When we make our seed investments, we have a strong preference for preferred equity rounds and forming a board of directors that meets regularly. Even in the rare case when we invest in a convertible note, we only do so if founders are interested and excited about convening with us and perhaps one or two other major investors on a regular basis in a structured way.
Some folks may question why we do this. Given how early a company is, it’s reasonable to think that the limited resources, simplicity of the business, and speed of execution negates the need for board meetings, at least until a company is further along. The argument is that board meetings (and prepping board materials) is probably overkill at best, and a waste of time at worst because of a few reasons:
1. Too time consuming to create materials when they don’t add direct value to the company
2. The meetings are not helpful enough. More can be accomplished ad-hoc or via email updates
3. Founders have control and don’t really need to report to anyone
I empathize with these concerns, and I’ve seen boards and board meetings become pretty disfunctional and a poor use of time and energy. But we think they are important even at the seed stage of a business. Here are a few reasons:
1. It forces a cadence of accountability
We tend to suggest that seed stage companies convene with their board ever 6-8 weeks. I think it’s a healthy level of frequency for the level of depth that these discussions should have. Overall, my bias is to suggest meetings that happen more frequently, but are shorter and less formal. But that’s personal preference.
Even though dozens of decisions are made each day, and multiple products will ship in between meetings, it’s nice to have an external forcing function to keep you accountable to goals and the longer term trend of your business. I find that this looks fairly different depending on whether your company is pre-product/market fit, or post PMF. If you are pre-PMF, I would use these meetings as mileposts to bound your experiments. In each board meeting, talk about the experiments you plan to run to get closer to PMF and why. Lay out short term goals, and then re-visit them during the board meetings to assess what worked, what didn’t work, and what you learned. This kind of methodical goal-setting I think is really helpful, and it’s nice to have some external structure to force that behavior at times. Sometimes, having mid-point check-ins are helpful. One founder I currently work with in the pre-PMF stage meets with me every 2-3 weeks to review these sorts of iterations.
Post PMF, it’s less about shorter term goals and experimentation, and more about monitoring the KPI’s of the business, and staying on top of longer-term priorities that might slip. Similarly, I’m a fan of setting goals, and doing lookbacks. Have you been unable to hire the engineers your were hoping for? Is a big partnership or deal slipping because you failed to reach some interim milestone? Has an important KPI slowly dropped for 4 weeks in a row to the point that it’s indicative of a major issue? Are you looking around corners and prepared for the future? Again, as an operator, you are asking yourself these things all the time, but it’s helpful to have other people to keep you accountable. I find that few founders have enough discipline such that they wouldn’t benefit from this kind of external accountability.
Accountability is also a potentially effective tool to motivate your team as well. One CEO of a seed-stage company I was on the board of, once told me “even when I know our board meetings are going to be short and straightforward, I find it really useful to push the team towards getting stuff done so that we can show our progress to the board. It may be artificial, but it’s a helpful tool for me, and it motivates the team to tell you about the stuff they’ve been able to get done”.
2. It Provides Strategic Time With Outsiders
It’s easy to get lost in the day-to-day grind of building your business. Actually, that’s probably the right thing to do to accomplish great things when you are under-resourced and under a lot of time pressure. But it’s important to be able to think more strategically about the business as well, and it’s helpful to get good external perspectives. Board members are potentially really great for this, because they should have sufficient familiarity with your business to have an informed POV, bring a broader set of perspective on what’s going on in the market or what has gone on in similar companies, and they are financially incentivized to maximize the enterprise value of your company.
If you think the strategic discussions at the board level aren’t productive, that’s a lost opportunity that should be addressed. I’d address it one-on-one, in a more casual setting with the board member. Your board member should be an ally, not an adversary or someone you are simply reporting information to. If things don’t feel that way, something have gone awry. This can’t always be fixed though, and it’s usually impossible to get rid of a board member. This is the reason why you should really be careful about picking the right investor and board member, not just maximizing terms on a financing round.
Even at the seed stage, I believe governance is really important. In many startups that I’ve observed, the companies that quickly started going sideways had a diffusion of responsibility among the investors, causing major problems to be caught way too late. Not that investors determine the success of a company, but I do think that good governance can help a company avoid mistakes, or reduce the impact of them, or at least prevent the mistake from becoming a mortal wound.
This is obviously helpful for founders too. I often see that a brief, informed board discussion does lead founders to make different decisions about hiring, compensation, budgeting, resource allocation, stock sales, etc that they end up being happy about down the road.
4. Preparation for future
Finally, if your company is going to get to a stage where there is a subsequent, VC-led financing round, you will certainly form a board then and have regular meetings and prepare materials. I think it’s helpful to have experience and context working with your seed board member before getting to this stage. It will help you determine your own style so you can get the most value out of your board. It will also give you additional context for what kind of a board member you want to have, which should inform the way you think about new investors in future rounds. If you are going to build a large scale, venture-backed company, board meetings and board materials are in your future. You may as well get started early.
Because we realize that many seed-stage founders have never run board meetings before, we wanted to provide some helpful guidance on preparing board materials and getting the most out of those meetings. Our latest NextView growth guide covers these topics, and even offers downloadable templates to simplify the creation of your own board decks (as well as a template for an alternative Google-docs approach). Check it out here and share it with other founders that might find this helpful: http://nextviewventures.com/blog/free-startup-board-decks-template/
There are a lot of folks that think that the private tech market is pretty frothy right now. Some may disagree about whether or not we are in a bubble. But it’s hard to argue against the observation that more bubble-like things are happening currently than in what would be considered a “normal” market. For example:
- We are seeing extremely healthy valuations for companies, some with very limited traction or semblance of a business.
- Very large scale acquisitions are happening for companies with little or no revenue for strategic reasons. These always happen from time to time, but they seem to be happening more frequently and at higher multiples at the moment.
- New and unusual participants in financing rounds are appearing. This includes both new funds being started with unusual backers, as well as later rounds being led by non-traditional entities.
Take your pick, weird stuff is happening. For participants in this ecosystem, what is one to do? How should you operate in frothy times? Here are a few thoughts, but I’d be curious to hear what others think too.
1. Stay in the game. It’s very hard to tell whether things are on the verge of collapse, or whether we are still in relatively early innings of a massive bull market in tech. Even if the activity in the market seems puzzling, it doesn’t mean that you shouldn’t be a beneficiary of it if you can. Even though many businesses in the first internet bubble were complete failures, some worked and are among the most important companies in existence today. Even though many people saw their wealth multiply on paper only to come crashing down, some made life changing wealth that did not evaporate. And almost everyone walked away with incredible experiences, skills, and a better intuition for the future.
2. Don’t be discouraged. It’s easy to get discouraged from time to time when blockbuster things are happening around you, but not to you. Hey, as a VC, I could get discouraged too. The day I started writing this post, RelateIQ (a 3-year old company) was acquired for ~$400M and RapGenius raised capital at a valuation of $400M. These things didn’t happen to companies in our portfolio that day. Nor did it happen to 99.9%+ of companies out there, some of which are excellent companies. To some degree, all participants in this market benefit from frothy times, but the headline grabbing events are still happening to a very small minority of companies. Don’t let yourself get too cynical or discouraged by this. Stay in the moment and play your own game. It doesn’t help to benchmark yourself with the outlier events because they are unpredictable and take a magical combination of being right, working hard, and being really lucky. Don’t give up – the harder you work, the luckier you’ll get.
3. Be realistic about what’s going on. If things are going really well, keep in mind that these are unusual times. Be humble, and remember that ultimately, the best companies in the world are real businesses that solve meaningful problems and capture some of the economic value they create (and that value is more than what it costs them to create it). When your company raises money at a sweet $1B valuation, remember that does’t mean that your company is worth $1B, nor does it mean that you are worth your ownership x $1B. It only means that someone who loves your business was willing to buy a fraction of your company’s shares with preferences at a $1B valuation. Besides, there is a lot more to happiness and self-worth than the dollars in your bank account or the value of whatever equity you own.
4. Maintain agility. Good times eventually give way to not so good times. Things could also get ugly pretty fast. Be ready to turn on a dime – the end of good times doesn’t mean the end for you, your company, or the prospects for (fill in your hot sector of choice: Bitcoin, IOT, Mobile, etc). Remember that wonderful companies like Paypal and Netflix survived the dot com crash, and companies like LInkedIN and Yelp were started in the wake of that crash. Twitter was started before the financial crisis hit, and survived, and is thriving. But raise a bit more money a bit sooner than you can. Keep in mind that you may need to get extra creative if things start to go south. Don’t get too far ahead of your skis, and you can navigate whatever lies ahead if you really have a great company.
On behalf of our team at NextView, I’m very pleased to announce that we have just closed our second fund. NextView Ventures II is $40M, twice the size of our first fund, and we continue to be exclusively focused on seed-stage companies pursuing internet-enabled innovation.
As former operators and product-oriented entrepreneurs, Dave, Lee, and I tend to think of our firm as a startup company and our approach to investing as our product. We’ve often explained to entrepreneurs that the second fund of a venture firm is very much like the series A for an early stage company. It shows that things are working and there is product/market fit, but there is a long way to go towards building an enduring company of great consequence.
For a seed stage venture capital firm, product/market fit comes down to two questions.
1) How is the portfolio performing?
2) Is your reputation in the market such that great people will want to work with you?
On performance, we are happy with how things are shaping up in our early NextView I portfolio. We have had a number of companies that have achieved successful liquidity events, including Rentjuice (acq. Zillow), Hyperpublic (acq. Groupon), and TapCommerce (acq. Twitter). As a result, we have been able to return a nice chunk of the first fund, with many of our most promising portfolio companies still in play and progressing rapidly. We have also been able to maintain a 70%+ hit rate of our seed companies raising series A’s, even in the depths of the “Series A Crunch”. The full story of the fund’s performance is still being written, but we are optimistic about what lies ahead.
On #2, we have been fortunate to collaborate with a wide group of exceptional entrepreneurs, coinvestors, and limited partners. Prospective LPs evaluating NextView tend to focus their due diligence on conversations with these folks as well as other trusted participants in the startup community that are likely to have a POV on us. Thankfully, that POV has been positive, and allowed us to bring on 4 new institutional limited partners in addition to our existing LP’s, several of whom significantly increased their commitment to NextView II. For those of you who spent time chatting with prospective LPs to build enthusiasm for our team and firm (you know who you are) we are grateful for your support and partnership over the years.
Just like any other startup, the question we are focused on post series A is whether we are doing the right things to allow us to win in a competitive market with a power-law outcome distribution. Does our strategy still resonate? Are we skating to where the puck is going? Are we hungry to keep innovating and investing internally to build on our early product-market fit?
Some of these questions led us to raise a larger fund for NextView II. We are still very small in the scope of venture capital firms, and we think that allows us to have a favorable balance of fund size to potential ownership in our portfolio companies. But a larger fund also allows us to invest a broader range of amounts in early seed rounds. There are a couple reasons for this.
First, the seed and early stage market continues to evolve. When we started NextView, it was fairly heroic to raise a $1M seed round, so a $20M fund could comfortably catalyze rounds with a relatively modest $250-$300K investment. Today, seed rounds are increasingly larger, sometimes creeping up to $2M. We want to be able to comfortably lead these rounds and speak for 1/3 – 1/2 of the capital or more. Our new fund size allows us to do that and continue to play the part of the lead investor.
This leads to the second factor. Although there are an increasing number of early stage capital sources, there remains a dearth of seed investors that are comfortable leading rounds. Our finding is that even rounds that end up largely oversubscribed often waste weeks trying to find a lead while other investors “hang around the hoop”. Part of our DNA was coming from larger funds that lead nearly all of their investments, and so we wanted to bring that behavior to seed investing. To date, we have led roughly 2/3 of the seed rounds we’ve been a part of, and even if our name isn’t the lead on the top of the term sheet, we act like a lead and drive to fast, independent decisions rather than hang back to see how syndicates take shape.
In most ways however, Fund II is a carbon copy of fund I. Same investing team (plus our new Director of Platform), same areas of focus, and same commitment to being exclusively seed stage investors. As I like to say, we are a one-product company, and that product is a highly engaged, lead seed investment. And just like any company, raising capital is not a metric of success, but merely a further opportunity to accomplish our mission.
Towards that end, we have already begun investing NextView II since the beginning of this year, and have 6 new companies in the portfolio so far. Stay tuned for more announcements in the months ahead! Follow our NextView blog here or the different members of our team. We’re excited with how things have been going, but there’s a lot of hard work ahead.
Today, we’re excited to officially launch our new blog, The View From Seed, providing insights and inspiration for seed-stage startups, founders, and entrepreneurs, from idea phase through raising Series A.
You can also check out the startup resources page on the blog, which we’ll continue to add to over time.
Why are we launching this blog, and why does it focus so specifically on the seed stage?
As venture capital firms evolve and strategies shift, we try to take the advice that VC’s give so often to their early stage portfolio companies: stay focused and be really great at one thing.
For NextView, our one thing is seed-stage innovation. Period. We want to be the very best capital partners for seed-stage technology companies in our areas of focus, and help founders give their companies the best possible start. We’ll continue to post topics a bit outside of this scope on our personal blogs, but will try to make The View From Seed the strongest collection of content that relates specifically to seed stage companies and the entrepreneurs leading them. This will include posts from the NextView team, but also from our friends in the ecosystem that have valuable perspectives to share as well.
If you have any feedback (or have ideas to contribute), we welcome them. Feel free to leave a comment here or contact myself or Jay Acunzo, our director of platform, directly via email.
Investors love to give advice. Even more so if they are board members or major investors. It’s part of our “value add”.
Some investors have a, shall we say, over-estimation of how much they know. It’s easy to make suggestions from the cheap seats, and even great investors or operators are often wrong.
At the same time, the very reason that you allowed certain people to invest in your company is because you valued their perspective and opinions. Often, investors have more experience, or at least a very different vantage point than what you might have as a founder. But how much should you listen to your investors? And what’s the right mindset to have about their advice?
I’ve seen entrepreneurs stumble at both extremes. In one extreme, I’ve seen founders start orienting towards pleasing their investors, and are looking too much towards their investors for direction. As the founder and CEO of the company, it’s critical for you to be the ultimate decider. You are the best equipped to understand all the nuances at work in your business. The buck stops with you. If you start acting like you report to your investors or your board, you are screwed. You’ll make bad decisions, move too slowly, create the perception of weak leadership, etc.
On the flip side, I’ve also seen entrepreneurs develop tunnel vision, and ignore their investors entirely. Even if there is a chorus of feedback that is contrary to their opinion, some founders will just put their heads down and ignore. Communication starts to break down and so does trust. Disfunction ensues.
The CEO of one of my portfolio companies once shared his perspective with me and I’ve always appreciated it. He said “It’s your job for you to tell me what you think. And it’s my job to process your feedback and the feedback of others, and decide what to do.” I appreciated that – it’s led to a good working relationship with this founder where I feel like I can say what I want, that it will be carefully considered, but he’ll own the decision. He’s also very communicative and honest, so whatever thoughts I have (right or wrong) are at least informed and timely.
Another portfolio company founder relayed a conversation he had with two investors in a prior company. In the midst of a difficult decision, investor A was very aggressively pushing the founder to make a particular choice that the founder believed was a mistake. In the midst of this situation, investor B suggested to the founder “just tell investor A, if I make the choice you want, will you be accountable for the results?”. Of course not.
Ultimately, entrepreneurs are responsible for the results of their decisions. Investors try to provide help and governance, but the operators make the tough calls and are accountable for the results. Make too many wrong calls, and investors may need to make hard decisions of their own as fiduciaries to our investors and other shareholders. But investors really don’t want to do this, and we are all rooting for founders to lead effectively with conviction.