A friend of mine just completed a very successful fundraise for an institutionally led seed-round of capital. Increasingly, these seem to be the most common ways that venture-funded companies get started.
What’s interesting is that this entrepreneur has raised $30M+ in venture capital before and knows the VC process intimately, but remarked to me midway through “this process is completely different from every other fundraise I’ve been a part of.”
It’s different across a few dimensions, but it comes down to the fact that most seed rounds are multi-party optimization exercises. In a given $1.5M round, there are often 2, 3, or more “funds” that are investing between $200K – $700K. Also included in the round are typically 2 sorts of high-quality angels – those that really know the founders and are let into the round because of relationship, and those that are more value-added in nature, usually because of the brand credibility they bring or deep domain knowledge. As an entrepreneur, you’d be willing to spend a bit extra time getting those angels across the finish line, even if their $’s aren’t that big. In some cases, these rounds come together very quickly and easily, but in most, it takes a bit of time, and feels a bit like this:
No fundraise is completely predictable. Actually, most are very unpredictable. But at the risk of being too formulaic, here is one possible roadmap I’d recommend for raising this sort of a round.
- This assumes that you are “ready” for the round to happen. Figuring that out is the subject of another blog post. This also assumes that you have a reasonable “ask” in terms of dollars, valuation expectation, etc
- Overall, I believe in very limited staging of a process. As Paul Graham as written, it’s a “breadth first” process, then you triage your list in a probability weighted way. So, even though I’m proposing a sequence of steps, the reality is that it should feel a lot more like a big parallel process
OK, so, here is a broad process:
- Line up support. Know who people are going to call as a reference – your prior bosses, obvious people in the ecosystem that would have a strong POV on you or your idea, etc. Pre-wire them so that when the calls come, they are ready and/or you are least know what they are likely to think.
- Get commitments from those who know you. These are the angels that are your closest mentors/references or individuals that you want to have affiliated with the company. The idea is to get a small but solid commitment from these people, so that when you have your first conversation with a lead, it doesn’t feel like you are starting from scratch, and there is built in credibility.
- The way to mechanically do this is to just get these individuals to feel comfortable with at least an investment of x ($25K or something) and then remind them “only say yes if you are willing to have people ask you about it. There is nothing more damaging that having a VC call an angel and have them say “actually, I’m not really committed”.
- You can give people the option to back out. Make it clear the commitment is “assuming reasonable terms and a round at least X” so they don’t fear that they are investing on potential dumb terms or an underfunded round. This is kind of the equivalent of “I’m in as long as you have a lead” but sounds a lot better. You want to be able to say “they are in, assuming reasonable terms. Feel free to call them”
- Find a lead investor: These are funds that are willing to stick their neck out and be the first “yes” and issue a term sheet. There are ways to do this without a lead, but I’ll ignore that for now. Some thoughts
- There are tons of seed funds, but way fewer than you would think actually lead.
- Leads tend to do fewer than 6 investments/year/partner (and I’d argue, ideally, much less than this). If they are higher velocity, I’d question whether they’d be able/willing to lead. There are some exception, however.
- This takes longer than you think, unfortunately. Leads usually do work, real due diligence and reference calls, but that’s because they are going to lead. But a good lead shows forward progress pretty transparently and can do their work in a couple weeks. If someone isn’t showing that kind of interest, de-prioritize.
- Be willing to travel a little. I think it’s helpful to get some feedback in fundraising, so it’s worthwhile to hit a few markets like BOS, NYC, and SF. It’s less likely to find a lead outside your core geography, but it does happen, and it ends up being pretty unpredictable who really does get excited or doesn’t. I also think that getting some market feedback is helpful from investors that have a different vantage point than you.
- Triage appropriately. As my partner Lee often says, fundraising is about searching for true believers, not convincing skeptics. This is particularly true at the earliest stages. It’s easy to spend too much time focusing on skeptics.
- Slightly behind lead conversations is value-added non-lead investors. Think of these as additional arrows in your quiver. These groups can augment the network of your lead, provide additional support capital if you need an extension, and hopefully be helpful. Prioritize these groups for value add, but keep in mind, these groups tend to be more clubby and care more about who else is in and social proof.
- Have good news to share along the course of the fundraise, if possible. Even small pieces of data like small-scale tests, new hires/advisors, etc. Unfortunately, fundraising is much easier when there is a sense of momentum behind you, so do what you can to create some momentum. Investors tend to exhibit lemming-like behavior. You can’t really change that, so accept it and try to make it work for you.
- When you get a term sheet, you can do some work to optimize the deal. Expect this to take a bit longer than you think. In my opinion, the goal at the seed round is to get a fair deal done quickly with the right partners, not to maximize valuation or terms. If you have a term sheet or two, you have a finite window to convert it to a deal – so do it pretty quickly. Time kills all deals.
I didn’t want to be too prescriptive here, so happy to get into more details in the comments if folks have specific questions.
Fundraising tends to move slow until it moves fast. What you’ll find is that in the middle of the process, it might seem frustrating as some investors pass, some investors feign interest but don’t really dig in, or it just takes a while to get meetings with the key decision-makers. But push through it! Once a lead or two start to take serious interest, the chorus will change. The challenge with seed rounds is that multiple parties can invest, even without being the first “yes”. So unfortunately, it potentially rewards investors that hang around the hoop and then try to sneak in at the end (as lame as that seems). But once there is some demand for the round, the group of potential investors will swarm pretty quickly, because ultimately, many of these rounds end up way over-subscribed. Just keep plugging away, and remember it moves fast until it moves slow.
This might seem laborious, and it kind of is. Funny enough, raising a seed round might end up being as time consuming as raising a larger round because of the multi-party nature of the process. But if you manage it properly, you can go from start to a term sheet within 3-5 weeks, and to a close a few weeks after that. Sometimes it can take longer, but beware of being in the market too long because a lot of seed investors are pretty chatty and word gets around fast about a company’s struggles to raise capital. Some investors are independently minded and can see past that, but most investors tend to get hot and bothered about momentum and perceived traction. I’ll talk about seed stage “traction” in another post.
A lot of things are evolving in the startup and VC world. Many of them for the better, as there has been a great surge in great talent going after big ideas and greater access to capital at the early stages. It’s an exciting time to be an entrepreneur and investor in this ecosystem.
But I find myself lamenting some things that seem to be changing. Or at least, things that used to be very rare, that are becoming less so. I’m pretty new to VC in the grand scheme of things, but I do think that are some old school idea that are being lost or forgotten that I tend to agree with. Here are three old-school ideas in particular I’ve been thinking about.
1. Knowing your investors.
This seems like common sense. In the early stages, entrepreneurs have historically known who all their investors are. Entrepreneurs will certainly know the VC’s that led their round, and they certainly know the friends and family that invested in their companies. Often early rounds included angel investors, and these usually fell into two categories. The first were people who know the founder really well, and believe in them. They wrote a check because they believed in the talents of the founder and wanted to support him or her. The second were people who know the space or opportunity, and either sought out the company because they saw the promise, or were sought out by the entrepreneur for the value they would bring by validating the business or helping the entrepreneur navigate the future. Almost all the founders we back have seed and series A syndicates that look like this. These syndicates have a manageable number of people on the cap table, and each person there is known and is there for a reason.
But this is slowly changing. Angelist syndicates and some other developments mean that there will increasingly be participants in seed rounds that are unfamiliar to the founder, or in some cases, completely unknown. I suppose it’s good because that means that there is more capital in the market, but it just doesn’t seem great to me. I think the best entrepreneurs tend to raise money in the way described above, so I wonder if these other capital sources are really funnelling their money into the best opportunities. And as a founder, I wonder if you really want to have someone as a shareholder in your company and life’s work that you don’t know, trust, and think could be valuable. Maybe it’s an old school idea, but I think it’s good to know who your investors are.
2. Investors that Lead, not Follow
The best investors tend to be very independent in the way they make decisions. They don’t particular care “who else is in” and they are a bit contrarian. As a VC, leading also means working with an entrepreneur to invest a meaningful portion of a round, negotiating terms, taking a board seat, and other activities that show that you have built substantial conviction around an opportunity.
Similarly, the best angels lead in their investing activity in a different sort of way. As described above, the best angels are either ones who know the founders exceptionally well, or know the space exceptionally well (or both). They will commit, and often commit early. They don’t typically say “come back to me when you have a lead and the terms are set”. They are more likely to say “I’m in for X amount assuming a reasonable deal is in place.”
But this behavior is changing, and I notice it most in seed rounds with smaller funds, especially groups that are more like angels that are institutionalizing. Once they are managing other people’s money, or once they are writing bigger checks, there seems to be more at stake. Also, because seed rounds are creeping up larger, you see rounds that are made up of a number of different groups, which makes it easier for an investor to hang back and try to squeeze in when a round has “heat”. More often, I’m hearing about funds that say “we don’t lead, come back when you have a lead.” Or “who else is interested?” Or you see the same investors banding together in the same deals over and over, rather than seeking independent, contrarian thought. As a result, you see many “seed funds”, but shockingly few that actually lead. I thought it was interesting to see a tweet from Shai Goldman a few weeks ago:
“@shaig: who is actively leading seed rounds in NYC? @ffvc @MetamorphicVC @firstround @trueventures @homebrew @NextViewVC @ResoluteVC are, others?“
There are certainly a few more he is missing, but even an all-inclusive list is tiny when you think of the morass of seed investors and “super angels” in the city. I think most of the best investors act like leads, even when the market might allow them to hang back and chase heat once syndicates form.
3. One Company at a Time
Sometimes called “portfolio entrepreneurship”, I notice a bit of a trend towards more founders that have their hands in a number of different projects simultaneously. This can look like a lot of things, like founders that launch multiple companies at once, different forms of incubators, founders launching side-project companies while running another one, etc.
I can see why this is attractive, and I can also see how a bit of a creative outlet can be helpful for an entrepreneur’s core endeavor. But I wonder if it’s really net-positive for the vast majority of founders. My old colleague Bijan at Spark wrote a post on this 5 years ago that still rings true. I won’t rehash it, but here’s the money paragraph:
“Ultimately in early stage investing we are backing people. I think founders that don’t want to commit 100% aren’t helping these companies reach their fullest potential. The companies don’t get enough time/focus, employees get mixed signals, end users suffer (and you know how important they are). Plus, every early stage company goes through its ups and downs. If not every day then every week it seems. If the founder isn’t 100% committed then it’s hard to deal with those ups & downs properly.”
There are some entrepreneurs that seem to have been able to do this reasonably well. Jack Dorsey working with both Square and Twitter, Elon Musk working on both Tesla and SpaceX. John Borthwick has done a nice job with Betaworks, launching multiple companies simultaneously. But there aren’t that many examples where this has worked out well.
Maybe these are old school ideas, but I tend to think that building great companies takes incredible focus and dedication, and the odds typically are not in your favor. So I think going old school isn’t such a bad idea for most people most of the time.
Today is an exciting day at NextView. Earlier this morning, we announced our investment in Change Collective (our first investment of 2014). Just as exciting, I am also pleased to announce that we are looking to add to our team for the first time since NextView was founded several years ago.
The venture capital industry is one that is experiencing unprecedented change. New funds are emerging with better strategies that are more in tune with the needs of founders. Additionally, firms are thinking more and more about how to add real value to their portfolio companies, and create more leverage all around for members of the team.
This is why I’m pleased to announce that we are looking to hire a Director of Platform and Community to join Dave, Lee, and I at NextView. Specifically, we are looking for someone who brings to the table four things:
- Deep, authentic commitment to the entrepreneurial community in Boston
- Ability to juggle lots of initiatives quickly and flawlessly in an unstructured environment
- Creativity and marketing acumen to help raise the visibility of our portfolio companies and help the portfolio WIN
- Hunger to work with us to build something great
At NextView, we think of our jobs as “Source, Select, and Win”. We find the best entrepreneurs and teams to work with, try to select the best opportunities that fit with our POV of the future, and work really hard to help those companies WIN. This role is all about Winning, and working with the investment team to propel our firm and entrepreneurs we support further.
More detail on the role and instructions on how to apply can be found at Dave’s blog post here.
My old colleague Michael Dearing (who is an outstanding seed investor in SV btw) shared this tweet recently:
“mcgd: The difference between companies who practice OKRs or equiv and those that do not is stark. n = hundreds”
I’ve definitely found this to be true in my experience so far. For those of you who are unfamiliar with this, OKR stands for “Objectives and Key Results”. OKRs are used in some form by many companies to focus teams around specific goals, track progress, and instill accountability throughout an organization.
There is surprisingly not that much written about OKR’s on the web in much depth. The best collection of info is probably on Quora or this terrific article by Angus Davis at our portfolio company Swipely.
From my observation, it’s a lot easier to manage by OKRs when a company is post-launch and there is some semblance of product market fit. Or maybe, I’d put it differently. When a company is pre-launch and pre-product-market fit, it’s easy to be much looser about OKRs since there is much less continuous feedback from users or customers and goals could potentially change dramatically in a short period of time.
I think that as a founder and CEO, it’s important to set a tone and culture for measurement and accountability from day 1. That’s why I am a fan of setting up a board even as an early stage company. I’m NOT a fan of laborious board meetings and extensive prep.
But it’s easy for early stage board meetings to be just an “update” meeting. “Here are the things we accomplished since last time.” That’s fine and informative, but more or less rudderless.
Instead, I’d recommend using board meetings as a cadence for setting OKRs. Early on, I’m a fan of meeting every 4-6 weeks. Your OKRs should span 1-2 periods max. But then use the time to review progress towards your objectives, and set goals for the next period. This is then an anchor for the OKRs for the rest of the team.
Of course, if things are going sideways, you should feel free to blow up the goals and priorities mid-stream. That’s the nature of companies at such an early stage. But establish this discipline early and take it seriously.
Since I wrote my draft of this post last week, it sounds like there are a few efforts in SF, NYC, and Boston to host some workshops around this, which I think is great. I’ll be working on one as well – stay tuned!
It’s been a yearly tradition for me to share a semi-quantitative view into our portfolio at NextView. Three years ago, I published our first “Stroll through the portfolio” and I’ve published updates each year in January. Here are the posts from 2011, 2012, and 2013.
What I’ve been particularly happy about over the past three years is that we have crafted an intentional strategy and stuck very closely to it from one year to the next. We are constantly re-evaluating our strategy and processes as a firm, but overall we have remained extremely focused and consistent because we think we offer a good product to our customers (entrepreneurs) which will lead to good results for our shareh0lders (LPs).
Because our data from 2013 is so similar to prior years, I thought I’d do something a little different with this lookback. I’ll talk about our focus as a firm and what has stayed the same, I’ll talk about some new developments in 2013, and I’ll talk about what is getting us excited about the year ahead.
Our Focus and What Has Stayed the Same
Here is a quick rehash of some of the metrics I’ve shared in the past. For those who don’t know us that well, I think this is a pretty good reflection of what we focus on and how we work as a firm.
- Stage: We call ourselves a “DEDICATED SEED FUND”. This means a few things:
- We are concentrated. We make 2-4 investments per year per partner. Each investment matters. We don’t do chip-in investments – each investment is a full-allocation of partner time. Surprisingly few seed funds operate this way.
- Seed rounds are what we do. We don’t invest in “syndicates A rounds” as our first point of entry into a company. We invest in companies that are early – we take the early stage risk and hope to be rewarded for that risk. 1/3 of the companies we invest in are pre-product. 1/3 are post product but pre-revenue. 1/3 are post revenue (but very small scale).
- Sector: We invest in internet and mobile innovation. Roughly 1/2 of what we invest in is consumer facing, and 1/2 is business facing (and a bunch of our investments are a hybrid of the two). Most of what we do is application layer software, but we do some commerce, enabling technology, adtech, etc.
- Focus: We focus on “Golazo” companies with capital efficient beginnings
- Founder Profile: 1/3 First Time Founders, 1/3 Repeat Founders, 1/3 “Tom Brady” entrepreneurs.
- Syndicates: We have a bias to lead rounds. We also have a pretty broad range of syndicates that we are a part of. In about 40% of the cases, we are investing with other seed funds. In about 40% of the cases, we are investing with larger, lifecycle VCs. In about 20% of the cases, we are going it alone or with just other individual angels.
What Was New In 2013
- Scaling beyond early. We started NextView just a few years ago, so for the first few years of the life of our firm, the companies we’ve been working with have been <2 years old, and mainly obsessed with proving out product-market-fit and building a decent foundation for growth. 2013 was probably the first year that quite a few of our portfolio companies made the transition from being interesting products that delighted customers, to businesses that were positioned to scale. It’s still relatively early for many of these companies, but it’s nice to see some of our portfolio companies grow revenue significantly with tons of headroom to go. Specifically, a number of our portfolio companies raised some nice series B+ rounds to do this, including InsightSquared ($8M series B led by DFJ), ThredUp ($14M series B led by Highland), and Custommade ($14M series B led by Atlas).
- Traction in Ad Tech Portfolio. We’ve been looking at advertising related investments since the inception of the firm. Actually, my partner David has been around some significant market leaders from his time at Venrock (board observer at Appnexus) and Masthead (board observer at Tremor). Adtech is a challenging area because it’s highly competitive and it’s difficult for companies to separate themselves from the pack. The flip side is that some of these companies can scale very very quickly, and if you can be #1 or #2 in a meaningful sub-category, you can build companies to a pretty big exit. We met with quite a few adtech companies in the first couple years at NextView, but just didn’t build enough conviction to push forward with an investment. But in late 2012 we placed a couple bets in pre-launch companies that came to market in 2013 and started scaling rapidly. First, we invested in TapCommerce, because we believed that they could secure a dominant position in helping retailers manage the massive platform shift to mobile commerce and marketing. Second, we invested in Triplelift because we believed that online publishing is rapidly becoming more and more visual and stream based, and native advertising will prove to be the next major advertising unit on both web and mobile. Both companies came out of the gates fast and have secured (for now) leadership positions in these promising spaces. TapCommerce has already raised a healthy $10M series A led by Bain to accelerate further and Triplelift was named one of top 5 companies to transform advertising in 2013. It took us a little while to pick our spots here, but we’re really excited about how these companies are progressing.
- We moved offices! Not too far away – just a couple blocks down the road to 179 Lincoln Street. It’s a bigger space, with nicer amenities while still retaining the startup feel. It was important for us to move to establish more gravity around our activities as a firm. Rather than just a collection of three guys doing seed investing, we want to build a platform that a) is destined to be around a long time b) creates benefits for companies and founders in our expanding network, and c) forms a hub for startup activity in Boston. All of these were difficult to achieve in our old space, but can be nicely addressed with our new digs. Plus, we are also psyched that Techstars and Startup Institute are about to move in next door as well, so we will have a really cool mini-cluster right here on the 4th floor of this building.
Looking Forward to 2014
- We continue to be extremely excited about investing in great founders that share our ethos and want to change the world. We actually have several new investments that are in the hopper that have not yet been announced, so we are going to come out guns blazing. Our investing approach in 2014 will be very similar to what we have been doing the past three years, but with a couple small (we think good) tweaks. More to come in the coming months
- In many ways, I see this as a new chapter for our firm. The first few years of a fund is about establishing yourself, developing a strategy that makes sense for your market, and proving you can make some decent investments. It’s kind of like the seed/series A stage of a startup where you are mainly obsessed with getting some semblance of product market fit. But beyond that, I think a firm needs to take the next step and show that they succeed repeatably, while continuing to innovate to build advantage in an increasingly competitive market. For my partners and I, 2014 is a year where we really need to be aggressive about building our position as a firm. We have a white board of new initiatives that we are going to pursue in 2014, and we are hungry to make them happen. Stay tuned – this will be a fun year.