Seed stage investing has developed significantly over the past 7 years that I’ve been in VC. What started as a rogue, almost anti-VC strategy has become very common. It’d pretty standard for entrepreneurs to contemplate raising an “institutional seed round” prior to approaching VC’s for series A rounds. Many have said that the institutional seed is the new series A.
This is rational because seed investing makes sense for companies that can have capital efficient beginnings. The challenge for those in the market of seed investing is that the barriers to entry in seed are relatively low. The main reason is that it just doesn’t take that much capital to get started. A lot of folks can pull together a few million bucks from high net worth individuals and start operating as a “seed fund”. One could go about writing dozens and dozens of $20K checks, catch a winner, and then build on that to gradually raise more money. Accelerators and crowd-funding are encroaching on this territory as well. On top of that, you are also seeing funds that used to be classic series A and B funds struggle to raise capital, and so go down-market to write more seed checks.
This is why the market has become so confusing, and why there seems to be a wealth of seed investors. But some winners have emerged, and I’d argue that their position is pretty well cemented. How do they do it? Three things.
1. Leadership. The seed stage is filled with folks who follow. It’s extremely common for me to talk to an entrepreneur that has tons of demand for their round, but is actually looking for someone to lead, set terms, and be the anchor investor in a $1-$2M seed round. If you think about the number of investors that have capacity to invest $500K+ and lead a round, the number of seed funds dwindles to single-digits (in the east coast). It’s a very different skill set, and requires a LOT more conviction (and more capital). Entrepreneurs are also going to be a lot more discerning about who is going to be a major investor in their round and potentially take a board seat or board observer seat. The market doesn’t need another seed fund that rides along with other investors or hangs around the hoop until a hot investor validates an opportunity then tries to get in.
2. Early. The complaint I’ve been hearing more and more is that many “seed” funds are only investing in companies that already have traction. I totally don’t get it. I find that the market leading seed funds, and the up-and-comers I respect get into deals very early. In our portfolio, over 1/3 of our investments happen pre-product. When I think about some of the other market leaders in seed, I see a similar commitment to being true seed-stage investors and get in early.
3. Gravity. After the investment happens, the best VC’s continue to distinguish themselves by the way they work with their portfolio and impact their outcomes. This is particularly hard for seed funds because a) most seed funds invest in quite a lot of companies and b) the funds are smaller and it’s impractical to hire an army of folks like bigger funds like A16Z.
Despite these challenges, the funds that show leadership in this space find ways to exhibit gravity around their firm and portfolio in a way that founders really appreciate. There are a few ways to do this. Firms like First Round and others have created small “Platform” teams to add leverage beyond the human capital of the GPs. We’ve started to do the same by being the first VC in Boston to hire a top-notch full time person dedicated to platform and community. Related to this, some firms also find ways to create stronger connective tissue between portfolio companies, so that there is collective strength in being part of the same network (SV Angel is the classic example of a firm that does this with a very large portfolio). Finally, a lot of gravity can simply be achieved through focus, which is something that most seed VC’s lack. It’s extraordinarily hard to be a focused, active investor in a company if you are making 8+ investments a year per investor or more. It’s much more practical to concentrate your capital and time in a smaller number of companies where you have high conviction and the skills and ability to make a meaningful difference.
The seed VC market will continue to mature and change. But I do think that as things progress, we’ll see more and more separation between the really strong players and everyone else. And I’m pretty convinced that the winners will distinguish themselves through these dimensions above, even as new players come and go and new innovations continue to change the early-stage financing market.
Early stage founders have to do a lot of storytelling. It’s important for fundraising, obviously, but also for recruiting, speaking to the press, motivating the team, etc.
There has been a meme going around about a talk that Kurt Vonnegut gave regarding the “shapes” of stories. The idea that there are only so many different story-arcs out there, and that they can be illustrated in a particular way. There is a cool infographic here and there is a video of him talking about it here.
This got me thinking about the story-arcs of VC pitches, and the stories that get me (and I think a lot of different investors) particularly excited. There are a few of them, but these three below really tend to stand out to me.
Story 1: Winter is Coming
Synopsis: Some structural change or shift is happening that is going to turn an industry upside down. The hero company is either is making that change happen (best case), or is going to solve some major problem or capitalize on some major opportunity that presents itself because this change is happening.
Example: Uber. The first time a cab medallion owner saw Uber working, if he was a Game of Thrones fan, he said “oh shit… winter is coming”
Story 2: Jiro Dreams of Sushi
Synopsis: This is a story of craftsmanship. There are tons of things broken about how a problem is being solved today. The hero company is going to solve it 10X better than anyone has ever solved it before. You trust this hero because she is just that good.
Example: Oculus is a good example of this. When you see their Kickstarter video, what do all the industry experts say? “I have seen lots of different VR goggles before… but nothing like this”. Another one of my favorite startup pitches I’ve written about before was for 2U (FKA 2Tor). The first line of the pitch was “bar none, online education sucks. We are going to make it great”.
Story 3: The Undiscovered Country
Synopsis: I have seen the future, it’s just not here yet
Example: Ethereum or something like it is a possible example. In this story, the hero company contemplates a future that is a step function or two different from the current trajectory of technological innovation. It sounds whacky, crazy, hard to understand, and could be a complete miss. But what is being proposed really does change everything, and that change will span multiple industries, making it a different narrative from story 1. BTW, to learn more about Ethereum, check out their explainer video here. (Thanks Aaron White for this example!)
In a future post, I’ll talk in a bit more detail about how entrepreneurs can craft their story effectively for different audiences, and go a bit deeper into the shapes of these narratives. Until then, I’d love to hear other story-lines that I may have forgotten that are particularly effective and motivating.
Not sure why, but over the last few years, quite a few people I know took on EIR roles at various VC firms in both the East Coast and in Silicon Valley. Overall, there are positives and negatives to being an EIR. The positives are kind of obvious:
- A reasonable paycheck to work off of while you think through your next company
- Exposure to a large data set of portfolio companies and companies that a VC reviews
- Expansion of one’s network through the network of the VC
- Usually few official “strings” attached to the VC aside from an implicit or explicit expectation that the firm get a “first look” at a company that is started during this time.
- Exposure to the venture capital process and a behind-the-scenes look to how VC’s work and evaluate deals
The negatives are relatively well known too. Mainly, they revolve around the signaling and reduced optionality that the entrepreneur may give up by hitching themselves to one firm over others even if that firm has no official rights associated with financing that entrepreneur’s company.
Personally, I don’t feel that strongly one way or another that entrepreneurs absolutely should or shouldn’t consider EIR opportunities. But watching a number of folks go through this, there is another, less obvious downside to the EIR role: it becomes hard to avoid absorbing the negativity of the VC process.
I’ve said before that one of the downsides of Venture Capital is that it tends to be a negative job. You say “no” all day long, you spend the most time on companies that are struggling, etc. VC’s get really good at analyzing investment opportunities and pointing out all the reasons why an opportunity won’t work, or is too high risk, or is too expensive, or is deficient on a dozen other dimensions. It’s hard to avoid this when investing is your day job and you say “no” 99% of the time, but I think it’s not necessarily the most helpful atmosphere for entrepreneurs that are trying to figure out a company to start. Even just hearing the internal chatter about companies can be a bit toxic, but on top of that, EIR’s end up getting pulled into specific discussions around companies, and sectors, and even sit in on company pitches in their areas of expertise.
All of these probably seem like a selling point to founders, who would be eager to expand their horizons and understand how the capital side of the innovation business works. And for some founders, it probably does help. But I think many if not most founders will find it difficult to absorb the learnings of Venture Capital as an EIR without also becoming much more critical and overly-analytical about the companies they are looking to start.
All that said, here are some other suggestions for entrepreneurs who do think an EIR gig is a fit, but want to avoid some of these challenges:
- Focus on firms and EIR roles that are structured around significantly helping you find your next company. This isn’t all that obvious. Many VCs do EIR’s primarily to draw someone on the outskirts of their network into their network. Once they are in, they don’t do anything particularly differentiated to significantly enhance one’s likelihood of hatching her next company – they basically get a desk, a paycheck, and can “hang out” or grab coffee with the investment team once in a while. Talk to past EIRs and try to tease out how instrumental the VC firm was in helping them find an idea, shape their team, etc through something structured and programmatic or just plain effort and sweat equity.
- Avoid the temptation to play VC. This is something else I’ve seen – an EIR role ends up being a way to “get to know” a talented entrepreneur with the potential that he or she would actually join the investing team instead. It’s easy to get sucked into “playing VC”, and it’s insanely distracting to be put in the position of deciding whether to pursue venture vs. actually work in earnest to start a company. I think it’s hard to do both, and introducing the possibility of playing VC just gets in the way of an entrepreneur’s ultimate goal.
- Don’t do it for too long. Most EIR roles I find are time-bound at something like 3-6 months. But some are open-ended. I think it’s best all around to limit one’s time as an EIR for a bunch of reasons. The longer you do it, the more likely it is that you’ll be impacted by the risks above. Also, I think that it’s helpful to start getting different perspectives after a while, and also to get re-energized and re-focused. It’s can be pretty frustrating for an entrepreneur to be an EIR for a period of time and not end up with an idea or company that they are ready to be fully committed to. Funny enough, I find that most of my friends got a burst of new energy and focus when they completed their time as an EIR but continued experimenting on their own. Maybe it’s the change of scenery, or the fire knowing that you are no longer on someone else’s payroll, but it’s a trend that has been interesting to observe.
There was great news yesterday in the MA entrepreneurial community when Governor Patrick proposed sweeping legislation to ban companies from enforcing non-compete agreements. I’m really excited about this, and think that it will have a big impact. But just as important in my mind is a proposal that was introduced to allow international entrepreneurs to build businesses in Boston with an exemption from the H-1B visa cap. My friend Jeff Bussgang has discussed it in more detail on his blog here.
This particularly hits home for me because I myself was on an H1-B for my entire professional life before gaining permanent residency in the United States in 2007. Lucky for me, it was a lot easier to get an H1-B when I was applying for them than they are today. Just recently, the entire allotment (85,000) for H-1B visas for FY 2015 were filled in the first week. When I was applying for jobs, the cap was 2.3X that (195K), and I have to imagine there was not as much demand then as there is today.
It’s hard to underestimate the impact that being able to work in the US has had on my life. Almost certainly, I would have centered my career around China and Southeast Asia, and my professional trajectory would have been totally different. On top of that, I met many of my most important people in my life through work experiences that I was only able to have because of an H-1B. Most importantly, my wife Nancy and I worked at the same company after college, a boutique consulting firm called “The Parthenon Group” (Parthenon was the first company to sponsor my H-1B). There is no way we would would be married and have a family today if it were not for their ability to sponsor me. Also, David, one of my co-founders at NextView also worked at this firm, as did some of our first investors and the founder of one of our portfolio companies. I also probably would never have been able to work at Ebay in the current immigration environment, because by the time I was seriously speaking to them, there would have been no visas left for someone like me.
As an investor, we’ve benefitted from the ability of international founders to start and build companies in the US. Four of our portfolio company founders are from other countries (India, Estonia, Croatia, and Canada). But building US based companies for these founders have not always been easy. In particular, Jay Meattle, the founder of Shareaholic struggled to stay in the United States for years even after raising millions of dollars in capital from terrific firms and building a company of impressive scale. It was a really unfortunate tax on the company, and caused him to start building out part of his team in India for a period of time rather than hiring more American employees, which was his preference. Thankfully, Jay has been back in the United States for over a year and these immigration worries are well behind him.
We will see where things go – I’m excited for this proposal and think that this, or something like it has a lot of promise. I hope the proposed program works and is replicated more broadly around the country. Stay tuned to this blog for updates and ways that you can help promote immigration reform further to make the United States (and MA in particular) a better place for entrepreneurs to build their businesses.
I was as surprised as the next person to hear today that Fred Destin was going to be leaving Atlas to return home to the UK with his family. I’m sure it was a tough decision, but one I can understand given someone who has lived abroad for most of his life.
Even though Fred was always obviously not a local Boston-guy, he had a tremendous impact on the tech community here that will be sorely missed. In particular, there are a couple things I’ve admired that I hope “sticks” even while he relocates across the Atlantic.
1. Fred did a really great job re-calibrating the local ecosystem around taking big swings. He looked at large scale, extremely fast growing, network businesses and said “why can’t those be built here?”. He also appreciated the fact that often, the most disruptive companies look like “toys” in the beginning, and that some of the best companies focus on growth and scale while being patient that revenue and profitability will come when the “technology leverage kicks in”. It’s counter-cultural here, and I appreciated his willingness to push for this loudly, even in the face of occasional criticism.
2. Fred has also been the model of someone who is vocal, engaged, and genuinely excited about the local tech eco-system in Boston. Yes, it’s by definition self-serving as an investor, but Fred has been more active than most, and I think genuinely excited to help this area become more attractive and friendly towards entrepreneurs. I’ve also always appreciated the way Fred has been very quick to openly express his admiration for companies and founders outside of the Atlas portfolio. Most VC’s (myself included) have a hard time not saying snarky remarks of companies that they are not involved with. It’s harder to be positive and constructive, which is what I’ve found Fred to be in nearly all of my interactions with him.
It’s too bad to see him go. But I think Fred will leave a positive mark, and I think some of these cultural norms have some staying power and will make this eco-system better even in the months ahead. Thanks Fred!