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.
In my last post about raising seed vs. jumping straight to A, I received a good comment from Chris Woods that my analysis neglected to include the impact of option pools that are created at each financing round. It was a good point, and one that is worth touching on with a dedicated post.
In almost every financing round, there is an important stipulation in the term sheet that talks about the employee option pool that will be created in tandem with the financing. Essentially, the new investor wants there to be a certain % of options available to employees after they invest.
There have been others in the past that have detailed the math behind option pools and their impact on venture deals. Here are three good ones from Venturehacks, Mark Suster, and Jeff Bussgang. The short implications are:
- You should definitely discuss this as part of your valuation/deal negotiations. It has a meaningful impact on your net dilution, and I’m often surprised how often founders don’t consider this a malleable term.
- I find that VC’s will tend to propose a larger option pool than is really needed. It’s not that we are bad, it’s that we are self interested. We know that at the next financing round, the new investor will probably want to have a certain sized pool available for future employees, so if we make the pool pretty big up front, we are less likely to share in that dilution down the road
- It does NOT make sense to try to change the rules of the game and get the VCs to handle this term differently than what is standard in the industry. You are better off in almost all cases maintaining the standard, but being savvy about negotiating this term.
- The negotiation tactic to take is to justify the size of pool that you think is reasonable. Basically, have an estimate of the hires that you are likely to make over the course of the next round and the equity packages you are expecting. Provide even an additional factor for “opportunistic hires” in case you happen to find “the best person in the world” for role X and want to bring them on prematurely. Add it up, and ask the VC why that level of options is not sufficient. It’s hard for a VC to make a principled argument in response to this that isn’t mainly self-serving. Or, it will be a good catalyst for an important discussion with the VC that will tell you a lot about how they are perceiving the quality of your team and the types of folks you need to bring on sooner rather than later.
What is a typical size of option pools that we see in the market? This tends to vary by company, stage, and completeness of team. As a result, I think most folks are kind of hesitant to put numbers out there because they can be misconstrued. But I’m going to give some ranges based on our portfolio, as I think it gives at least directional guidance for founders.
For seed rounds, we have seen options pools in the last 12 months in the range of 5% (which is low) to 10% (which is a bit on the high side). 7.5% is a pretty decent place to be. Keep in mind that these are for rounds where a) we are NOT contemplating bringing in an outside CEO and b) we believe that there is enough technical leadership in place to take the company to a good place. As such, these numbers do not contemplate an extremely senior hire that ought to take up a large chunk of the pool on their own.
For series A’s, we have seen option pools in the last 12 months in the range of 7-15%. This means that whatever % remains unallocated, the new investor is asking for the pool to be increased to this percentage. In some cases, it’s getting the pool to more or less the same size as what we had after the seed, but sometimes more or less.
As a means for comparison, historically, first institutional financing rounds used to require option pools in the 20% range, sometimes more, rarely much less. This was more in the days prior to the popularity of institutional seed rounds. Net net, I think that currently entrepreneurs are able to manage this more effectively. It’s fairly typical for a founder to start with a pool of 7.5%, actually only allocate ~5%, and then raise their next round requiring the pool be refreshed to 10%. Thus, the actual net effect is 5+10 = 15% dilution after 2 rounds, with your seed investors sharing in your dilution when you go from seed to series A.
Ultimately though, negotiating too hard here can signal a focus on the wrong thing. Investors want to work with entrepreneurs who want to build great companies, and will attract great people to do it. You don’t want to come off as overly stingy about equity to the point that one wonders whether you will do what it takes to attract the best talent to the team. But I wouldn’t shy away from the discussion either, because it has meaningful economic impact to founders and is the basis for an important discussion with your investors about how they view team building in the coming months and years of the company.
(Note: The majority of this post first ran on BetaBoston. This version goes a little deeper into some of my more nuanced thoughts)
There has been a lot of discussion recently about the bar required to raise a series A.
A few notable excerpts: Kyle Alspach’s commentary on seed and series A at BetaBoston; Brad Feld’s tweet a few weeks ago that “$100k MRR [monthly recurring revenue] used to be interesting. Now it’s table stakes”; Jo Tango’s blog post on the VC Bottleneck in Boston; and Mike Volpe’s comments on a post from my blog on raising seed rounds vs. Series A’s. In fact, Mike allowed me to publish the following facts: When HubSpot raised their $5M series A in 2007, the company had $12K in MRR from 48 customers. They had previously raised $500K in seed, plus about a $1M note shortly before the series A.
I can summarize the sentiment here in broad strokes. The “traction bar” for series A rounds is higher than ever. On top of that, there are fewer series A investors now than there have been in the past (at least in Boston). And the investors that do exist have “no guts” (or so the dialogue goes).
Wow, that sounds really bad. Maybe we should all just close up shop.
I’m not quite as pessimistic. In fact, at this moment, we have a few early-stage companies in our portfolio at NextView Ventures that are raising really nice rounds in the face of this perception. One of our portfolio companies has no revenue, and good but not explosive user growth, and yet it’s still raising a very nice series A from a very good venture capital firm at a significantly higher valuation from our seed. Another company raising series A doesn’t even have product in the market yet, while the third falls far short of the $100K MRR number despite raising from a top west coast firm. How do I reconcile this experience with the observations above, which seems to ring true for others as well?
My first and main thought is that an objective “bar” at which VC’s will want to invest in a company doesn’t exist — nor has it ever existed nor will it exist. I get asked this all the time, and the formula just isn’t there. I know that over the last several years, there has been standard guidance for SaaS companies to try to focus on getting to $100K MRR before raising an A. There are other benchmarks in other segments too. I think these benchmarks are helpful in allowing an entrepreneur level-set their progress with what others have been able to achieve in similar markets. But I just don’t think it’s the right way to think about the bar for raising a series A round.
Instead, I think the most important factor that VC’s consider is the strength of the team and the excellence/uniqueness of the idea. After that, they are looking for some demonstrable evidence that things are working. This is where traction comes in. If you are working in a very crowded space, you probably need more traction to show separation from others in the market. But if the space is brand new or uncompetitive, then the traction bar will be lower. Also, if the team or idea isn’t excellent, then the traction bar will be higher. VC’s are very good at convincing themselves that a team or opportunity is interesting if there is enough traction. But still, I find that the most unique and exciting companies are able to raise capital with relatively limited traction because the right investors require only a small amount of proof to be excited enough to jump in.
I think this was the case for HubSpot in ‘07, and I’d bet it would still be the case for them if the fundraising environment then was like it is today. Sure, not everyone would be jumping up and down to invest, but those people would have been very wrong, and fundraising at the early stages is the search for true believers.
Couple other secondary thoughts:
- There are more investors out there than you think. Some of the classic folks you think of as VC’s have shifted to other parts of the market, so there does seem to be fewer traditional players. But there are more new or non-traditional players emerging all the time. It’s the job of the entrepreneur and their seed investors to put in the hustle to keep their networks fresh and uncover potential capital sources that may not show up in a list published by the NVCA. On top of that, investors from other geographies definitely do invest in early-stage companies that are not in their backyard. Again, two of the companies I mentioned above are raising rounds from investors in other regions. Also, just a few months ago, I connected an investor from True Ventures to the folks at Bolt, and they ended up leading a $2M seed round for Understory. Proximity does matter, but it’s become a little less important.
- I think that emphasizing traction vs. emphasizing potential tends to flip-flop back and forth. Actually, I think we are in the middle of this shift returning to the emphasis on potential, as companies like Oculus, Oscar, and others are showing that some of the most aggressive funds are very boldly going after series A and B rounds for technologies that seem industry transforming, even if actual traction is minimal (or the product hasn’t even launched yet).
- What is challenging is that there is increasingly a market gap at the level of smaller series A’s. As the venture industry has started to recover after the economic crisis, we have seen the best funds increase pretty significantly to $400M+ in size. These large, mega-funds are able to write very large checks to get the ownership they want, or wait things out and invest a little later when there is more certainty. Some of the funds that didn’t do as well are struggling to raise capital, or are shrinking or shifting strategies. As a result, when it comes time to raise a series A and look for an early-stage investor that will write a $3M check to lead a $3-5M round, there are fewer players out there. I see this as a temporary market gap. What’s likely to happen is that some of the older funds will retrench and get back into the business of doing these deals and perform quite well. Some seed funds will decide to migrate up and start making series A and B investments (this is already happening). And seed rounds will continue to get a little bit bigger, and seed-extension rounds will be common and a perfectly fine ways for early stage companies to keep building before showing enough scale to raise a larger round.
Overall, I’m actually quite optimistic about the fundraising prospects for companies in the markets in which we participate. There is a healthy volume of seed activity across the board, and although it seems daunting to raise series A successfully in light of some recent comments, it continues to happen at the same level of regularity as we have seen in prior years (at least based on our own portfolio). Some of the players are changing, and the dynamics around these rounds are a bit different, but of course markets evolve. Overall, I think they are evolving in a way that is more favorable to founders at both the seed and series A stages of development.