2 in their category. Why not try something new? Yes, it is hard and getting over sunk costs is hard, but sometimes necessity is the mother of (re)invention.
New “A Round” Players: There are all sorts of groups now leading what could be called Series A deals. They could be companies, smaller funds which have leveled up to bigger funds, entirely new funds backed by new money, spinouts from bigger VC funds, hedge funds or larger funds who “move down the stack,” and so forth. I’ve noticed more and more “new Series A players” who pop up in Term Sheet and StrictlyVC every morning. Many founders get suckered into thinking the big branded firms are the only ones to go after, and while they’re undoubtedly great, they are not the only shops one should consider.
RIF: The dreaded reductions in force, the quick fix to increase runway. Those are coming. There are lots of startups only backed by seed-level funding that are burning well over $100k/month. Stay tuned.
Chasing Revenues: We are past the Zuckerberg-age of audience aggregation at all costs. VCs have shown a desire to fund these types of plays once they’re already working — but while some folks will get seeded on talent or reputation, it’s much harder for a bigger VC now to commit to one or more rounds of funding to an endeavor that doesn’t have a clear path to revenue. I assume most know this by now, but just in case.
I believe many founders are too worried about dilution from follow-on “up rounds”, and should be more concerned about running out of money.
This is the existential threat, right in our faces. This is where seed-stage founders and investors have to be creative, determined, and hustle. And, not only will most not do it, many will not even realize the runway is shortening before it’s too late. It’s easier to work on product features versus getting out of the office and banging down the door to ink a game-changing distribution deal for growth. In the end, while not perfect, the whole seed-to-Series-A process is much more efficient than most people would like to admit. The ones that make it there often benefit from a mix of timing, luck, and proper planning. And, for those that don’t, there are other options, and those options will ultimately test who is in it to win it, who is in it for the right reasons. Raising the seed was easy. Let’s see what happens next.
A new program just launched on AngelList to invest in YC companies”– though please note, this is not a formal partnership. YC Alumni who have chosen great deals in the past in their individual investments, and now they can leverage AngelList’s platform to pool outside money together, package it up alongside their investments, and charge a 20% carry for that access. Given that the amounts will be relatively small, and that it’s only $10k minimum to invest, those who want to invest in YC companies but live in rural Florida can now do so with a click of a button without ever having to meet the direct investor or the company itself.
This combination bundles new companies with equity crowdfunding. So, why is this happening?
Online platforms create access. Let’s not lose sight of the fact that this wasn’t possible over two years ago. We are in a new world. Just because you’re invited to Demo Day doesn’t mean you’ll be able to invest.
Excess supply hungry to invest in startups. The brilliance of AngelList is it democratizes the ability of money to flow to opportunities and rewards those who have been granted access from founders, or a incubator/accelerator. That excess money can then pour through these channels. Many will not like that because it could challenge what they believed to be their own proprietary flow. One risk here, however, is the indirect investor has to go along with whatever terms either the startup or syndicator set, and those may not be market prices.
Lower minimum amounts to play. It’s only $10k to play. A family office in Oklahoma with no connections to the Valley but lots of money could find this an interesting way to learn and invest somewhat more directly than before.
Who is on the cap table? To me, this is the BIG SHIFT and one I’ll write about in more detail soon. With so much money out there, founders care about getting brand names which send a signal on their cap table. After a few brand names (if they’re lucky to score them), some (not all) start to care less about where the rest of the money comes from. This phenomena is happening more even as companies go to Series A, B, and beyond. The currency now is to have a brand name whereby the founders want that name on the cap table. They want that association. And, once they have those names, they’d prefer the following name on their cap table “John Trusted Friend — AL Syndicate II” vs having the name of a Fund of Funds or family office they don’t know to have direct access. This adds a layer of protection and distance between the company and the equity.
It will take some time to see how the effects of all of this play out, but it is definitely changing fast and becoming a new world.
I wanted to write a brief post on changes founders and current investors can expect in the on-demand sector. I realize that a well-known startup which raised venture capital from prominent firms has shut down. I do not know much about that particular company, and I have never used that particular service, so the following notes below have little to do with a specific company and all to do with general terms founders and early investors should keep in mind:
Worker Classification: On-demand founders will now encounter investor questions around their philosophies and strategies toward classifying workers. I am not a lawyer, but the most rational explanation I’ve heard so far is that in a true marketplace, the service provider can assign a monetary value to their work, whereas in a managed marketplace, the marketplace itself regulates the payment. In the former, those are probably contractors; the latter begins to sound like employees.
Frequency of Use: I’m a broken record here, but aside from managed marketplaces which can have a subscription component, it requires a strong, weekly active use case to justify the upfront costs these things inevitably require. Predictable frequency is a trump card.
Geographic Expansion: My standard line to founders is, a team has be so operationally excellent that it can, at some point in the future, have systems in place that enable them to launch two (2) geographies in the same week. Lately, I’ve met founders with ambitions to open up international cities after the first cut of U.S. cities, and those conversations excite me.
Unit Economics: Looking at top-line revenue without digging into the unit economics will likely kill any investor discussions unless the team makes the case for going into the red for a while. Mastery of unit economics is a must to convince a big VC to take on the risk of models that require more cash to expand city by city.
Soft- vs Hard Landings: Theory would suggest that with huge companies like Google, Amazon, Uber, eBay, Walmart, Costco, Baidu, Tencent, Alibaba, and others who are interested in providing on-demand services, there would be a soft landing for companies that didn’t make it to being an independent company. Well, that hasn’t really happened yet, so people will be skeptical. However, that could happen in the future, and if it’s perceived to be a big/good outcome, that could then re-energize comfort with the sector. Always worth keeping in mind that VCs run exit profiles of potential investments in their diligence and higher valuations in the earlier stage begin to limit exit options. And, with most of these businesses being “tech-enabled” vs pure tech companies, the harder landings could be quite harsh from how M&A departments value existing assets.
As a founder or active early investor in this space helping companies prepare for downstream VC, these issues must be anticipated and addressed. I’d make sure to include 1-2 slides on each issue above. Again, to be clear, I am still looking at this space and more deals will be done in the sector by big VCs. But, issues surrounding these businesses have bubbled up, the gig economy and worker classification, and the lack of real exits in businesses that aren’t wholly defensible in the classic sense of the word. When bits collide with atoms, now we should expect those reactions to ignite more scrutiny.
This weekend, I wanted to write a few posts about the state of early-stage markets. Last night, I wrote a longer post about the different world seed founders should expect as they try to raise their coveted Series A rounds. I was surprised at the way it flew around Twitter. My posts rarely get that much pick-up.
There was a related topic I was going to touch on, but I’m glad I saved it for a separate post here. The topic: That the ecosystem should expect pre-seed and seed valuations to cool down. Note, they’ll still be quite attractive for founders, but I believe they’ll shift down. I can’t prove it with data, but that is my intuition. Why?
(1) Summer Slump. The fatigue I explained in my previous post is also rippling through seed, though it’s of a different variety, specifically around being disciplined on valuation.
(2) M&A Sleepy. Not Many IPOs. Seed has now been professionalized for 5+ yrs, and folks have seen the data. Whereas the bigger VCs have to pay up, they get more data and see more mature companies; the seed folks, on the other hand, run the risk of funding into a red ocean filled with competitors and are often blindsided when this rears its head. There’s not much M&A to write home about, and even fewer tech IPOs in 2015. A $20m exit as acqui-hire on a $12m cap in seed doesn’t rile up the natives.
(3) Questions From LPs. A few little M&A activity and LPs will start to inquire “Do we get some distributions?” Yet, most of these are smaller, and with a higher entry price as seeds have creeped up over the past few years, it turns what would’ve been decent to a wash on the balance sheet. Part of this is to blame on bad picking, but also at seed, so much of it is hit or miss, and very few people pick consistently well so early. (Many of the folks who are known for a few signature deals have likely done many others they don’t publicize.)
(4) Knowing Series A Investors Are Wary. As I wrote last night, whereas Seed and Series A markets are different, all of these markets are interrelated, and after a few years, seed investors have likely noticed only a percentage of their carefully picked portfolio actually graduates to A. After a few years, the pattern becomes engrained.
(5) Optimizing For Partnership. Seed is frenetic, can feel transactional with different note structures, deadlines with caps, little to no information sharing, and so forth. But, in my conversations, seed investors seem to be less worried now about FOMO if in exchange they can find founders who want to work with them and actually develop a partnership that works both ways. I have found, much to my surprise, that many founders inside Haystack have gone to bat for me over and over again. In some cases, a founder has helped me more than I’ve helped them.
There’s so much money in seed (mine included), and more money coming — I’ve heard from folks in NYC and other places that we will have even more micro-funds forming. I am not writing about sour grapes — I am part of that movement, or problem. But for the firms and seed investors that have been doing it for a few years, entirely in this up market, I believe we are now past the peak of seed valuations and high caps for not-yet-proven models.
To be clear, if a seed-level startup is cranking, pulling down revenues, and showing signs of great promise, a seed fund is willing to pay $12-15m as an entry price on valuation, betting the bigger VCs 3-4x that price if things work out. However, in the absence of traction, technology achievement, or being a founder with demonstrable entrepreneurial talent, I’d expect $8m to be the new ceiling for entry price on valuation caps, and that’s for the opportunities in higher demand — most will settle around $6m.
Not much I can do to prove it, but it’s something I think about, talk about, and monitor every day. My two cents. Or, my 600m cents. By the way, $6m-8m for seed entry price is still pretty damn good, so this isn’t meant to be a downer-post, but more of a sober prediction (a “big chill”) now that we’ve all had a few cycles under our collective belts in this new world of atomized VC.
Like last summer, too, I will write my own short column for three (3) Fridays and share some views as to what I think is going on in the seed and VC worlds. I’m excited to have another chance to guest curate and write, so thanks to Connie and her loyal readers for the opportunity!
As a very early and active pre-seed, angel, seed, or whatever-you-want-to-call-it investor, I view my main job is to select companies and founding teams that will eventually go on to raise a proper and priced Series A round from a credible firm, with a partner from that firm joining the board. In some cases, you find a young team who you just know will make it — more often than not, you have to be imaginative and allow for time to help products, markets, and people grow. People can definitely surprise you with their learning pace and drive to succeed.
I often joke that in today’s frenetic seed environment, many founders view “Getting To Series A” as post-college grads may view law school or getting an MBA as the next step along an academic journey. Since I am not a Series A investor — but rather someone who tries to help Haystack seeded companies work toward a Series A — please read the following post with the context that I want to help young companies reach this milestone, but from my conversations this summer with a variety of Series A VCs across the country, I am predicting the seed explosion of the last few years have finally worn down professional VCs to the point where the environment and attitude toward putting together an A round has — in my opinion — changed significantly.
(1) Hit the ground running by no later than Labor Day. You may have heard that “deals happen all the time.” Sure, less so for the hotly contested A’s and B’s. Folks pitching want all the big firms to be around and in the flow, and September is a great time. It’s hard to start a new conversation for an A once mid-October rolls around, though of course a deal could start in this window but require many weeks to close. Timing matters. There is a somewhat immutable seasonality to VC investing, despite what others may chatter about.
(2) Be precise with your introductions. Create a spreadsheet with specific VCs. Figure out if they’d be interested in your company and space. Be targeted. Find someone in your network to give you a warm recommendation — not just an intro, but a recommendation — to each target. Run a process.
(4) It’s not all metrics. Metrics open the door, but people close the deal. People get so wound up about metrics and it lulls them into a false sense of security. Linear progress is hard to achieve in any new endeavor, but big VC firms are looking for breakout potential. The metrics help demonstrate that the team cares about them, knows how to record and read them, and proves (a little bit) that the team can get things done. Metrics help ground what may otherwise be an abstract pitch, but personnel and vision help seal the deal. See below.
(5) Executive teams matter a great deal. A big VC wants to know who the CEO can recruit around him/her. Selfishly, the VC may not want to help build the entire executive team and would rather find one intact and what’s working. Having a missing piece among a team is one thing — not having a COO when the business is moving so fast adds a layer of risk in a fragmented talent market that could push a VC to favor an opportunity with a more fully-baked team.
(6) Long-term plans and ambitions matter. I heard a great quote this past week: “Clearly articulating a long-term vision is actually a differentiator.” Big VCs will absolutely evaluate whether the founding team wants to go for a big, big outcome — they cannot afford to have a $200m exit, even though it sounds nice. It will happen more and more, but VCs want to at least protect against it.
(7) Whatever funding habits worked in seed will likely backfire with the pros. Oh man. This is where it gets hairy. In seed, founders can set caps; at Series A, the market sets the price, and oftentimes it’s a real negotiation with an experienced VC. In seed, a round can stay open for ever at the founders’ whim; at Series A, within 2-3 weeks a founding team can see their deal momentum slip away on short notice. In seed, founders can dictate how the round closes; often at Series A, the firm coming in (who will likely have a board seat) has significant control on the close, as well. It all sounds more like a partnership, right?
(8) Expect VCs to be more valuation-sensitive than the recent past. This is my bigger prediction. Depending on who you listen to, people will say entry price at seed doesn’t matter — instead, just invest in things you think will be huge and don’t worry about price. But, in the last few years, seed investing has exploded, and there are now hundreds of seed stage firms (the stage has professionalized). And with professionalization comes new LPs who have funded these vehicles, some looking for access and everyone looking for returns. Now after over two years of meeting and getting to know LPs, each one asks about the “entry price” in seed, and how that may go up and down. In this “dry” environment of elongated private markets without many big tech IPOs or acquisitions, LPs are now starting to ask funds like mine: “When do you expect returns?”
Angels are a dying breed. Seed is where the early action is, and much of it is professionalized with other peoples’ money. Hence, it has a business model, and more and more folks are starting to realize what the larger VCs have known for years — it’s often 100x harder to get money out of an investment than it is to make the investment in the first place. The lack of liquidity leads to more awkward LP meetings. The summer slump slows things down. Many bigger VCs won’t admit this publicly, but they’re fatigued with all the notes and structures and crowded cap tables, and that fatigue will likely make them approach opportunities more conservatively. Yes, this will cause some folks to miss things, but this isn’t about VCs passing on things that will work out — it’s about how to go and get a Series A in the Fall of 2015 given environmental conditions.
The next Snapchat or company with insane metrics or revenue growth will be a hot deal and get many great term sheets. If you’re Larry Page, you can expect to get term sheets from everyone. But, if you’re not Larry Page, it will be harder, and it may be wise to expect a more sober valuation, or perhaps a valuation that even lower than some of your caps. Unless investors get conviction you’ll IPO or lead to a huge outcome through sheer will & determination and dominate a huge market, they will keep looking for one that will — and keep telling you to come back when you have more to show.
In December 2014, a small group of us at Ven51, Bullpen, and Vator organized the inaugural “Post-Seed Conference,” with keynote fireside chats with the likes of Keith Rabois, Chris Dixon, Peter Thiel, and Naval Ravikant. (Click here to see all the videos and wrap-ups.) The day was filled with tons of inside information from investors/practitioners about all the ins and outs of investing in the pre-, seed-, and post-seed stages. And, we had a large turnout of founders who are trying to get an edge about how the investment world is moving — in real time.
A few caveats about this event, so please take notice:
Price: The price is initially high because we have decided to keep this as an invitation-only event to start. We want to make sure founders and angel investors can attend, and I have a whole stack of comp codes to give out. Please ping me (firstlast at gmail) and briefly explain who you are and why you’d like to attend.
Keynotes: We are proud that our keynote/fireside chats for this event will be Alfred Lin (Sequoia), John Doerr (Kleiner Perkins), Vinod Khosla (Khosla Ventures), and Scott Kupor (Andreessen Horowitz). Wow, that is an amazing lineup!
Content: We will have more time for meeting people this year, and fewer sessions (relatively). We are just beginning to outline the sessions now. More soon, but of course it will all be focused on how the seed stages are evolving.
Outliers are valuable because they offer us 20/20 hindsight to reevaluate and challenge the assumptions we may have originally held to be true. Lyrically, it’s been a linguistic technique I’ve used in writing this one post about Snapchat and then another one about the Whatsapp acquisition — both posts went viral, in part because of the intense focus of global tech attention on the protagonist companies in question, but largely driven by, I believe, our subconscious, collective desire for and adherence to “convention.” The thought goes — if we do what are supposed to do, and what other elders say, that “convention” will ensure our success.
Yet, the reason these posts fly around the web is because, further down in our subconscious, we know conventions are challenged in deep ways, and especially by the companies listed in this post. It’s worth re-reading the posts above on Snapchat and Whatsapp, both for founders and investors alike. Subconsciously building up convention happens as a stealthy byproduct of being forced to recognize patterns in a fast-moving, dynamic environment. All of a sudden, there are things we are supposed to do, and the echo of social media hardens it into convention.
The latest company to break convention is Slack. You have may noticed me tweeting about it more. I’m trying to understand it. We all know it’s a great product, but I wanted to understand how big it can be, and what they did to make it happen. Below are some things I tweeted out, as well as a response from Anil Dash adding to the fire.
This is how Slack defied convention:
Slack originally HQ’d in SF/Valley — so many blogs and pundits liked to pander that “the next big thing won’t be in the Valley.” But, Uber is. Slack is. Whatsapp is. Snapchat born here, built in LA. For Slack, there was a distributed team with HQ in SF. Those are the facts.
Slack was funded with traditional VC — so many blogs and pundits like to talk about the end of traditional venture capital, even after firms like Greylock, Sequoia, and Benchmark, among others, are sitting on monster portfolios and exits. Maybe traditional VC isn’t all that bad.
Slack was the byproduct of a pivot — in an era where there could be 5-10 startups in a category, there are likely too many teams playing for 2nd place or worst. Why not re-roll the dice and reinvent? That’s what Slack did. Nothing to lose but investor’s money.
Slack was founded by an adult without a CS degree — via Anil. The success of Zuck and Spiegel and the fascination with youthful energy and creation has helped calcify a brand of ageism in the Valley. Add to this the “everyone must code” drumbeat and how could Butterfield have succeeded?
Slack openly embraces diversity – via Anil again. This is not to say other companies don’t, but it’s only recently been brought to light as a more systemic issue. Larger companies can be slower to respond. Startups are more nimble to create cultures in real time. This has been a touchy issue across the Bay Area startup ecosystem. Slack has shown leadership in its efforts to diversify and speak its mind beyond tech circles and topics.
Slack respects work/life balance — again, via Anil. The company sees most employees going home by 6pm. Sure, many work late into the night, but there is balance set into the culture from Day 1. I think that’s hard for very early-stage startups to have this luxury, but once a startup gets some serious funding, and with technology invading family life, companies can now help design structures to keep people out of the office (though still working, if they want) with a bit more ease.
Slack had a revenue model from beginning – via Anil. After the pivot, Slack went cross-platform with a paid product right away, possibly marking the end of the “build first, monetize later” mantra in the wake of Zuckerberg’s masterpiece. It reminds me of this great, prescient post by Mark Suster, “Why You Need To Ring The Freaking Cash Register.”
Independence Day is supposed to be about reflecting on and celebrating our collective independence, especially relative to the rest of the world, as well as the grave sacrifices generations have made to make it so. When taken in this light, it is likely something we all take for granted, and perhaps that’s the luxury symbiotically associated with it. Without independence, we wouldn’t be free to overlook why we are blessed with it.
The idea of “independence” has layers, especially within our personal and professional lives. For me, married with a kid, I am very lucky to have a small family that binds me to them, but they also work hard to let me do things independently — to travel, to keep odd hours, to work when I’m inspired to, and so forth. Here, “independence” exists within a structure of co-dependence.
In work, the layers are even more complex. I personally have been blessed throughout the recent past of being in roles at companies and with investment firms where everyone recognized and honored my desire for independence. Where else could that happen in the world? That’s why I can’t imagine living anywhere else.
Independence in work doesn’t always mean that you are your own boss and answer to no one, but more often it’s about having the freedom within your team or organization to take risks, to follow your instincts, to make decisions, to prosecute your ideas and beliefs. In all of my work experiences in venture, despite what you may read on Twitter and Hacker News, the groups’ structures have rules but underneath them are huge oceans of independence available to anyone who wants to navigate them. So, there are many layers to independence — our national independence, our independence to do what we want (within reason) on an individual level, the ability to exercise independence even within a family, and at least for me in investing, a chance to think freely about how the past may inform the future with the freedom to follow my intuition.