Some Thoughts On The Seed Fund Phenomenon

There have been quite a few posts written about this meme in the past few weeks. 

I think that Paul Kedrosky got the discussion started with this post. Chris Dixon wrote an interesting response. And yesterday John Boyd wrote a thoughtful post on the topic.

John makes a point in his post that I want to second and add to. He says:

While many businesses require a lot less capital to start, they don't require less capital to grow.

John's comment made me think about a blog post I wrote three and a half years ago called "Web 2.0 Is A Gift, Not A Threat, To VCs." If you haven't read that post, I would urge you to go read it. I blog because it helps me think through a lot of issues we face in our business and that post was really useful to us over the past several years of investing.

Here's a chart from that post:


This is an entirely theoretical chart. There is absolutely no real data behind this chart. That said, it does reflect our experience investing in about thirty "web 2.0" companies over the past seven years.

What this chart says is that it still takes on average $20mm to get a web startup to sustainable positive cash flow. But the vast majority of that capital will be required after the business has "traction."

What has changed in technology venture capital is not so much the total capital requirements, but when they are required. This is very good news for everyone involved. It means entrepreneurs that don't have to take expensive dilution early on in the development of their business. And it means that entrepreneurs can raise the big money later on when their business is worth more. It means that entrepreneurs should be able to keep more of the companies they start. That is good for everyone.

It also means that VCs don't have to take big risks early on. They can write checks in $250k and $500k sizes. It means that when the businesses develop into winners or likely winners, they can write the bigger checks like $3mm or $5mm or even $10mm. This is good for the VC business. Less writeoffs, more capital deployed into the winners and less into the losers. 

Where this all gets interesting is the point at which it is clear that the business is going to be a winner. Let's look at our portfolio company Foursquare as an example. We invested in a ~$1mm seed round last summer, investing $500k. By that time, Foursquare had already launched and was growing nicely. Dennis and Naveen had built the service all by themselves and had just lured Harry onto their team. They needed no capital to do that. In fact they did not even have a bank account when we went to close our seed investment. That seed round was highly competitive and Dennis and Naveen could have raised money from dozens of investors. A year later, Foursquare is scaling quickly, adding 1mm new users in the past three months. They need a lot of capital now. And they were able to raise it, $20mm on their terms, a few weeks ago. As competitive as the seed round was, the large round was even more so. The company added one new investor, Andreessen Horowitz. And our firm and OATV got to invest a bunch more into Foursquare. 

Clearly Dennis and Naveen used the capital efficiency of web startups to their advantage. They did not need any money to get the service built and launched. They scaled the service to 2mm users and the employee base to close to fifteen people on just over $1mm of seed capital. And they got the capital they need to scale it to a much larger business on their terms. That's how it is done these days.

And the seed investors, USV and OATV, got to put a little money into the business early on and then got to write a big check when it was clear the business was going to work. At least it is clear to me that the business is going to work. I much prefer doing it this way than putting a ton of capital into the business early on before the outcome is reasonably clear.

But there are two places you don't want to be in this new world. You don't want to be the VCs who wanted to be in the "big round" and didn't get to be in it. The deals that work get very competitive when it is time to raise real money. That's a problem for VCs who don't invest at the seed stage and are betting they can get into the deal in the "first venture round."

You also don't want to be a seed fund that is invested in a company that hasn't scaled yet but is out of money. Then what do you do? You can write off the investment or you can put more money in. Or you can find a VC firm to invest. But what if the company isn't far enough along to attract VC money? 

Very few entrepreneurs will execute as well as Dennis and Naveen did over the past year. Most will need a longer runway before their business scales. And that is an issue for the seed funds. They need to get bigger or find a "bridge" to VC for those companies that take a bit longer.

I think we will see both things happen. First Round Capital, the grandaddy of the web 2.0 super seed funds, has now evolved into a firm that is twice as big as our firm in terms of investors and they have about $200mm in total capital under management. And I've met a couple investors who are talking about creating "seed bridge funds." I think that's a great idea.

Will the seed market crash? I don't think so. Will it evolve and change and look differently in a few years? Absolutely. We are still figuring out to evolve the VC business to reflect the change in financing needs of entrepreneurs and we aren't done by a long shot.

#VC & Technology

Comments (Archived):

  1. seankelly

    Is it possible you overlooked that Dennis and Naveen had the luxury of their own capital from prior success to hold out for the “right” deal structure?

    1. Gregory Magarshak

      very important pointself sufficiency is attractive

    2. Nuke Goldstein

      Right! But even if the core management team takes no salaries, 15 employees @ $1mm… unless they run a slave ship these numbers don’t add up.

      1. fredwilson

        they built it up to 15 over the course of a yearaverage employee base was more like 6, maybe 8

    3. fredwilson

      naveen didn’tand it isn’t like dennis made a killing on dodgeball

      1. seankelly

        The other point over looked perhaps is that they in fairness have worked on the concept since 2000 first as Dodgeball then Foursquare. Most new entrepreneurs overlook that there are no real overnight successes and the real funding requirement is to survive the 7-10 years you may need to get the right product/market fit.

  2. Julien

    This is very interesting, indeed. do you think that eventually all these VC (like USV), will own or finance these super-angel funds? I know that Betaworks already gets financing by a lot of bigger VCs, I guess the target is to have both a return (maybe small), but also a significant access to the dealflow?

    1. fredwilson

      I think you have to be able to do it all (seed and growth) in a single fundEverything else is sub-optimal in my view

      1. RichardF

        I wish this was the view of VC’s in the UK. We are so far behind in this thinking, Index and Eden are leading the way but we need more.Chris Dixon also has blogged the counter point

      2. JLM

        There is a bit of a difference between being “seed” and “growth” when you are, in effect, growing your OWN portfolio companies. It is effectively risk managed capital rationing.The risk management aspect of having a lower finite investment in the portfolio canines is a fundamental capital allocation skill. If the investment is going to falter, there is great wisdom in having cooked a 2-egg omlet rather than its country cousin 4-egg omlet.I respect that attention to detail as it is a rare skill these days —RESTRAINT. Going “all in” is great for Texas Hold ‘Em but it is not the wise thing to do in the investment business.

        1. fredwilson

          great point. doing a growth investment in one of your own portfolio companies is very different than doing it a company you don’t know well

      3. Eghosa Omoigui

        I agree. Worth noting that it is not a skill set you find very often among VCs. I think AH has a useful conceptual approach to this but the firm and its partners are still pretty new to VC. And of course, ‘growth’ is a continuum and not just an event…

  3. kagilandam

    Diluting the risk with multi-layer investment…how about the following structure :-)Start-Seed – 25-100K (show me the proto)Seed – 100-500K (show me the first 100K users)Super Seed – 500K-2M (show me the financial report and 1M users)VC – 3M-6M (show me YOY % growth)Super VC – 6M-20M (Do you really need us?)Direct from Almighty – 20-~M (Go figure yourself!!).

    1. fredwilson

      I love it

    2. aminTorres

      This assumes that the core business model is directly influenced by the users base right? But what about other factors for example. One may have a smaller users base but a larger number of say products that are more directly connected with the core business model.In the case of a project I am working on that deals with owner’s run vacation rentals, we have twice as may properties listed as we have vacation rental owners. This is mainly because some of them own or manage 2 or 5 or more rentals in some instances. In a case like this where they are paying to promote and list on the basis of individual properties (not users), is it fare to assume that the 100k users can actually be 100k property listed? In other words, would you look at the number of listings instead of users?

      1. Tereza

        The 100k users metric is for consumer web businesses.What you’re describing sounds like long-tail/small business B2B which in my mind has fundamentally different properties — kind of a hybrid between B2C and B2B. So it strikes me that your business (a) may run on a pair (100k end users), plus another goal for either your landlords (# of, or the # of properties listed). As you manage the business you may find yourself adjusting what that “right” metric is. Hopefully the latter becomes a leading indicator for the former.Also what you describe should be monetizable sooner than classic B2C consumer web. That is great for cash flow and reducing your capital invesent requirements.That’s my gut response not as an investor but as a marketer.Will be eager to hear Fred’s and others’ take on

        1. aminTorres

          Thanks Tereza.

      2. fredwilson

        a few weeks ago we talked about “key business metrics” in an MBA Mondays postfor your business, the number of listings you have is certainly one of thembut you need a good number of potential renters coming every month to attract those listingsso UVs is still an important metric for you

        1. aminTorres

          Thanks Fred, I will go back and read: key business metrics.

    3. JLM

      Brilliant segmentation of investment v progress. Evidence of an orderly mind. Well done!

    4. John Frankel

      Note the funding gap between your Super Seed and VC. This is more like $1.5mm to $3mm and there are a lot of companies that find bridging that gap tough to do. They thus “bootstrap” further on seed/angel funding and then wonder how they would spend VC sized checks in their businesses.

      1. ShanaC

        I think we have to adjust our expectations here. If they are stuck there, no amount of money is going to push them further. And it’s a combo of problems of how we create businesses of the web.Making something that is a “platform” doesn’t cut it. Having a great business plan also doesn’t cut it. marketing, doesn’t cut it. I’m not sure what does.

    5. Mark Essel

      What portions may be boot strapped/self funded and what portions require external funding – This is the mystery each startup has to solve.Percentage of startups which survive each phase (source)Start: ~?% -many decide to abandon an idea because it proves intractableOut of those who make it past the start here are the percentages.Seed: 45-60%super seed: 25-40% (?)VC: 10%super VC: 5%profitable/private market: 1-3%A company can succeed by providing a profit to their investors before reaching. According to that source first time founders had an 17% success rate by that criteria, and a 30% if second time entrepreneurs. Interestingly enough first time founders who worked with experienced VCs got their chance of success up to 22% (from 17%)

    6. ShanaC

      I really think that that 3-6 million round will drop out and partially merge with Super VC round as the next new normal.Same goes with start-seed and super seed. And I think you’ll see start seed go down as low as 5-10k and upwards of 300k depending on what one is doing (i’ve seen some implementation issues that people keep asking me about with much tighter financials because they have logistics. Complex business-wear that resolves how a complexity is dealt with is also going to have long sales cycle, neither of these facts are bad)That gap is going to make life interesting when it comes to companies breaking out. I keep telling this to people, and I feel like I am getting ignored in person, you have to have a really superb blend of product, people, and at least some sort of basic marketing plan (and maybe a basic basic business plan built into the marketing plan). This is at least so you have a testable thesis of something to build off of in case something goes wrong during iteration A! (which, because I have yet to meet a robot building a company, something will)I also really think there should be a gap between Direct From the Almighty (aka the outsiders cadre who want to pile on but we’re polite and we don’t say that) and Super VC. Usually that cash infusion is something that happens out of sheer belief in the power of the service/the service is performing as expected/but the company is private. Those people are starting to act more closely to their PE equivalents, even if they are modeling off of the VC understandings. They have a relatively stable company to work with (Facebook anyone? It could go bust, it is also not likely) I really want to meet someone from that end of the spectrum of investment and ask how they do it and if they plan on changing their models to more closely conform to the reality of what is going on…

    7. Fred T

      My take on this would be based on our company. Although we can consider a part of our technology as web 2.0 with the virtual machines, we cater to startups and enterprise with 24/7 uptime and the method of gaining traction may be entirely different from individual users. Some startups will require us to present physical servers performing realtime data replication and server migration; in to which we may need the fiduciary resources to gain access to. Once we are given the chance to scale to that level, our traction will have a likely chance to grow exponentially as we add physical servers on top of the from virtual server storage that we provide.

  4. Dan Ramsden

    I think the seed fund phenom is a long overdue recognition that early stage investing is an option purchase that should be priced like an option purchase. The costs of doing business online having diminished to a point where $500k could well get someone started, the price of the option has diminished to a level that more closely resembles true option value. Additionally, because realizing on option value also requires a highly diversified portfolio, a fund containing 50+ positions accomplishes diversification much more effectively than one with 10-15 positions. Thus… seed funds.I also think, however, that there could be an inherent conflict in seed-stage capital being provided by a full-fledged VC. It may shift influence to the VC quite drastically… which from the entrepreneur’s perspective is equivalent to having drastically underpriced the option sale. If the source VC for whatever reason does NOT want to reinvest in a future round, the probability of that round getting done at all diminishes (by a lot).So, I think seed funds make very good sense, but I also think it’s important that these should be true seed funds and clearly independent in order to eliminate any conflict.

    1. fredwilson

      i think the opposite is truemost “full fledged” VCs will give an entrepreneur two rounds minimum, largely because they can afford to do it and because if they don’t they will get a reputation as an “option buyer”go with a full fledged VC and you get two roundsgo with a seed investor and you get oneeasy choice

      1. Dan Ramsden

        Well… since you put it that way. 🙂

  5. Liam

    What did Foursquare do with debt during that first year? With such a capital-efficient business, you have to imagine a tiny bit of debt could have bought another 6+months and made the terms of the Series A even more company-favorable.

    1. PhilipSugar

      Not to be negative, but there is no such thing as debt for a company the size of Foursquare.

      1. Liam

        I doubt its that cut and dry. I’ve only done it at Series A and later but with these seed investors and their enthusiasm about the company I don’t think the analysis is much different. I know bankers that would take a close look. Adds 250K or 350K to the first million and you’ve got another couple months of runway and piece of mind.

        1. PhilipSugar

          Again with all respect, I’d love to know the bankers.See the thread up with JLM, I will not debate what used to happen, because it was (major emphasis) possible.Right now with the exception of SVB that is really lending to USV it is very hard.

          1. Liam

            I work with Square1 right now and they tell me they’d have looked hard at this deal… they work with lots of VC-backed companies. And yes SVB is clearly in the space (I know and like the SVB team too).I’m not arguing that it’s hard – it is. So is raising venture capital. But for companies backed by top funds, seems like the debt market may be starting to open up again.

    2. fredwilson

      they got far enough without debti am not a fan of venture debt for the most partit’s debt and it has to be paid backif you can’t, the bank owns the companythat is too risky for my taste

      1. Liam

        Fair enough, but every month counts and sometimes great to buy some time without the dilution. How risky would $300-$500K in debt have been for Foursquare? A very competitive seed round followed months later by a very competitive process for Series A. Not to mention that no bank wants to own a company especially in this industry. Makes sense to be careful of course, but risk depends on the circumstances.

  6. Mark Essel

    Foursquare is a tough act to follow, but they’ve shown they can build without funding and that they can grow efficiently with seed funding.Are we confident it will take 20million to execute successful web companies – if those are people costs yes, but if they’re tech costs I would expect to see a drop

    1. Tereza

      I’d love to hear that too, Mark.Of the $20m, what % is tech (devt, platform scaling, maintenance), what % is demand generation (Mktg, customer acquisition).And does that $20m assume the co will do some acquisitions along the way, to sort out a fragmented market or accelerate filling out their feature set (like Twitter)?

    2. fredwilson

      it is mostly people costthings like community management and “environmental remediation” issues like spam, hacking, abuse, etc take bodies

      1. Mark Essel

        Thanks Fred, great to get an inside cross startup view of growth costs.I’m still amazed at the ramping up to 10-15 heads on under a million dollars.

  7. Rahul Deodhar

    There is also some amount of organisation building that is yet to happen. That is why the chart is scaling like that. As we evolve, some organisation models will emerge (we can call them Web 2.0 infrastructure) that will help keep the costs lower, still along that curve but way less steep. To a degree Facebook provides that kind of infrastructure. But there is still way lot more work to be done on this side.

    1. ShanaC

      What kind of organizations would you like to see (beyond bridge funds)Some things I haven’t seen en mass yet is Web 2.0 for businesses. I was talking with Someone recently, and I had passed on the vague idea that’s been percolating for a while of how do you get many people to talk to each other in a business context when things have to be kept quiet(er) and it isn’t as clear who you should be talking to. (B2B) At least with a consumer, there may be some prototypical person, or you can do some more research. In b2b, you seem to be dealing with both a person and an organization (or multiples of both)

      1. Rahul Deodhar

        I think two missing pieces.First, the idea of VC was that initial capital would be taken care of so that the idea originator is free to create the business. The idea of multi-level financing was to de-risk the capital investment. What it has led to is very surprising. The multi-level funding requires the idea originator to continuously canvass for funds. Paul Kedrosky talks about VCs forcing capital to companies. At the same time we have capable VCs holding back funds for other VCs to come in. That reminds me of something similar in debt markets – consortium lending. Unlike popular belief risk assessment weakens when bankers get into consortium deals. What we need is a VC who is committed throughout the cycle, both in terms of ability (size of funds) and intention (no consortium deals). We need infrastructure to differentiate between VCs in terms of reputation or otherwise.Secondly, the current crop of Web 2.0 companies(essentially B2C) are competing for consumers. So these companies have a good grip on the need part. But needs are diverse, so when you want to address the needs you need other companies (who also work on Web platforms) essentially B2B in nature. And here there is a dearth of ideas. We are getting there but at the moment the C are challenging B2C about how they know the needs (which actually B2C are guessing rather than asking). Once these intermediate companies are set up then we will find it cheaper to create and test new products and companies.

        1. ShanaC

          I’ve always wanted to build a B2B. B2B has more interesting problems to solve. And a number of those problems are actually of only medium complexity if you start asking questions (I decided I wanted to one day because I’m bizarre like that). That was the original reason how I got to here.You need a lot more help to build a B2B. Consume focused products are like kids. B2b are like Adults. They have more problems and moving parts when they start. Stuff has to be decently executed for certain fields because people who are in charge are in charge of recommending you across a number of other places. And that is annoying. I actually wrote up a business plan of how to do this, and then I mostly junked it, because I realized I have no idea of how to build out and then market more effectively. And from what I was getting after a while here, what I was saying wasn’t half bad for nothing built (didn’t know how to build for the level of complexity I was looking to deal with/ help other people deal with) Here is an example of a logical problem that is actually easier than it seems to solve (and I gave this one away to the company that probably should have it, so ha) Social media tools for Small business to keep connected to customers are very in. what is you are a Small Business that deals with other small businesses, who do you connect to? Ah, then what your tool needs to do, is keep tract of who you are connecting to to and about within a company, (aks fun database sugar), sort of like the OldSpice man keeps personalized responses. So then you have tabs on your semi-personalized responses within your social media world, and how they interrelate, so that when person at business a sees what was said to person at business b, they think positive thoughts. It’s a play on all things already out there….

          1. Douglas Crets

            Can I see this business plan you speak of!? I am building b2b too. It’s mire engagingDouglas Crets

          2. ShanaC

            I have a much better language for what I want to do now. Just a warning. Ican rewrite a prospectus, and then from there, you can see the businessplan, if it really interests you that much (I should tell you I copied thestyle the one the Government’s small business administration did, I shouldtotally redo how I did all of this) It still has no numbers plugged in,because at the time I was looking for help to figure out how do you do that.(Though I did figure out that if I captured 20% at $125 per month of themarkets I was looking at, I was doing more than ok. The second largeststate alone would be something on the order of $44,520,000/annum with just20% of the market. And I assumed it would be a royal screwup at 20% Andwhile there were some products similar for general management, not for whatI was doing specifically. Very strange.) I still have only parts of itwritten down, remember that. I came here, and I had to learn all of thesemysterious pieces (like spreadsheets). No one told me that when I started. I was just a random college student who saw a problem and was cracking upabout it, and thought it would be better to solve it. I still plan on it, Ijust think I need some polishing of a year or two of work (B2B is a verydifferent world than consumer)That being said, every person I’ve mentioned this to who it is not beingsold to seems to think this is a brilliant idea and thinks it should bebuilt. The actual consumers are either in running terror, think itsterrible, or go “I can see parts of it, but how would you manage to sell it” And that, is a very complicated question which I have not managed to figureout at all.

        2. JLM

          The original thinking about the efficiencies of “loan syndication” was predicated upon the concept that a number of banks did not have to build nationwide lending organizations if they would all just participate in funding deals proposed by a syndicate leader who had worthy folks in the field, reasonable policies and competent due diligence capabilities.The lead lender ran the books and got the origination fees and the balance of the lenders bought into the loans following their own sense of diversification. No loans were lost to competition because they essentially did not compete with each other. A gross oversimplification but not far from the truth.There was even the mythology that the lead lender had a bit of “work out” expertise in addition but unfortunately that and the Easter Bunny turned out to be urban legend.In some ways VCs have accomplished the same thing by their open participation in deals which might otherwise have generated a bit of competition. Segmentation by fund size and stage discipline have created a similar symbiotic relationship.

          1. Rahul Deodhar

            Is there a mechanism that can ensure that risk assessment is appropriate. In startup case we also need to assess viability. So are consortium VCs (for a lack of better phrase) ensuring appropriate controls in assessment of viability and risk? If not the symbiosis may be a good-times phenomenon.Personally, I doubt if such mechanism exists. The system, per design, goes two polar opposite ways. Either too much control (too many assessment variables etc) stifles investment which is a bad outcome. Or, the VCs take too many risks because net individual risk is quite low which means capital wastage again not an efficient outcome. I think it is a feature of the system.If we can devise a mechanism to manage it, the system can be vastly improved.

          2. JLM

            The fundamental skill for a VC may, in fact, be the ability to raise money and the greatest impediment to the attainment of real excellence may be the assurance that they will collect an asset management fee almost regardless of performance.It would be interesting to ask a number of VCs to reveal their actual written due diligence metholodogy. I would be willing to bet that very few have a systemized way of evaluating individual deals.The polarity and the pendulum effect is obvious and only more pronounced by the personalities involved and the blind reinforcement created by market driven success.I used to think I was brilliant when I made unleveraged 30% returns and 100% leveraged returns even though the market was providing those returns to everybody. I just felt a lot smarter. Now I feel substantially dumber.

          3. fredwilson

            we don’t have much of a due diligence processeach deal is differentbut we do have a combined almost 60 years of venture investment experience between us that we rely on

          4. JLM

            Good judgment — the product of experience.Experience — the product of bad judgment.I have no brief against experience and judgment and a bit of tuning fork vibrating wisdom — all earned at full tuition no doubt. I am a great respecter of instinct.The older I get the more I find myself negotiating with myself and finding the necessity of documenting how I actually think about things. The intellectual equivalent of “walking the cat backwards” from success or failure and documenting the instant in time and which particular decisions and judgments — made or missed — which began to separate the deal from the pack.As a pilot wiith a significant number of hours, I sometimes find myself getting a bit rusty and checklists that I have usually run from memory are checked, doublechecked and re-checked until I knock the rust off.A good read is the Checklist Manifesto — not so much exclusively from the perspective of checklists themselves which I absolutely adore but standing for the proposition that just a bit of thoughtful organization — particulary for guys like us who have engineering degrees and MBAs in finance and deal with a lot of different folks but in typically the same context — allows us to repeat our successful moves, thought processes and instincts while simultaneously avoiding the pitfalls for which we have also paid full tuition.I have a 17 page DD checklist which I update annually and it never fails to provide a bit of learning along the way as I make the annual update. It is absolutely the Rosetta Stone when dealing with training others but it also allows me to go completely intellectually limp and come roaring back when the next great deal comes down the pipe.As they say there is no learning in the second kick of a mule though there is a tuition invoice.

          5. PhilipSugar

            I have stolen your first line and people love that line. I shall also steal the last line.

          6. JLM

            Observation on experience — in the world as it exists today, nobody has 20-30 years of experience any more, rather we all have one year of experience 20-30 times.We could never get away with the way we ran our businesses 5 years ago.The world is moving fast and faster.Not a criticism just an observation. Makes life interesting but creates an obligation to stay sharp.

  8. Amish Jani

    Completely agree. For me the question of a seed bubble has little to do with valuation or the number of microcap funds/angels versus the number of companies being spawned. With the proliferation in number of companies seeded (increasing rapidly) against a fixed or even declining venture backdrop, the bar for what clears a Series A and stands out from others inevitably has to move upwards… The best companies will never feel it, but tons of companies in the middle will either need more capital from insiders to move the needle further or will not make it. Wrote a post with my thoughts a few months ago on it, if interested. I love the seed bridge concept if it works…. but I wonder whether companies caught in the middle stage would be best served by raising more from insiders (do it quickly and focus). If they can’t, outsiders may either spin them more or ask for tougher terms…. Key question for entrepreneurs to ask their investors. Interesting times!

  9. andyswan

    This post also describes the ONLY reasons that I am comfortable and willing to invest in startups as an individual:1. Even with modest cash to invest, I can get a significant portion of a business that has the ability to go BIG. With ONE win from seed stage you can make an entire portfolio a nice winner.2. My modest cash CAN be a tipping point into “traction” for a company…it doesn’t have to be part of a $5m round to be effective3. The multiple rounds following a successful seed investment add liquidity opportunities to private investing.4. And of course most importantly, I know that I can add a lot of beyond-cash value and have a positive impact on my own investment, much like quality VC’s do at later stages. Essentially, you’re playing roulette with one hand on the wheel.This wasn’t possible 15 years ago. I hope nannies Obama and Frank don’t push me out of this opportunity because they feel a right to dictate how my money can be used (direct violation of the 4th amendment), but I fear they will….in order to show the “little guy” how they are sticking it to “wall street” (as Fannie whistles with $1T into the sunset).Anyway….rant portion over….set out to write how this phenomenon is great for both the VC and the angel, because now we both have more opportunity to invest effectively in our own style.

    1. ShanaC

      That’s also a huge change. Imagine you had a portfolio of losing stuff. It’s totally possible now. I keep seeing stuff I would run away and hide from. Far far away.Far more interesting is why things are not gaining traction, what is missing from the mix.

  10. Adrian Scott

    I like the capital-efficiency of the new/updated model — deploying capital at more appropriate times. I do think it makes things tougher for VC financial performance and shifts more power to the founders. Probably the biggest piece missing that would help VC returns while also encouraging seed investments, is a way for the seed-stage VC/super-angels to be able to lead (or be large participants in) subsequent rounds efficiently. I haven’t seen a model for that piece that works well.Either way, it’s exciting to see the evolution of the model. The industry’s going through the process of making initial investment fast and efficient towards the small business loan processes wells fargo, bofa and other banks put in place.

    1. John Frankel

      This is what we are working on at ff Asset Management. It will be exciting if we can execute to plan.

      1. Adrian Scott

        ok neat

    2. ShanaC

      I don’t necessarily think that shift is a bad thing. I oppose the drama of Web 1.0 that my professor made me read about.

      1. Adrian Scott

        It’s a good shift in many respects (speaking as a founder). I’d love to see more innovation in their business model from the large VC funds, as I think that would be good for all in the ecosystem.

    3. fredwilson

      they have to turn into real VC funds, the way first round did

  11. JLM

    This post typifies the high quality of this blog and its value to its readers.This is both current and cutting edge thinking and practice in a fairly tight lipped and arcane business. There are not a lot of VCs who would be as generous in their education as this post, in fact, demonstrates.This thinking — which is normal while being both evolutionary and revolutionary — is before its readers far earlier than it will be in academia and before it is considered accepted wisdom.It is interesting to me to see the thought process involved as it is typical of many different business growth models — stick your toe in before going for the full blown skinny dip.It should be a comfort to LPs to see a VC who is able to identify, plan for and execute an investment thesis which minimizes the absolute magnitude of the financial risk amongst the 1/3 of the investment portfolio which is destined for the dustbin.That is old fashioned risk management which banks used to be able to do. Now they just use NO as their risk management policy.Fred, I appreciate the lesson. Thanks.

    1. fredwilson

      so true about the banksthanks for the kind words JLM

      1. PhilipSugar

        Yes, having a fresh experience dealing with banks, you might as well lend the money to yourself…..literally I know that sounds ridiculous but you will have better luck.

        1. JLM

          I have raised or borrowed well over $1B in my biz career and I have never seen a tougher debt market from banks small and large.Banks will literally NOT lend to you your own deposits. Literally.This current environment has not even been minimally impacted by any government action in any discernible manner. The gap between government rhetoric and actual banking practice is inpenetrable — no fault of the government, mind you.The bank examiners are running the entire banking world now. They might as well sit on loan committees as they are influencing every loan decision is a decisive manner.

          1. Douglas Crets

            Depending on what industry you invest in, or operate in, I’d love to knowmore, and perhaps it might have some relevancy to investing strategies forK12 education. Or the for-profit education space, generally.

          2. fredwilson

            silicon valley bank is lending to tech companies with strong venture backing, as they always havebut the truth about SVB, a partner i really love working with, is that they are lending against the creditworthiness of the VCs, not the companies

          3. PhilipSugar

            Does Union Square Ventures in anyway have to guarantee the loan?Or is it just an implicit guarantee meaning if you have to wind things down you’ll look out for them and not have the company go into bankruptcy.

          4. fredwilson

            We don’t guarantee the loans

          5. PhilipSugar

            Totally agree,I have borrowed infinitely less than you have and on a totally different scale, but my comment about lending it to yourself wasn’t a joke.I had to switch banks because my current bank started charging $100 fees on every Canadian check I received drawn on U.S. dollars. Way to try and make up all of your loses on my back!So in my quest to switch I also wanted to renew our unused line which is minuscule compared to our tax bill over the last two years, our average balance, AND the equity in my house AND the equity in my partners house. (at my level personal guarantees are involved)We got rejected three times. Literally easier to lend it to yourself.

  12. robchogo

    Good balanced analysis. On your last point Fred: “We are still figuring out to evolve the VC business to reflect the change in financing needs of entrepreneurs and we aren’t done by a long shot.”How would you say USV has evolved their approach since inception in response to changes in the market? What areas of the venture model are you thinking about these days that might morph in the next 5 years?

    1. fredwilson

      we have been more willing to write smaller checks than we thought when we started the business in 2003i think we are going to see much smaller partnerships and fund sizes across the board

  13. RichardF

    Great post 3 1/2 years ago by the way. It was and is bang on. Seems strange to try to read comments without Disqus too.

  14. Charles Birnbaum

    Great post. What’s also really interesting is that as the cap requirements and methods of seed funding have continued to evolve of late, so has the future of exit opportunities for these businesses. This seems to be happening in parallel.The opportunity for a trusted & liquid secondary market for quality private equity, something we have discussed before in the comments here (and some are already working towards this), will be crucial for VCs to fully reap the rewards of this new paradigm. Otherwise, the traditional exit paths (M&A, IPO) will make these early shifts less monumental than they seem.

    1. fredwilson

      i agree

  15. Berislav Lopac

    It’s nice and great when a startup can show traction very early in the game, especially if it can do that with no external investment. But this is possible only if there is very little technological innovation — most of the startups du jour — like Foursquare — are essentially building a new type of product on a well-known technology stack.But what about technology innovation? A truly innovative startup will take much longer before it can launch a product and bring revenue — as it first has to build and test the new technology behind the product. Does that mean that they are not interesting to the investors in this new world of “no funding before traction”? By extension, does that mean that independent innovation is doomed, leaving everything either in the hands of giants like Apple (right) or Microsoft (oh my), or in the open-source community?

    1. fredwilson

      we have a portfolio company, 10gen, that has built a nosql datastore from the ground upthere is a lot of technical innovation in that companythey have taken very little investment to date

      1. Berislav Lopac

        Yes, 10gen is exactly the kind of startup I was talking about. But my point wasn’t that such companies need a lot of funding, onthe contrary — I was addressing the investors’ approach of “build it and we will come”.Actually, your investment in 10gen and MongoDB inspires so many questions… Would you mind answering them in a private email?

        1. fredwilson

          sure, send me an email at fred at usv dot com

  16. PhilipSugar

    I’m not a big baseball fan but it really is exactly like having a good minor league to build your big league team.Safeguard used to do this. They had investments in lots of small feeder funds and if you did well you made it to the big leagues as a Safeguard company. If you didn’t you just stayed down at the feeder fund level.I’ve always thought it would be really interesting to have a four tiered model….but I agree with you, you must have the two middle tiersTiny investments $100k to see if you can actually get something off the ground kind of YcombinatorSmall investments $500k to really commercialize ideasInvestments to scale at $5MAnd now the fantasy:Finally some sort of publicly traded company that holds shares in the winners. In theory the individual companies wouldn’t have to deal with all of the regulation because they are not public only the entity holding shares is…..I’m sure I just violated about a zillion SEC and IRS rules, but there would be a ton of demand for people to buy into Twitter/Zynga etc. but right now its too hard for them to go public themselves

    1. JLM

      Actually you are right on the money. Look at KKR as a public company and remember they were just swaggering LBO guys once upon a very short time ago.The moral equivalent of VC, LBO, PE and Somalian piracy wrapped into one bespoke suit with a bunch of second and third wives and expensive dooda — homes, jets, yachts.But at its core, as a public company, a freakin’ casino where you fund or, more accurately, bet on the bettors rather than on the games.This is real life and you reasoned to it without apparently knowing it was already underway making you a wizard in your own right. Congratulations!

  17. Douglas Crets

    Do you think this is true also for media startups? Or is every company that is starting on the web considered a media company? By media startups, I mean Gawker, and companies like that.

    1. fredwilson

      i think software is becoming mediabut i know what you meangawker has never taken a dime of investor capital and it is very profitable

      1. Douglas Crets

        If that is true, then I feel very good. I know now what to do. Thanks forthat probably unintended bit of advice, Fred. 🙂

  18. Christian Brucculeri

    I imagine this refined model will put VCs at an advantage in the seed round.As all entrepreneurs believe they’ll need more capital in later stages, getting seed money from a VC that has the capabilities to meet the later capital demands is almost always easier than partnering with an angel who will not be able to participate in the next round. It’s usually easier to deal with people you know than have to deal with new partners.

    1. fredwilson


  19. honam

    What was old is new again. This is how VC was practiced long ago and hope to see a return to it (but I doubt it will happen).When Genentech got started, Bob Swanson wanted to raise $2M, which was unheard of in those days (KPCB’s entire first fund was about $5M, I believe, and it was considered a “mega fund” in those days). Tom Perkins urged the founders to raise a smaller amount and bootstrap. Swanson ignored him at first and tried to raise the full amount. After failing to do it, he took $250k from Perkins. Throughout the course of the company’s development, they raised well over $1B in capital. Perkins got David Packard to join the board after IPO. Packard commented that he learned nothing about biotech sitting on the board but he sure learned a lot about financings! (This is all in Perkin’s autobiography).There is a similar story to Tandem, which was seeded by KP and Pitch Johnson, who stayed on the board of that company for 30+ years. Pitch also seeded Amgen, which also required HUGE amounts of funding but seeded it very successfully with his own money. He still has hundreds of millions of dollars worth of Amgen and other shares and cashes out here and there to fund new investments (we co-invested with Asset Management, where he is the LP/GP, in a recently in a deal).There should be a warning to those wanting to follow the seed to BIG later stage funding strategy. Just because a seed investment leads to a great round at an over-inflated valuation, it doesn’t mean the company will succeed or that the model is “working” or “proven.” There are plenty of spectacular failures (even after IPO). We had several companies that we seeded which got later stage investment at crazy valuations. One company we had we went from $4mm valuation to $450mm pre ($525mm post) in less than a year during the bubble. That doesn’t mean much. All paper gains.The surest sign that a model is working is when a company starts spitting out positive cashflow, even after funding its own growth. Great companies generate so much cash even as it is growing. Google raised close to $3B at IPO but they didn’t need it. Microsoft, Oracle, Cisco, eBay were like that also. Cisco is interesting because it is a hardware company with an expensive direct sales force. Series A was $3mm (when they were already bootstrapped and profitable). Series B was IPO about a year later.A very recent, Web 2.0 example is Survey Monkey which bootstrapped its way to $200mm valuation (really, more like a growth equity stage buyout) with less than 10 people. Founder took out tens of millions and still owns a large % of the company. After bringing in a new CEO and ramping up costs and staff in a huge way, they continue to be incredibly profitable. I believe $30mm in profits a year now and still well over 50% profit margins.

    1. ShanaC

      The equity growth buyout is the question. Or at least to me. Are we moving more in that direction or not?

      1. honam

        Hard to say but I would answer no. No question that growth equity has been hot. I think there is too much money at later stages, especially in growth equity. Summit, TA and General Atlantic have done very well there and tons of followers have emerged over the past 10 years. Very competitive. Prices get bid up. The best guys move up market and new guys come in and fill in where Summit/TA used to operate. In general, investor money looks more and more like a commodity at later stages and it’s hard to differentiate among players, especially as they grow in staff and add clones from various MBA programs around the globe. I know many of them and they are all incredibly smart, hard working, motivated people. They just start looking/sounding alike after a while. Same goes for hedge fund managers – which is the hottest of all sectors. So many 25-30 somethings making big bucks in that field.

        1. ShanaC

          what is the anti-clone market right now then? got to be one.

          1. honam

            Good question. I don’t think you can pick a model and say that is the hot new way of doing things. You will have clones and anti-clones in ANY field at any time.VC and growth equity is full of clones but then you have certain players doing their own thing – and will make money even as the industry tanks.The hedge fund market is full of clones but the best keep cranking out incredible returns. Jim Simons is a great example. Plenty of clones out there but he is still doing it after 30+ years. I think returns were 80% IRR in 2008 when everyone else tanked (he was the #1 most highly compensated fund manager that year. The next year when the market did great, he did great too).Warren Buffett is still doing it. Plenty of clones but no-one has been able to do better. Buffett has shared his “secrets” very openly for decades. Yet no-one can replicate. Why? It takes discipline, patience, judgment and humility. Buffett still takes about his mistakes – not just mistakes from long ago, but very recent mistakes at shareholder meetings, especially the one in 2009. At that meeting Charlie Munger marveled at how Buffet is still learning – and getting better – at the age of 78. He didn’t mean it as a joke. He was sincere and impressed by it. Contrast that to so many young people who think they have it all figured out.

          2. Dan Ramsden

            The biggest question to me in all this is not so much how the investment field shapes out, but how the exit environment behaves. Everything else will fall into place from that.

          3. honam

            The exit environment will change drastically based on the fluctuation of stock markets. Hard to predict. Even Warren Buffett can’t predict how markets will behave.VCs are supposed to be long term investors (but most don’t behave that way – just look at dollars invested by VCs, it totally fluctuates based on how stock markets behave). Large public companies who acquire VC backed companies also behave in funny ways. They tend to buy when market is riding all time highs. Then when the market tanks, they stop buying and horde cash. They tend to do very few acquisitions when valuations are at all time lows. Then when the market picks back up again and valuations go back up, they look to do more acquisitions. Strange, huh?If entrepreneurs and VCs focus more on building profitable companies with sustainable competitive advantages, rather than exits, they should do well, regardless of exit environment. All I can say about the exit environment is that it will get better, then it will get worse, then it will get better…

          4. Harry DeMott

            If ever there was a business that ought to be counter cyclical – it is the VC business. Yes you need good public markets for exits (I would argue that the IPO market as well as the strategic sale market are almost 100% correlated). When you look at VC, it is not dependent on debt financing in any way – almost 100% equity – and that equity is long term and locked up. There’s no escape hatch. Yes there is IRR pressure from investors – but if you invest when others are fleeing the market – you should get better economic terms, you should have an easier time making good hires, you should gain more traction in a less competitive environment, and you should emerge from the doldrums with a far better enterprise, ready to roll into the inevitable euphoria. Very hard to do this (just like your comment on Warren Buffet who has given away all of his secrets, yet no one has the discipline to follow them because they are just not sexy or exciting). When Sequoia put up its Good Times RIP slide show – that was probably the day all VC should have started looking to get more aggressive.

          5. honam

            Yes, I agree and I remember that Sequoia presentation well. It got emailed around by everyone and got tons of press. This is a blog post I wrote around that time “RIP Good Times? A Different Perspective.” It links to a Slideshare presentation on the topic. Our firm went on to do more deals in the subsequent 12 months than in our entire history.

          6. fredwilson

            yup, build a sustainable business and the exit will take care of itself

    2. PhilipSugar

      Well said

    3. fredwilson

      i think we have to return to the old modeli don’t think there really is another wayand i totally agree about getting to positive cash flowit is the moment i celebrate most in all of our companies’ life cycles

      1. honam

        Fred, totally agree. BTW, after positive cash flow, I think the next key milestone is when companies start paying taxes – that means that they’ve generated enough profits to cover all loss carry forwards. Perhaps the biggest milestone is when companies start generating more in annual profits than invested capital. More capital raised keeps moving that milestone out but it’s a good goal to shoot for.Some people forget that it’s all about generating profits. Apple has very small market share but a disproportionate share of profits in the PC and cell phone industries. I just read that they have 3% unit share in phones but 2x the entire industry’s profits. Good to see them doing so well as a proof point. (Of course, it is often the case that profits follow market share. But not always. Market share should be seen as a means to the end).

    4. JLM

      What you are talking about is building great COMPANIES while today there is much allure in building great PRODUCTS. While they are certainly not mutually exclusive, the concept tends to ebb and flow through the business cycle.In the end, great companies build great products while great products spawn great, sometimes new, companies.The average entrepreneur — as if there were such a thing — is becoming a much better businessman. There is absolutely no reason to continually pay full tuition to re-learn the same business organization and operational lessons. And yet, every generation thinks they invented or discovered sex.

      1. fredwilson

        one of the things good VCs do is push, cajole, and help entrepreneurs decide to go from building great products to building great companies

        1. JLM

          Unless a liquidity event gets in the way — no trash talk intended thereby as VCs are “investors” and have a practical and fiduciary duty to crack the pay window open whenever possible.It would be wrong not to take the right profit. Very wrong.

  20. paramendra

    One of your better posts.

  21. Harry DeMott

    What you are describing here is simply the narrowing of the moat around businesses brought on by the declining cost of technology. It is cheaper and easier than ever to not only reach potential customers with a product or service – but to pivot when necessary without having to start over completely. The new moat is the scale economics of the network you create – but as My Space found out – even that moat is not insurmountable. The outcome of this phenomena is that companies require less money to start and exponentially more money to support a growing network. If you are not in early, you don’t get to play “pro-rata” or larger later. And due to the decline of “growth equity” funds in the public market – and the lack of staying power for most of the new breed of companies, there are no IPO’s. Which basically just concentrates all of the VC’s profitable efforts on the seed stage companies so you can write the bigger check for the winners (feed the winners starve the losers) and then get out in a sale to Google/Apple/Microsoft/ Cisco /Intel or anyone else with $20B+ in the bank. Where you really don’t want to be is at a VC fund with mediocre results coming up on the end of your fund life carrying a lot of partners. You need to radically slim down (Venrock’s latest fund is a great example – $350M down from over $600M with far fewer GP’s in this one). You also don’t want to be in the position of not knowing what your competitive advantage as a VC in sourcing deals is. I would almost guarantee that Andreessen Horowitz was not chosen because they were the high bid on the deal – just like I’d venture that USV was not likely the high bid on a number of high profile deals that have worked out. There is a competitive advantage both of you have in the minds of founders – just as Sequoia has in the minds of its companies – and that should lead to a positive selection bias in terms of both investor base (hopefully far steadier and with better terms) and in ultimate outcomes (assuming you can sift through the mass of deals that comes over the transom and choose and nurture the right ones). To me that is going to be the biggest shift ion model over time – how do you get a more partner heavy structure, where the partners can add real value on an operating and business development level – and do so in an environment where they are dealing with far smaller companies and their idiosyncratic issues.

    1. Douglas Crets

      Just look at the Old Spice advertisements. The star of those ads now doespersonal ads for fans.

    2. fredwilson

      that last question is what we deal with every day. we have three partners and we deal with a bunch of idiosyncratic small companies. it’s a struggle to do more

      1. Harry DeMott

        As long as you are happy with your other partners and your investors are happy with you it may be a struggle – but it is one on your own terms. Given the state of the business you are in – it means smaller funds – or funds that are self limited – but what is wrong with that? It is easy to add partners, but unless they are a great fit with the existing team – what’s the point?

        1. fredwilson

          you are right that it is a nice problem to haveit is not easy to add partners to a partnership that is working extremely welli’ve added partners before and it doesn’t always work

  22. Peter Cranstone

    I think you’re spot on. $25m is the magic number for a Web 2.0 play. Foursquare is approaching that, Flirtomatic just got some more (now up to $17m) – Essentially they’re all “media” plays. $25m is designed to get to a number that generates meaningful (but rarely profitable) revenue. After that it’s a crap shot as to how they grow to profitability or get acquired as part of a larger play.

  23. thewalrus

    classic post. great comments.

  24. Steven Kane

    Fred you overlook a huge factor in the genesis of Foursquare – the founders were independently wealthy, or at least sufficiently affluent that they funded the true initial needs themselves, and they did not have to have a paycheck to take care of a family or mortgage or whatever.The “capital efficiency” of early stage companies is only in the hardware and software departments. Not in the sweat-ware department — human beings have not gotten cheaper. in fact they have gotten more expensive (eg inflation etc).so — as you and i discussed in this blog a few years back — the game of founding and funding startups has become more and more focused on either founders who are wealthy, or who are so young that earning nothing and for whom the idea of living on ramen and a dirty futon is exciting and romantic — and do-able

    1. fredwilson

      good points steve, but let me clarify a few things1) dennis made some money on the sale of dodgeball to google, but naveen wasn’t involved in that project. he worked for nothing when he had nothing2) they build and launched foursquare and got funded in six months. so we are talking about six months without pay to execute a strategy like this. not everyone can do that but i know many people who have saved up that kind of money to take a shot at something like this3) with so many double income families, it is easier for one of them to take six months and give something like this a shot

      1. MikeSchinkel

        I love this post, thanks for writing it. So don’t take this as criticism but instead a bit of realism; Yes, lots of people could take a 6 month risk. But Foursquare was intensely rare to get that kind of traction and get funded in that short of time period. I once negotiated a loan of $500k for 6 months for a business operating for 5 years with $12 mil/year revenue and great cash flow.Point is while many people can go for 6 months what’s the reasonably likelihood that they will be able to pay themselves within 6 months? If they are doing consulting, sure. If they are launching a startup of the type you fund, like FourSquare, chances of a paycheck within 6 months are slim to none. And if chances of reaching personal sustainability within the timeframe allotted are so small, it’s a fools bet for most anyone to take. With the same odds, you’d never invest your fund’s money, right?I have to give Steven his due; startups are for people with money and people young enough to eat ramen and sleep on a futon in a closet somewhere. (I wish it were not so, but it is.)P.S. I’ve recently decided to launch a “replicative” startup (a conference/media company) instead of the “innovative” startup I wanted to start because I simply can’t take the 6 month risk I just discussed. What I’m doing will never be a home run like Foursquare may be, but it’ll easily be able to be successful because I’ve been in the industry before and know how to do it. It saddens me, but I don’t see another option.

  25. Tereza

    I suggested the following in a previous comment but it’s a propos here.In my next life I would like to see a Y-Combinator for women. Call it “XX-Combinator”. Maybe I’ll create it after i’ve made my big bucks. Here’s the logic.Practically no women can code. But in today’s model the founders have to. Women that start something up, like to know what they’re doing, and be trained and experienced in it. That takes up our 20’s. We have kids in our 30’s. Our entrepreneurial sweet spot is around age 40. Conventional tech investors are not really into this group and the metrics they look for are really hard for these people to hit. Most of the (few) women’s businesses that go big were funded by F&F, not traditional angels and VCs.The XX-Combinator program would provide women who know their target market extremely well, based on personal and professional experience. They have a huge innovative idea about how to crack it. The program would help define their MVP. Benevolent hackers would work side-by-side with them to build it, for equity and possibly paid salaries by sponsors and can convert into CTO positions.It would be scheduled and located so that women with families could actively do it. No “3-months in SF”.It can complement and feed other women’s programs out there (astia, golden seeds, etc.).Also I’d like a list of male VCs who have daughters and therefore have a vested emotional interest in creating some successes in girls’ startup land.

    1. Douglas Crets

      That’s interesting that you write this, but I don’t know about yourstatistic. I have worked with five developers on my project. Three of themhave been women. They all know how to code very well.

      1. Tereza

        It wasn’t a statistic, it was anecdotal, although I’ve seen some in the low double digits.That’s great that you have a bunch where you are. Where are you based?

        1. Douglas Crets

          New York City, but they live in San Diego, Brisbane, Auckland so all over. I used to live in Hong Kong. I found that women there also were pretty good at coding. It depends on exposure I am sure. The Chinese developers I know are pretty good.Douglas Crets

          1. Tereza

            Just to clarify — it’s not that I think women don’t have the intelligence or cognitive ability to code. But few have the training, experience or ability in the U.S. (and certainly here in NY) and therefore they are highly underrepresented.I am mother of two young daughters and you better believe they will have programming as part of their general education.I was always very strong at math and took some programming in high school (a million years ago), found out years later I was “talented” at it, but unfortunately no one told me that when it mattered. There are many women like me.Hopefully this is changing but it will take a long time.(maybe the soon-to-be-released Computer Engineer Barbie will tip the scales on this. LOL)

    2. Berislav Lopac

      I don’t think that any kind of favoritism, however benevolent, would really be a good thing. There is no gain for anyone involved in a ladies-only incubator — what about men who have great ideas but can’t code? What about coding women? One of my co-founders is a coding mother, in fact.Gender, age, nationality etc should play no part in helping a startup succeed — the only thing that should matter is the potential of the team and their product.

      1. Tereza

        This blog post from Y-Combinator co-founder Jessica Livingston says that:Between the 102 startups we’ve funded– about 250 people total– only 7 of the founders have been female.http://www.foundersatwork.c…It is a rather dated (summer 2008), and I’d love to see that the latest numbers show a drastic change, but I’d be doubtful.7 women out of 250 participants suggests that structurally something’s not working.

        1. Douglas Crets

          Or that someones not interested? Could thy be structural? Or could it originate in the marketing? Very curious now…Douglas Crets

          1. Tereza

            I believe you have to relocate to SF for the program for 3 months if you don’t already live there. Tough for a mom.

        2. Berislav Lopac

          And how many founders were 40+? How many were non-white? How many were European? How many were taller than 6 feet? Why don’t we start a favorizing incubator for each of these groups?

          1. Tereza

            Life is full of unintended consequences.I’ve spent a lifetime with men from 440 kilometers north of where you live telling me what I can’t do, and listing out in painful detail all the many reasons why. So reading what you wrote and its tone makes me want to do it even more. Unintended consequences.I’ve spent ~20 years doing, designing, advising on innovation. Definitionally, the more diversity entering the wide end of the funnel leads to more and better innovation surviving and thriving at the end of the funnel.Crowding out population segments that have nothing to do with how smart or talented they are, before they plant there seeds, leads to the Tallest Midget Syndrome.Very large companies have paid me lots of money to teach them this very basic lesson.The biggest ideas are counter to the status-quo. They’re so different that most people cannot conceive where and how they fit in the world. Because they don’t! They are getting ready to define a new world.Incubators are tiny. We shouldn’t make them bigger, but create more.Y-Combinator works great. Let’s not mess with it. Take the principles that work and create some slightly alternative structures so that seeds from some different species can take root.And yes, age 40+ could be one. And if someone is willing to step up and fund a “Europeans that are 6′ and taller” incubator, that is perfectly fine with me. I hope it hits the ball out of the park.

          2. Berislav Lopac

            I’ll just repeat that trying to “boost” a demographic which seems “underrepresented” is healing a symptom, not the disease. There are industries traditionally dominated by women, and nobody’s trying to boost the number of men involved. Are there basketball camps focused only on white players, to boost their numbers at the NBA? Of course not, as that would be ridiculous.So the idea “our incubator accepts only female entrepreneurs” is just adding to the sexism and the divide. What if there is a mixed-sex founder pair? Would you not accept them? If you wouldn’t, it is doing more harm then good, as the “traditional” incubators have no such policy. If you would, how is that different from any other incubator? And it’s still unfair to the all-male founder teams.My point is that you’re fighting a wrong battle here. It’s not like someone’s forbidding women from becoming entrepreneurs — the reason for their low numbers here are different, and if you think that there should be more women in tech startups you should find those reasons and fight them.As for those reasons, I see your point that most incubators tend to be hacker-oriented, which might detract women. But this is also a hurdle to many men who have great ideas and ability to market or sell them, but no hacking skills. With that in mind, an incubator as you describe could be very useful, but you should step away and try to see the forest and not the trees — it’s not about or for women, it’s for the non-tech people looking for a place to help them start.I remember that a while back there was a European company which was offering “sweat VC” — if you had a startup idea, they would develop it for you, and instead of payment take equity in your startup. I don’t know what happened to them, but haven’t heard a word for a while…

          3. Tereza

            You raised some important points here.Personally, I far prefer a room of mixed gender and diversity of all types than just women, or just any other group.I want incubator options aligned to underrepresented groups’ needs (such as women’s or 40-yr-old’s), so that they *could* do if they wanted to.Once the availability is there, I am fine with men, or anyone else applying and participating.As an analog, The OpEd Project is a great organization designed around a pain point that is very acute for women: that they don’t submit enough OpEds to the major press. So they created a workshop and program to meet that need. And while mostly women take it, it is not limited to men, and in fact men are welcome.

          4. the next women

            Exactly, we should make it indeed easier for Europeans and non-whites, as well as 40+ (more chance that you have a family and are juggling things) to get started, if you have a great idea.Its called support and there is nothing wrong with it.its too easy to add to it 6 feet people, people with beards, peopel with jeans on etc, can’t believe that one still makes a statement like that, if an argument is made based on statistics which are relevant.

          5. Berislav Lopac

            No, something is horribly wrong with the idea that you give that support only to *some* people , simply based on an arbitrary parameters. It’s fine to support women, but it isn’t OK to support men. It’s fine to support 40 year olds, but 39 year olds are out of the question.

        3. the next women

          Tereza,I support your aim for women focused incubator. We interviewed Jessica Livingstone in March 2009 and she said the following:…Question to Jessica: From your experience with Y Combinator, do you find that male and female founders approach things in a different way or are they more similar than different?Answer from Jessica: Practically all the female founders we’ve funded so far focused on design or sales/marketing rather than programming. So while there has been a difference, it’s hard to say how much of it is due to male/female differences and how much is the difference between technical and nontechnical founders. In my experience, the technical vs. nontechnical difference seems to be the biggest.We at are promoting female founders with visibility, mentor programme and funding & pitching events, and we have teamed up with, who is a VC accelerator for women led companies.I agree that we also need a programme at an earlier stage as well.reg. Simone

      2. Tereza

        What I’m saying is there are products whose potential can never be judged because they cannot get created and into market, to let market forces do their thing.Since they don’t get birthed we don’t get to see if they can crawl, walk or run. They’re not even stillborn.

        1. Berislav Lopac

          Trust me, I know about that kind of products like anyone else — but both men and women equally have those ideas.

    3. fredwilson

      i’m on that listi love the idea of making it easier for women entrepreneurs to start tech companiesthe hardest part is the “benevolent hackers”hackers like to work on stuff they want to work onnot someone else’s project

      1. Tereza

        There are lots of ways to skin that cat.Obviously start with what requires the least intervention: since a small program wouldn’t need many, simply put out and invitation and see who shows up. At minimum the hackers get exposure to top VCs and others associated with the program.But assume there is no interest from good local hackers. Other possible sources:–for concepts that are tech-enabled plays but not core tech innovation plays, match with an architect who can (possibly part-time) help define the MVP and scope and define the work, selection and management of offshore development.–link to the Startup Visa program. In the way that we bring in nurses from all over the world to account for our acute nursing shortage, enable for accelerated visas by pairing with an entrepreneur in the program. She helps him/her get acclimated in the US. S/he helps build v.1. Obviously there needs to be sophisticated enough matching so the hacker cares about the idea.–structure it as an “educational exchange program”, for visa purposes. I mean, the U.S. Au Pair programs bring in young women and men up to ~age 26 to live with families and babysit, for a year or more. There’s a lot of BS in that program. Why can’t we do that with programmers? And if they do great, they can extend the visa or go for the green card. Even as I say this I’m half-tempted to go to the Au Pair America website to search for a young woman who does know PHP and could code for me for the ~$180/wk program fee instead of watching my kids. I swear I could give her a freaking awesome experience. A win/win.–some people will hate this but how about accelerating female hackers through the visa processI could easily see a version of the program age 40+ version, too. Starting next week, I qualify!I could see father/daughter pitching events for teenage/college age daughters of VCs, or an internship program. A vested emotional interest really cranks up the chances of success.I see it as a for-profit fund, not a national program. And small.New York is the place to start. We have the best marketing talent in the world who have the skills and experience to think big and can smoke out the opportunity but just need to get from Pt. A to Pt. B.Y-Combinator is excellent for a very specific type of person. Don’t mess with success. But the construct and lessons can be applied to groups which are high potential but don’t fit in the original model.

      2. the next women

        Dear Fred,Thanks very much for your comment: i love the idea of making it easier for women entrepreneurs to start tech companiesA lot of the incubator programmes (seedcamp etc.) around, assume that the startups take off 3 months, do their coding in house and not outsourced, while living on a slice of pizza. That is not the USP of a lot women who start companies: they have great ideas, but have a hard time finding ‘coding mates’ and living like a student, while they start the company.We are trying to get around these requirements by introducing different programmes to get the startups going, find coding team mates and a much better network and introductions to investors, many more contacts than most of these women have.We would love to have your support. Take a look at (we are the female tech crunch..) and, the very successful VC accelerator for women led teams.regards,Simone BrummelhuisFounder thenextwomen.comUK Board member, (responsible for the European programme)

        1. Tereza

          Hey Simone — we met at We Own It. Great to hear your voice here!

    4. fredwilson

      i sent your comment to my friend brad feld who was inspired to write this post today…

      1. Tereza

        Hey thanks. I’ve actually been toying with writing an Op-Ed to add to the debate, to keep it rolling.Brad is terrific.He was on a panel at the We Own It Summit in June. Gotta have guts to sit on an otherwise all-woman panel, including Esther Dyson and Susan Lyne, to an auditorium of about 200 women.The highlight was early on when, in describing the investments he’s looking for, he said, “I’m obsessed with males age 10-25.” The collective bristling practically made the room vibrate.But you know what? It propelled the conversation forward about 100 miles in seconds.I follow this topic closely and have for years, and the responding Q&A opened up and elevated the discussion in all new ways.It is so heartening to see Brad engaging in the subject in a really earnest, genuine way. He’s not a BS-er and he wants to make it work. For that to be real and lasting it must not ignore the realities of the tech and VC business.This kind of discussion is so important. Including naysayers. That’s the only way we can move the needle.

        1. fredwilson

          right back at you…

          1. Tereza

            Who knew my whining would strike such a chord?Thanks for the play, Fred. It’s just fabulous to see you engaging in this.

          2. fredwilson

            This is a community tereza. I’m not sure I’m in control of it very much. It has a mind of its own

          3. Douglas Crets

            I think one of the most gratifying things about business and relationshipsis the giving and the dialogue, the validation and the response. Makes sensethat this is something that goes very deep with women. I am sure it issomething that is very deep with men. Ingrained.

    5. Peter Beddows

      Tereza, you obviously, by now, know you have started a terrific discourse. You have posted some really excellent, clearly well thought out, ideas. I have been impressed enough by what I have read to have now scoured not only your blog as well as your comments in this thread but also looked up every other related link including Brad Feld and Fred’s other blog post in which he specifically references your XX Combinator conversation.I suspect you actually need no encouragement from me; nonetheless I would like to add my voice to those who have offered you encouragement: You are a much needed inspiration and advocate for encouraging women of all ages to pursue entrepreneurial aspirations.

      1. Tereza

        Peter I greatly appreciate your words and I’d respond with only one observation:Women need validation, on an ongoing basis. It’s like insulin. In fact I believe this so deeply I’m building my business around the concept.So when a compliment comes to mind toward a woman, there is never downside to saying it. And it’s always treasured. In fact, will probably make her day.It made mine!

  26. William Mougayar

    This is such a great post it’s hard to disagree with anything said. But I wanted to chime in on the B2B vs B2C topic. I’m assuming that Fred’s assumptions are biased for large consumer businesses. Both sectors have different growth dynamics and trigger points for their lifecycles, but the advent of Web2.0 is blurring the lines between them. Fresh B2B apps have several B2C characteristics and consumer-driven apps (eg Twitter / 4SQ) are encroaching on business users. So, I think this continued blurring will have interesting implications.

    1. fredwilson

      we (USV) have struggled to understand how to apply the strategies and tactics that have worked so well in the consumer web over the past five years to the enterprise. we think we understand SMB which is a bit more like consumer. but large enterprise is still controlled by gatekeepers and we struggle with how to disrupt those gatekeepers and go directly to the enterprise worker

      1. William Mougayar

        I’m with you on the gatekeepers issues. What works there is that progressive enterprise end-users discover your app and before you know it there are dozens of users in the organization, then you’ve got a Trojan horse strategy. I think that’s how started its adoption curve within enterprises. I believe there are more and more enterprise-class apps that are creeping up with a bottom-up approach and usurping traditional stodgy apps that used to be centrally dictated on users. The ease of implementation, integration and short adoption cycles of “Enterprise 2.0” apps are too hard to resist, as well as their rich features and lower costs. This trend has been referred to as the “Consumerization of the Enterprise”, and I’d like to see more of it.

        1. Zvi

          In big organizations end users typically don’t have Administrator privilege and not allowed to install not-authorized software applications. Only IT can install them, after PO is issued and application purchased.

          1. William Mougayar

            But the point about these Web 2.0 apps is that they don’t need IT or admin to do anything. The user sets themselves up. We’re not talking software installs. These are SaaS or hosted services. A web browser does the trick mostly.

          2. Peter Beddows

            However, in this day and age of all too frequent web exploits attempting to breach firewall security, most IT management groups are now focused upon eliminating the individual self-adopting any app from the web or from any other source: These are a huge threat to corporate data security.Secondly, again most IT management groups today do not want to be faced with “managing” possibly numerous differently configured desktops, the consequence of otherwise allowing individuals to self-adopt web apps.Like it or not, you really do have to sell at least the IT Gatekeepers on the value of your app to them and to the business.

          3. William Mougayar

            Am still not buying the notion that you can’t escape the jaws of IT. I’m not talking about breaching anything- rather just providing a SaaS app that gives the user or department what they need directly.The old ways and days of Enterprise apps are numbered. Plug and play APIs, open plugins, connectors, activity streams & OAuth/FB Connect types of integrations can go a long way, and you can say “look Ma, no IT”.

          4. Peter Beddows

            I appreciate your follow up and I believe I do understand your point and understand your frustration. Seemingly illogical conclusions by gatekeepers can be extremely frustrating and disruptive.I’m not suggesting that using SaaS based apps is, per se, automatically opening up to a system vulnerability and I absolutely do agree that the days of Enterprise Apps are numbered – that’s just one of the reasons Oracle absorbed PeopleSoft some years back now which was, at the time, the foremost browser based ERP system on the market and which – even back then – was also offered in an SaaS mode.I do also believe that we are still just seeing the tip of the iceberg in terms of potential for SaaS B2B solutions; exciting times ahead really … BUT …. having observed far too many desktop users in recent years having to be rescued from the folly of their ways in having randomly installed various web based apps and seen the impact such activity has had on related IT departments as well as being also keenly interested in securing orders for such services, I regret that reality is still that we do have to deal with IT management – even if we find ways to circumnavigate them – if we are to succeed in building a market for such tools.That said, if you discover a way to escape the jaws of IT, I, and I suspect many others on this thread, would be delighted to learn more about how to do that from you: More power to all of us male or female; yes?

      2. ShanaC

        play jiujitsu with enterprise

      3. Tereza

        I’ve done a lot of that. It’s long lead-time and really a co-development process. You start incubating it with a partner/client (more like a “service”) and then “productize” it after. This means working through how it can replicated, what parts are universal.But quite often that first version was so tailored to the specifics of the first customer that it gets really hard to see the forest for the trees. It pretty much requires putting pencils down after v.1, and then getting out and talking in-depth to all the different potential customers with a rigorous business requirements definition and prioritization process.For disrupting the gatekeepers the only way I know is to find what I call the “edge of the wedge”. It’s your corporate MVP. Something senior management doesn’t care enough about to say no, probably will say yes just to get you to shut up, and just quietly ooze in there and quietly build up usage while no one is looking. Like a boa constrictor.Or, it’s a down-and-out cost savings play. But most of those are long behind us. They were reliant on distribution by the big consulting firms.There is great variability among large companies’ ability to innovate. A small number are committed to true innovation on a sustained basis and like to be “first” and either partner with newbies or build it themselves.For most, the ability and fortitude to innovate is not steady over time. It can change like the weather. For example it is highly vulnerable to changes in senior leadership because it requires a sponsor with cojones.I don’t think it’s a fabulous fit for USV unless you have an acute, laser-focused pain point. Either has to be so bad people are ready to jump out windows, or so non-political and cheap it’s a no-brainer. I really liked how Simulmedia tightly defined that value prop was from the start, and how clearly fixing it could not come from the inside. Clever.Also helpful for Simu I think is that “industry-based” (consortium) solutions have failed in that and adjacent sectors time and again. That road is littered with carcasses.Beware consortia. They are corporate Dementors. It is extremely easy to spend 2 years slowly getting the life force sucked out of you, leaving you in a vegetative state.But maybe that’s just me.

        1. Peter Beddows

          Not just you Tereza: This is very well said; pragmatic, realistic.Knowing, as you have so succinctly outlined it, that this is the situation typical in almost any type of B2B development where a co-development sponsor or partner business can make all the difference between producing a viable versus impractical result, one can then decide if the product development time/money costs followed by the market development time and related cost investment to create a viable solution to the identified pain point can ultimately be recouped in timely fashion once the solution has been proven successful and repeatable/expandable beyond the original proof-of-concept situation.With the ever increasing need to adopt improvements in Supply-Chain Systems, improvements to MRP systems such as accomplished by iMaps, the management demands related to running LEAN and Six-Sigma mfg, Warehousing and Inventory Automation Management systems – including implementation of RFID technology, all of these openings for solution – both hardware and software – developments in the now global market place, there are surely plenty of B2B opportunities that would be well worth the investment in time, money and resources don’t you think?

          1. Tereza

            I think that’s true. And my view of how B2B fits into the VC model is evolving (as in, it could change tomorrow).

  27. HowieG

    No need to pay for a server farm until one is needed. But I think the race is how fast can you respond if you do it later in the development cycle. A guy from Leo Burnett at Cannes now has a Tattoo that is a Whale for Twitter’s Fail Whale issue. Their network is over capacity a lot. Pretty much everyday. That said what if they paid for all that capacity up front and then no one came to play?I like he new version better. Would rather play catch up with all its stresses than have the stress of big investment sink and then failing. Facebook is the old version. They were valued at $11bil in January but outside valuers, yet inside it was valued at $23bil. No pressure there! They are playing catch up to the investment.

    1. fredwilson

      twitter has been playing catch up in all areas of its business since the company was formedthey have not been able to get ahead of the usage curve no matter how hard they have triedand they have tried hardand it is not just true in tech, but in all aspects of the businessi believe that the company has finally amassed the resources it needs to get ahead of the curve but it takes time for all of those resources to make sufficient progressi’m hopeful that we’ll be there by the end of the year in most areas of the business

  28. chrissheehan

    Fred, good post as always. I posted some similar thoughts a couple of months ago from the perspective of managing a micro cap fund and an angel group

  29. Penny Grabber

    Thanks for the post Fred. I would agree. There is definitely a need for more seed bridge fund firms. We have a meeting with First Round Capital the other day, and were confident in securing an investment from them. One thing precluded them from moving forward on the deal though, and that was the similarities we have with one of their portfolio companies.

  30. Zvi

    Unrelated question: do VCs, I talking about General Partners, invest their own money in funds managed by them?Hedge Fund managers usually do.thanks,Zvi

    1. fredwilson

      yes, they always dobut the amounts vary

  31. parkparadigm

    I think there is a need for more a more dynamic capital market in ‘venture capital’ (here encompassing everything from seed to growth) – more specialisation (which we are seeing) and more secondary (which we are starting to see a little bit of but not enough imo.) I have no hard, statistically valid evidence but my anecdotal take is that the attitude that ‘nobody exits until everybody exits’ is still ingrained in the venture capital “id” to the detriment of all (including mainstream vc’s.) I’ve written down my thoughts on this in more detail here:

  32. Csongor

    I think all VCs tackling this current bubble issue — Fred, Paul Kedrosky, Chris Dixon, John Boyd, Mark Suster — are missing a key point.Not only the startup costs were considerably lowered during the lost decade but the growing costs too.Putting hope in this single idea “While many businesses require a lot less capital to start, they don’t require less capital to grow.” simply won’t succeed.According to network scientist Albert-LászlĂł Barabási something is scalable or scale-free when its core features does not change with growth. Something which doesn’t need extra effort when growing.That scale-free core feature in the case of web startups is not the usual tech hype like location based services, social applications or platforms as services VCs like very much, but, the income/customer rate.Startups already having an income/customer rate are scale-free. The rest is just simple speculation transiting from an era powered by institutions to a new one powered by people.Venture Capital’s Anosognosic’s dilemma (Something’s Wrong But You’ll Never Know What It Is) was already coined gently by Clay Shirky: “Institutions will try to preserve the problem to which they are the solution.”VCs acting like institutions will never survive this next bubble. Those who embrace the openness and put customers before users will help us developers, and help themselves too.The complete article you’ll found here:

  33. Tereza

    Love that story!Makes me laugh. I think it was actually when I met with Fred of all people and I stupidly couldn’t get the OH projector to quickly work. I could see the seconds passing and said F This! Let’s just look at my screen.But I wasn’t stressed about it. I mean, I can’t think of a day, as a mother, or as a human being, when some sort of plan didn’t change on a dime.We just have to roll with it, do the best we can in that moment, and beyond that don’t sweat it too much.And then go plan the next day.What else can we do, ya know?