In Between: The Tough Place To Be

In a comment on the latest tally of VC fundraising, NVCA President Mark Heesen said:

“The venture capital fundraising environment has settled into a ‘new normal’ which is characterized by a barbell structure of larger funds which are stage and industry agnostic on one end, and smaller, early stage, industry or region specific funds on the other.

This is certainly true and has been for a long time. The two successful models seem to be the large megafund and the small early stage fund. It's hard to be anything else in VC.

Entrepreneurs need to understand this. There are a ton of options out there for early stage funding. And if you get to the stage where you need a growth round from a big fund, there are plenty of options for that too. But if you are looking for a Series B round to help you grow from early revenue status to true growth status, you are going to find that challenging.

To put it another way, there are plenty of us who fund hopes and dreams. And plenty of us willing to fund true success. At the stage where you are past hopes and dreams, where you have customers, revenue, and a real business, but have not yet reached "true success", there just aren't many investors to choose from.

The truth is early stage investors are often asked to be the funders of last resort for the "in between" stage. We do that all the time at USV. We will lead or do an inside round for the Series B and Series C rounds if we have to. So choose your early stage investors well. Make sure they are willing to see you through the in between phase if need be. Because they will probably need to.

#VC & Technology

Comments (Archived):

  1. John Revay

    interesting – I was just reading an email/blog from Seth Levine…

    1. lisa hickey

      As James said above, “the barbell is everywhere.” Thanks for that link John.I’d be interested in more posts on strategies for dealing with the middle other than going back to series A funders. Especially with a proven business model, the opportunity for scale but needing (often a small amount) more resources to get there. “Funders of last resort” doesn’t sound fun for anyone.

  2. Harry DeMott

    Capitalism hates a void – and so as the IPO market gets tougher (i.e. fewer successful late round financings) and tons of people head early (JOBS Act anyone?) there will be a void in that middle – and with less competition, someone – or some group of investors is likely to do pretty well not having to bid against others but undercapitalized seed series guys.

    1. ShanaC

      and when do you think that will happen?

    2. andyidsinga

      i was just thinking a similar thing while looking at @AlexBangash:disqus ‘s picture. looking back it looks bad but looking fwd 1-2 years there will likely be more activity there…

    3. fredwilson

      most of what we have funded in the past 18 months has been B and C rounds

      1. PhilipSugar

        Yes but according to the timeline it is very few….

        1. fredwilson

          Maybe the timeline is wrong. At least half of our new deals in the past 18 months have been Bs and Cs

          1. PhilipSugar

            In the last eighteen months the timeline says 4 out of 14. For the year of 2012 it is 3 of 6 which is exactly half, my point is it is 4 deals total for six quarters. Not a bust whatsoever.The timeline doesn’t say which investments you did a follow on for, which you indicate is 100% if requested, it just says in which round you started. It just reinforces your point, those are some long odds, and again not a bust whatsoever, but I’m sure you could be very choosy in those deals.

          2. fredwilson

            thanks Phil. i will have to take a look at the timeline. i am wondering if some of the more recent investments have been labled incorrectly

    4. PhilipSugar

      The problem is one of valuation. I’ve seen this many times, I’ve really thought about it, I thought I should start a fund like that and even worked the numbers in spreadsheets. My career started as a turnaround guy. But I think they can only be done with existing investors.The problem is that if you are in the muddling middle, the reality is there is a very low chance you are going to pull off a 10xer, the facts are in, the market has spoken. (if its an execution issue, that’s even harder because now you need to change the very team that is raising money)So now if you are an outsider trying to make good money and not just save face you are looking at valuations that were set when the skies were nothing but blue. The clouds have rolled in but you still need to make as much money as any other VC or you aren’t going to get any LP’sSo now the brain damage of a down round starts, it has to, you almost have to do bridge loan terms. I have too few points to draw a line but I can say in my experience turnaround work seemed genteel compared to cramming down previous investors.

  3. John Revay

    “The truth is early stage investors are often asked to be the funders of last resort for the “in between” stage. We do that all the time at USV. We will lead or do an inside round for the Series B and Series C rounds if we have to.”It sounds like USV does this reluctantly, I would think in many cases you want to keep your pro-rata ownership.

    1. fredwilson

      it is not often the best answer for the company. so we are reluctant in that regard. but not reluctant to support.

      1. PhilipSugar

        Is the best answer to get profitable or something else?

        1. fredwilson

          get profitable or prove that you are on a relatively short and demonstrable path to getting profitable. insiders will fund the latter.

      2. John Revay

        I once worked for a VC firm – there were 8 GPs at the time:I specifically recall one GP who was very discipline – He would participate in a round and then if the company was not meeting milestones – he was done,,,I recall another one of the GPs – he was much more likely to continue funding the company, inside rounds etc.

        1. fredwilson

          I am in the latter camp. But the amounts we invest in the follow ons are the tell

  4. kidmercury

    how much capital do most of these SaaS plays take? there is this belief, which i’m highly skeptical of, that the number is going up. i think it’s flat or going down — would love to see a comprehensive study on this. i don’t know how a business that is not dependent upon hardware or physical stuff needs more than a Series A to get to a point of financing growth via its own profits. the more it takes for a company to self-finance off profits, the more everything devolves into a game of hot potato/bubble blowing, and the more the whole thing is dependent upon a fragile (disappearing?) IPO market that entrepreneurs increasingly don’t want to be a part of anyway.

    1. awaldstein

      if international is a market, expansion takes dollars.

      1. kidmercury

        if you’re trying to expand internationally and haven’t found a business model that enables you to finance it with profits, i think you’re setting the stage for a big problem.

        1. markslater

          not nescessarily. there are still very strong “land grab” arguments out there. not to mention the thiefs over at rocket internet to keep in mind. Finally – it amazes some companies how different cultures take radically different approaches to product adoption – you just might find that the turks go hopping mad for the product, while the we here dont….

          1. kidmercury

            i’m skeptical of how many land grab opportunities that warrant multi-round VC funding are really out there in the SaaS space. companies worried about rocket internet as thieves don’t have anything defensible in the first place. rocket internet tried to copy amazon, but i doubt bezos is losing sleep over it, because amzn is extremely defensible.

          2. markslater

            ok, fair enough. Ask Hailo about the “land grab” they are trying to execute in NYC.My experience with rocket is not the same as yours either kid. its not as simple as how you characterize. Rocket has localization assets – they reverse engineer a product and localize it fast than the company can get there – its not just about IP theft. And frankly – the best defense today is a market defense. Get there first – be 1 in the mind of the consumer – thats very difficult to take away.

          3. kidmercury

            if they are leveraging their own assets, i don’t see it as theft. i wonder if hailo is a geolocal app and best incorporated as a feature into a local app targeting a specific jurisdiction. in either event, hailo is exactly what i’m talking about; if they structure it properly, i dont see how they could need a series B in the first place.

          4. markslater

            i am purely speculating kid – but its GET THERE FIRST money – has little to do with explicit P & L. they have to deploy snazzy iphones in to as many yellow cabs as they can before the other e-hailers and the incumbents get there (think veriphone with 12,000 payment enabled cabs in NYC). they are a payment processor disguised as a cab app essentially – and that business is worth a fortune.i agree on your observation – i believe – when all is said and done – they are a point solution and will become subordinated to an app framework far more powerful. but thats just my crazy opinion!

          5. Matt A. Myers

            This is why USV invests in large networks of engaged users. Defensible.

          6. markslater

            agree – users man the ramparts – hopefully long enough for revenue to follow. It usually does.

      2. Matt A. Myers

        Being first to market / quick to market is also important factor to keep in mind, especially with foreign investors who copy anything that looks successful.

        1. markslater

          yep – see our comments on rocket above matt

    2. markslater

      depends on the series A. I’d argue that series A de-risks a software investment such that key KPI’s are properly understood (CAC, maybe LTV) – and that new money going in can be allocated with a reasonably degree of predictability as to return. If X $ invested, Then Y revenue will result over A period of time leading to B in terms of value bump / CF positive etc. Coming out of A for a software company – you should have Revenue, plan for scale, market opportunity to match lead in market, and team fully in place. The edges cases (highly successful one might not need B – i would argue that he vast majority will. Safe to say its an 8-12M number to get to profitability? sounds about right to me.

      1. ShanaC

        so then why do most venture back companies fail?

        1. markslater

          because they simple dont prove enough in series A with the runway they are given. therefore – even though a fund may have a follow on allocation – it may chose not to given the lack of progress.Series A is still risky – i’ve seen fred throw out 30/30/30 in terms of success in a fund. 30 fail, 30 push, 30 win.Bottom line is – if you are a first timer getting your series A – its extremely difficult – VERY.

          1. Matt A. Myers

            I thrive on challenge. And I imagine by the time you get a Series A though you’d hopefully have a pretty competent CFO?On a side note, do you have any books / resources you’d recommend where you learned these things from?

          2. markslater

            We have a fantastic one – but thats not important to the VC matt. Its not a box they need to check really at A.But get a good one – things just go better on the operating side and i’d argue – the VC gets more for their money as a is an article in CFO magazine on ours.….

          3. Matt A. Myers

            I’ve heard that a good CFO will help out the operating side of things – they really need to know everything about the company as they need to keep track of and know what resources will be needed, etc..Great article. Thanks for sharing.

          4. JLM

            .Great article. Look at a company vCFO which provides a similar service. Don’t know how cost effective it is. A former CFO of mine works there and he is VERY good..

          5. ShanaC

            i don’t see a third timer being less risky. there is something going on that isn’t derisking at all about series a

          6. markslater

            its perception. its a known entity – but yes – does not mean that the opportunity itself is any less risky.

          7. pointsnfigures

            there is a little less risk if the third timer has been down the road successfully before. But, every investment is iid.

    3. Matt A. Myers

      I imagine I will use a Series A to finance mainly R&D. Growth can happen naturally, organically, word of mouth, and the support/outreach can be paid for by those profits / revenue streams and systems that will have had time to mature. Good talent costs money, and research costs time. And until you’re a multi-billion dollar company I’m not sure good talent can be as comfortably acquired based on internal profits alone.

    4. baba12

      There are very few VC’s today that have the desire to invest in ventures that have a hardware or physical component to the product/service. But the number of SaaS low investment ventures that have a huge network effect are getting to be rare. Most of these ventures are all hoping to be acquired or else be shuttered. The Dave McClure’s of the world invest in 100 companies and if 1 of them gets acquired then that’s a good day.For them raising a Series A/B round is equivalent to getting acquired and thats pretty much how they have operated.Twitter is getting primed to make an IPO at a $11Billion valuation, I read somewhere, but if someone like Google were to offer a $30 billion I am sure the investors would be willing to talk at the minimum.I think for SaaS based products most of the time Series A means get acquired.

      1. markslater

        and yet we see devices popping up in local businesses weekly.

        1. baba12

          the devices that are popping up in local businesses are not requiring significant capital investments. Look at companies like Meraki got acquired by Cisco and Meraki was assembling hardware together and selling a software for mesh networking. From the time they were formed till they got acquired there was never any other option that was entertained by the investors and the board. All the hardware based kickstarter projects are small in that they require very minimal investments as they are primarily assembling some pieces together. I doubt a Tesla Motors could be started through a Kickstarter or a VC. Elon Musk invested $25 million to begin with and then as added another $100 million and some of the big VC’s followed through on the investment. Doubt VC’s would have said this is a great idea lets put in $ some significant money.As kidMercury points out if you are a SaaS and you are creating a huge network of users, the amount of money you need to sustain your business is significantly low and if you are profitable then doubt you need any series of funding.

          1. markslater

            so take belly or grubhub or level up. run the economics on these deployments.

    5. andyidsinga

      it might be going up because people are really starting to understand what it takes to scale a freemium business using hosted services with only revenue from 4-6% of users but with 100% of user using storage, IO, and various sizes of machine instances. then as they scale they realize there is a sweet spot between using hosted service for new features and turning on their own iron for stable features ..either takes a portion of the bank

      1. kidmercury

        i don’t think the solution here is to add more money, but rather to find a way to reduce the cost of servicing the 95% of unprofitable users, or to stop servicing them altogether.

        1. andyidsinga

          yes exactly! a lot of interesting stuff going to to scale IT workforce by virtue of making it drastically easier for fewer devops to to maintain lots of iron and apps. doesnt seem to be quite there yet ..but it will.

    6. Richard

      Since 90% of the deals go south,  It sure would be helpful to open up the income statements so we can get a better sense for deal size, employee count, burn rate. It will help for upcoming crowd funding trials. 

    7. fredwilson

      that’s not been our experience but maybe we are doing it wrong

      1. markslater

        ha! – doubt that


      “how much capital do most of these SaaS plays take?”.That depends. If the founders have software engineering skills then it’s a matter of marketing costs. If the founders have marketing skills it’s a matter of software development costs..If you can put together a mixed team then it’s usually a matter of time not money. But, keep in mind that (and I have to keep saying this) the business is what’s most important. If you’re going into a business with a bunch of liability involved then you’ll need money for a legal department that shadows the software and marketing costs..This is what I say about the “software project is a business” approach. You must know the business. We’ve been engineering software for decades. That’s now a moot point. The business difficulties are back as the issue at hand.

  5. JamesHRH

    The barbell seems to be everywhere.i am anecdotally inclined to say the middle is tough everywhere.

    1. William Mougayar

      the proverbial “muddled middle”.

      1. Charlie Crystle

        try middle age

        1. William Mougayar


        2. ShanaC

          i thought that was the peak of life

          1. Charlie Crystle

            Peaks and valleys, like every other age 🙂

          2. JLM

            .No, actually, it KEEPS getting better, no decline..

        3. awaldstein

          I’ll take being in the middle of life every single day and consider this a win!

          1. Charlie Crystle

            we’re at different stages 🙂

          2. awaldstein


        4. fredwilson

          you know it

        5. JLM

          .Say nothing ugly about the Empty Nest. It is like being a teenager again but always being able to get a date on short notice..

        6. Donna Brewington White

          I’d rather not try it. Thank you.Is there such a thing as middle age anymore?

      2. JamesHRH

        This is true William – it is harder to cleanly define the Value Prop of a value or middle offering. Esp in tough times.

    2. John Revay

      Good linemiddle is tough everywhere

      1. JamesHRH

        I was flying on Sunday & thought ‘how come noone has tried an airline that is first class seating throughout the entire plane. I would pay a reasonable premium for that.’Then I thought, ‘most people buy cost or premium (not a reasonable uptick , but a serious cost diferrence that infers status).It just seems that value – the middle – is a poor position.’I don’t know that I totally believe that thought, but I am inclined to believe it. And I cannot readily think of too many awesome middle / value consumer successes.Over time, it seems markets mature to premium & cost.I assume that the majority of late round investors think of themselves as The Big Time or Whales or some such thing, just like the majority of business class passengers……..


          “first class seating throughout the entire plane”.That’s a private jet.

          1. JamesHRH

            Not if it is an Airbus 319…..most jet setters don’t roll that big.

        2. Cam MacRae

          Paul Stoddart tried it with a fleet of business class only 737-300s in the mid 00’s but it crashed and burned (so to speak).

          1. JamesHRH

            Biz only @ biz prices?I am thinking biz seats, no amenities & a 20% lift on prices…..

          2. PhilipSugar

            It has been tried multiple, multiple, multiple times. MGM Air East Coast to West Coast, there were two I forget that were doing East Coast to London and Paris.That’s the really hard thing about providing premium service. Everybody says yes, I will pay for that, then they see the really low price of a dirt scratcher and they buy that instead and wonder why the service sucks. Airlines are the prime example of this.Also when you look at biz seats because there are two across not three and you get 50 percent more legroom you can fit 9 seats 3×3 into the space of 4 2×2. So 20% in no way is going to cut it. Think double..

          3. Cam MacRae

            Biz only at competitive prices. The problem they had was that most corporations have a preferred travel agent that must be used for booking travel, and these were up to their ears in graft and kickbacks from the incumbents.

        3. FAKE GRIMLOCK


    3. FlavioGomes

      Plan your seed to get you to cash flow positive. Stay in the game.

    4. fredwilson

      yes indeed

    5. James Ferguson @kWIQly

      So – sort of between a rock and a hard place !

  6. Tom Labus

    Where are the banks? Isn’t this their role?

    1. JimHirshfield

      Innovating with free checking, I believe….oh, no, wait, I stand corrected: Innovating with deposits made from your mobile phone. Pretty cool stuff.But yeah, startup financing? Faggetaboutit.

    2. FlavioGomes

      As JLM once put it. “Banks are dead”

      1. Tom Labus

        I see it more as before the start of a new generation of banks who want to do this biz. @JimHirshfield

  7. JimHirshfield

    I smell a new kind of “junk bond” to fill the gap.

    1. ShanaC

      that actually could be interesting as the bond market is quite liquid

  8. William Mougayar

    This in-between stage is what Steve Blank calls the “build-out” stage which is critical to reach repeatable scalability.But why is it that you (USV) do it and most others aren’t doing it?

    1. markslater

      there are many that do. I think what fred is referring to is be wary of an investment from a fund that does not allocate beyond the round being invested – some seed funds especially are … is xxx $ – thats all you are getting……Where as more mature (?) funds like USV and its peers invest $3M in A and allocate $X more for follow on.

      1. FlavioGomes

        If the general consensus is a large gap between rounds…why would seed investors participate at all? Knowing that build out funding is far and few in between?

        1. markslater

          good question! looking for the POP! or have strong network of A investors who will “carry the weight” post proof of concept?Or just got drunk on economics to start, and failed to appreciate that getting out the blocks might be one thing (and alot cheaper) but getting down the track still requires patience, resiliance, luck……

        2. PhilipSugar

          Everyone loves the dream. If the dream comes through, there is no gap. Fred’s point is that if you are somewhere between dream and failure life is tough. If the people that funded the dream can’t follow on to see if it just is taking a little more time than expected to develop/might not be quite as big as one hoped you can get stuck.Nothing has changed. For whatever reason there were more dreams than usual getting funded. Most people agree that when it comes to the number of big exits/big second rounds, that stays roughly constant. So net, net if your first investor can’t put up more money that can be a problem.But here is the thing. Most people try to raise money anyway they can and worry about it later. If you can pick and choose then Fred is right it is better to pick somebody that can do a follow on, but the fact is most money is raised in an any way I can get it done fashion.

      2. fredwilson

        that’s my point Mark. thanks for reinforcing it.

        1. William Mougayar

          But even if they have the fund size to support it, they may not have the disposition (or conviction) for doing follow-ups.

      3. Abdallah Al-Hakim

        what would you say is a good percentage that a fund should allocate for followup investments?

        1. markslater

          i dont know. there are a bunch of fund pro’s on here that could better answer that – but for a $3M A investment – allocate $6M more? something like that.

          1. Abdallah Al-Hakim


  9. Mark Birch

    I question whether the middle is even required for revenue generating SaaS startups. Once the Series A has given the startup the necessary boost, that should be it in many cases.

    1. kidmercury


      1. markslater

        not always. it should be enough to see run rate – but not pure profitability in alot of cases. I would say run-rate to profitability – yes. CF pos – less likely. Depends on size of A and stage though

  10. David Roman

    In boxing and MMA they use this expression– “never leave it in the hands of the judges.”The same should be said here. I know it’s nice to make precautionary efforts but you also don’t want to become too dependent on that. If you position your company properly you will make the decision yourself (knockout) rather than leaving it in the hands of the judges.If you’re solving a real problem, you should be able to ultimately demonstrate the proper traction and growth to make raising a follow on round more pleasurable. If we can instill this train of thought I think we’d breed more quality entrepreneurs that take greater care and give the depth of thought that is required to successfully execute.

    1. markslater

      could not agree more. NEVER leave it in the hands of the judges – do absolutely everything to make the follow on discussion a pleasure not a beg.

  11. Jorge M. Torres

    Today’s post reminds me of the conversation about the Series A Crunch and the practice of making seed investments that are, at their very core, financial options on a company’s future round of financing. That practice is widespread, but it often rubs me the wrong way. The other day, Bryan Roberts discussed the idea of commitment front running money in seed stage deals. Ideally, I think that’s the way early-stage financings should operate.

    1. fredwilson

      that is how we operate

  12. Seth Lieberman

    Why do you think this is the case? Risk/reward ratios would seem to indicate that a true Seria A or Series B should be the sweet spot for investing. Early folks have taken on huge risk (and been rewarded with larger equity) to get through proof of concept to viable business. Late stage has much higher probability of success but at lower expected return- we all know these days late stage prices can be astronomical.It seems like there should be strong demand to invest in companies that have shed 1-2 levels of risk and proven market and demand and therefore have high expected future value but still at a stage where a VC can obtain enough equity at a reasonable price to produce a great return. The only thing I can see in the market for the dearth of these folks is that possibly valuations at this level are impacting the return a VC can make compared to their equity stake and the size he/she thinks the business can achieve, thereby skewing risk/return ratio and making these investments not attractive. Go early/big and flame out or go late big and low risk do seem the biggest games in town…but *something* doesn’t add up.

    1. ShanaC

      well, that sounds like a bubble in the lower stages

    2. ErikSchwartz

      Because VC’s don’t want to fund companies that never get very large. All dreams are big businesses (and you can fund them for cheap). Big businesses are big. But there are a ton of businesses that can run along forever at $1M in revenue and never get larger than that. In the current easy early funding world they raised their seed at a $3M valuation, for this round they want $9M. So the question is can they grow revenue by an order of magnitude or more? What is the plan for that?

      1. PhilipSugar

        Yes, this is exactly right. At the dream stage all businesses are big, but once you get revenues…..that can work against you.

        1. fredwilson

          yup. erik and phil have their finger on the big issue. its easy to fund dreams. harder to fund reality.

          1. William Mougayar

            “its easy to fund dreams. harder to fund reality.”Great quote. Note to self- Keep the dream going, and escape reality.

          2. David Clarke

            I’m sure everyone here has seen Yossi Vardi’s ‘The Economics of Dreams’ many times but it always rewards another look…

          3. William Mougayar

            That’s a great graph. Thanks!

        2. JLM

          .Fred said it first — it really is easier to fund a dream than a messy little reality..

      2. LE

        “All dreams are big businesses”Same thing happens with real estate and dating. I like to say that “the good merchandise gets snapped up right away”. Anything on the market for a long time has been picked over and there are (yiddish word here) no “mitzias” to be had. Was also reminded of this when I went last week to LL Bean and found that the jacket I wanted was not available in the size that I wanted which is why the remaining ones were on clearance. Not even on the web site.Consequently something on the market initially has not only not been passed over by others yet and hasn’t been proven to not work yet either. So it is more attractive to buyers.All this makes sense with respect to investing as I’ve said business is about taking advantage of the low hanging fruit of opportunity and riding it.

    3. fredwilson

      a lot of it has to do with how much equity you can buy in the B and C rounds. the dollar amounts are higher and the equity allocations are lower because a lot of the cap table has been bought already

  13. AlexBangash

    Pictorially, capital availability for seed and late stage ballooned, but for intermediate stages was cut in half from $8B to $4B.

    1. fredwilson

      that’s a cool picture. however, i think its a Series B crunch more than a Series A crunch

      1. JamesHRH

        What do you call a16z’s Ark round? Not that naming matters, but it was weird to have it described as Seed.Is the crunch in the middle post-2008 pessimism related?Or is it generally just a bad place to invest (control, metrics, exits)?


          “Seed” is always open for debate. Do a test by contacting 100 VCs with an email saying you have an idea and you need seed money to get started. You’ll get back 5-10 responses (if you’re lucky) and there will be 5-10 different explainations of why you need some other kind of funding. I know because I’ve done it many times..Usually the most common thing you get is “Go to family and friends first to get this or that completed.” Problem is if you do that then you’re not at seed stage anymore..Next is the angel approach. Fantasy at best because the law requires angel investors to fit a set of rules. Net worth of a certain amount and/or certain income. Also, there are lies always floating around about connecting with people and discussing investing if you’re not a licensed whatever..All that being said. It’s the usuall foolishness that’s getting in the way; lifestyle businesses, lifestyle VC firms, etc. But, for every 10 wanna-be’s there is 1 person who’s actually doing it. The problem then comes down to how does the entrepreneur find the good investor and how does the investor find the good entrepreneur?

    2. JamesHRH

      Where are these stats pulled from? NVCA?

  14. Mroberhozer

    I’d be curious to see the distribution of the barbell on a map. I would be willing to bet that the megafunds are on the coasts, with the smaller funds spread throughout the country (another barbell of sorts).On a different note, I would imagine the funds at each end of the barbell (mega vs smalls) fundamentally operate differently from each other (different types of LP’s, different pipelines, different portfolio challenges, and different exit opportunities). Might make for a good follow-up post 😉

  15. Richard

    Fred. Do you have numbers on the average series A? Total deals, average size, firm size, forecasted burn through time? 10k a month. Per empoyee still the number ?What does this say about crowd source financing risks?

    1. fredwilson

      not off the top of my head

  16. JLM

    .Never get mad at the money, it will change its mind (and shape).The availability of money for funding anything has always been the gatekeeper which has marshalled ideas from cradle to adolescence to adulthood.The banks are dead. Long live the banks.Get all the money you can, when you can get it. Because the future is uncertain..

    1. markslater

      yes. and make the next discussion a pleasure not a beg.

    2. fredwilson

      “never get mad at the money”i love that line, as of course i would

    3. Dasher

      Change shape? I am sure there is an interesting story there somewhere 🙂

  17. bijan

    love this post. the last paragraph describes one of the hardest thing to do in this business. and we are big fans of how USV shoots straight with their founders in good times and in bad.

    1. fredwilson

      the respect is mutual Bijan, as we are doing this together a lot

  18. PhilipSugar

    I agree its always been true. Each generation (seems about every ten years) has to learn it again.Its just a simple fact. At the dream stage every deal is a 10xer. When you are exploding and riding the rocket people will fight to get in.Its the middle that’s hard. I’ve always thought a lot of value gets wasted there but I don’t have the answer, because I’ve worked the numbers and its really hard. Its those middle 30%, not the 30% that flame out, not the 30% that are 10xers, that are really hard to fund.Fred is basically saying: Lets take two companies with the exact same traction. If I have already put money in I will follow on, if I haven’t put in money you are out of luck. Proof that no matter how much you say you should evaluate everything as a sunk cost, that just isn’t true. And that’s not a knock, because again, its a reason to take his money versus possibly a higher valuation, but no ability to follow on.I’m not sure what you can do other than to get profitable, and that can be really hard. Nobody wants to invest in something that could be a 2xer. There just isn’t enough room. Your LPs want a 2xer as a minimum return, that’s logical, otherwise put it somewhere else. So you have zero room for any failures and that just isn’t going to happen.

    1. fredwilson

      yes, except we are doing a lot of B and C rounds right now. it’s where we find the best risk/reward

    2. LE

      ” If I have already put money in I will follow on, if I haven’t put in money you are out of luck.”For all the reasons mentions and additionally people have a tendency to want to be proven right. In a fresh situation that isn’t happening there is not the same loss.Your house you are renovating. If you’ve already put in a large amount of money to get it into shape you are more likely to put in another $100,000 because to not do so would be admitting that maybe you weren’t right to take on the project in the first place. As opposed to a completely new situation where the costs are higher and you pass since you aren’t psychologically invested in the outcome yet. This is actually a concept that can be used in negotiating. The more time you waste of the other party the more likely they are to not walk out of a deal over some minor or possibly major negotiating point. (Works with buying cars really well I’ve found as well as domains and just about anything else).While I don’t think any of this trumps sound business judgement I do think it plays a key role in the process.

      1. PhilipSugar

        Have you been to my house LE??? That one stung a bit. 🙂

        1. LE

          “That one stung a bit”Sorry about that!It’s a human nature thing. What’s the chance that someone decides to renovate an old house and accurately is able to predict all the costs and not have overruns? I mean it’s not like you are going to sue anyone that makes a mistake in their estimate or anything.I found it’s very freeing and try to follow a strategy of not focusing on exact numbers but rather ranges and vicinity. It makes it much easier and I don’t get upset then if there are extra costs. This dates back to my ex wife getting parking tickets in the city “just expect she will get tickets and allocate $500 a year in your brain for that”. (It worked and I didn’t get mad (about that) ever again. Then came the divorce. Same strategy. Ended it very quickly.).I’ve got a situation right now where we bought some hardware and now I’m hearing that there might be a problem porting the old software. So my brain automatically without knowing any numbers says “ok this could cost me $10000 “. Now if it comes in lower I will be presently surprised.

          1. PhilipSugar

            No, I say it tongue in cheek. The good news is where I live you can get the Amish (actually Mennonites) to do the work. Twenty miles away at the office its literally twice as much, for half the quality.Actually the overages don’t really bother me too much. I have a policy. I buy materials and only the very best, and if you run into an issue (a house built in 1839 on the Chesapeake is like a box of chocolates) tell me.That is much cheaper than somebody realizing they underbid and cutting corners on materials.My entire renovation for a five bedroom house: Custom Red Tin Roof, Custom Kitchen expanded by three fold by enclosing a porch and removing two load bearing walls, two new bathrooms installed, two gutted and renovated, great room refurbished, a upstairs den completely customized with vaulted ceilings and exposed beams, teak tongue and groove front porch, 800 sqft back teak deck with solid cedar railings, new romex wiring, new pex supply, PVC waste, new custom closets and storage, all new Mitsubishi HVAC, and insulation and paint.Cost about the same as a quote a buddy got to change the kitchen, sunroom, and deck at his new house in a very upscale neighborhood, that quote actually made me happy. Human nature is funny.

          2. LE

            “Amish (actually Mennonites)”Interesting. Is it low cost of living? Is it they don’t know how to price their time? I knew they did that stuff for their own but not for outsiders.I’ve found that contractors are always doing stupid things and not understanding where someone should pay and get more.The first experience I had was when I was young and had to have electrical work done for printing equipment. The electrician (a good guy) puts in a breaker box. I kept getting more equipment and needed more breakers and conduit. He tells me that he needs to replace and rewire the entire box put up some new conduit. Then he mentions (stupidly imo) that for (some nominal amount) he could have just put in a bigger breaker box back at the start and larger conduit and he could have done the extra job much cheaper. The amount for the larger box from memory was really trivial also.I don’t think he did this to make the extra money down the road (for a few reasons including why would he be stupid enough to tell me the delta in price vs. what I had to pay now).I’ve see that pattern so many times. Just today I was ordering some office furniture. The guy asks me if someone will be sitting in the corner of the desk area. I ask why. He says “well because I can get you a half leg for $25 more if someone will be sitting there. If you’re just using it for non sitting you don’t need it.” I mean who wouldn’t pay $25 more just in case and have at least the option?. Why wasn’t that obvious? Makes no sense to me at all.I almost went into home building out of college. I had a professor that wanted me to join him he was a homebuilder but I passed on the opportunity. I always like that type of thing.

          3. PhilipSugar

            They generally don’t do work for the English. (I am a total mix but that is what I am to them) They wouldn’t talk or look at my wife for the first three months until enough pie, coffee, persistence, and putting on a sweater convinced them they could speak to her just with their head down. They still insist I tell them if I want something changed not her. I had always patronized their markets, and they couldn’t believe somebody would actually put on a metal roof, so Leon introduced me to Titus and we started projects.The materials thing is because everybody is used to people being so cheap, and knocking them down so hard, and complaining so much that they just go cheap (that and that’s how they do their own projects so they think that is what you want)Even at the supply stores. I wanted 6×6’s instead of 4×4’s for the deck, double 2x12s instead of 2×10’s, an extra row so the deck didn’t hang on the house, 2×10 stringers to show off the teak in all homerun fashion perpendicular to the house.Literally got in a big argument. Had the guy price it out his cheap way and I would have saved $400 (on that size project!) The building inspector stood there on structural inspection and looked and looked and looked. I was worried. He turned to me and said you are the owner? (the Mennonites won’t do permits) I said yup. He said what are you doing here? Are you looking to park cars or land helicopters on this thing? I said I just like doing it right.

          4. PhilipSugar

            Oh and their price is low because they have low expenses. I have no idea what the apprentices get paid, but its not much. They do not pay workers compensation or social security because they have a religious objection:… They come to learn their trade and they live with the GC. They save up enough and in September and October they get a house built before they get married, they will not do work for the English during those months. I still have a vivid memory going to his house and seeing the women boiling diapers outside in a cauldron.

          5. LE

            If there were more of them they could be the secret weapon that allows us to beat the chinese.I guess when you boil down life to the essentials and get rid of all the things that modern people spend on what essentially is entertainment that is not necessary for living, that’s what you end up with.

          6. LE

            “they just go cheap (that and that’s how they do their own projects so they think that is what you want)”They are in a sense self insured. They have an ample supply of labor to fix any problems so the need to make things last I”m speculating is of less importance. They can afford to take more chances. (That said I’ve always thought they did the barn thing pretty sturdy at least from TV shows and popular culture). But if I had to reverse engineer that thinking that’s what I come up with. If I have people or if I am able to fix an old machine I have less reason to buy a new machine.I was watching “Mighty Ships” on Smithsonian and there were two ships featured and I could tell one of the head engineers took pride and had a good running engine and mechanicals and the other guy (on a different ship) was a slacker and his ship (as presented) had all these issues. It wasn’t an art to him.I love the narrative in how you go about doing what you do. You can sense the enjoyment in doing it right. That’s really rare. What you normally get is people who simply spend money and have no clue why they are doing what they are doing. This stuff is art. I’ve told the story of the ability to appreciate good industrial shelving over crappy shelving and thick cleats on a boat over thin crappy ones that aren’t reinforced on the other side. Art takes many forms.

          7. PhilipSugar

            When I say “they” I don’t mean the Amish specifically. They are true craftsman.I mean contractors in general. For instance the plumbing/HVAC guy is certainly not Amish, same with the electrician, same with the supply store guy. But I know from talking to all of them and having them get used to me that almost all customers don’t know and therefore don’t give a shit on whether they use expensive materials like PEX and quarter turn ball shutoff valves or cheap ass CPVC and the cheapest shutoff valve money can buy. They have to chase people for money, I go out of my way to make sure the day the job is done they get the check. Literally confuses the hell out of them for the first time because it is behavior they don’t see.What they see is they bid it out and if the other guy is cheaper by $50 they lose. God forbid they actually do what they did at my house which is pull all the plumbing from the meter to the sewer connection versus just graft it (I had copper, brass, galvanized, PVC, CPVC, and some type of black rubber supply and Lead, Brass, Cast Iron, PVC and rubber waste) People would think they were ripoff artists. Even worse is if they find a problem and ask for more money. People tell them they will not pay them a single penny more and write up awful reviews on the web.Also there are a ton of people that get in over their heads (like the last owner of my house). People look at an old house like that and think: wow its huge, its in a great location, the lot is awesome you could just do a couple of minor things yourself like This Old House and you’d be done. Let me cobble together a traditional mortgage with as low of a down payment as is possible, stretch like hell and buy it. What do you mean that roof is going to cost as much as a Lexus? I don’t have that…slap a coat of paint on it.My wife thought that, she was in tears when I turned it down the first three times, I waited until I bought the house for 64% of the original ask. Just like you in my mind I bought it for the original ask, because the other third was going to fix it right. Six years later I am getting close to both.We should take this offline, but I think this thread is mostly dead, hopefully we’re not clogging up Fred’s email.

  19. MikeSchinkel

    I ran into that in 1998. Over US$10 million in bootstrapped revenue, growing like a weed with a 4 year track record, staring down a US$120 million public company, and nobody would talk to us. Alas.

  20. LE

    “So choose your early stage investors well. Make sure they are willing to see you through the in between phase if need be. Because they will probably need to.”This is a concept that probably goes over well in a message packaged this way (this blog). More or less as a brainwashing (said in a positive sense) and through dissemination of this type of thought and information to the group of people who will be looking for funding going forward. That’s why blogs like this (and places like HN) are so valuable to their operators. They get to propagandize (once again said positively) their message. This is not to say the message isn’t right just because it’s propaganda I want to make that clear.The reason that I say this is that people are particularly lazy in listening and taking the appropriate action when it comes to a sales message that points to some future event which doesn’t seem to be much of a reality in the present. So the same said directly in a meeting with a young company has less of a chance of working. [1] If it were so simple young people wouldn’t smoke either. Future events have little chance of altering someone’s current behavior generally. Actually at any age if they haven’t had an experience that they can relate to.A few examples. You are a guy who is really solid and you try to convince a girl that you want to date that you are the better choice because you won’t cheat, drink, or beat her. (Or same with a girl and her perceived advantages over other competing women who aren’t as physically attractive). You are a car dealer and you try to convince someone to buy a car from you on less favorable terms because “our service department is really good” (I’ve been hearing that for so many years now I even remember it as a kid when I shopped with my dad actually).”We do that all the time at USV.”If I was advising someone approaching USV for initial investment (and of course assuming they had multiple competing VC firms trying to throw money at them) I would tell them to ask for some hard data on that from USV as well as hard data from the other firms throwing money to determine how often that actually happens. (Not doubting what you are saying just suggesting to trust but verify any sales statement.)[1] Of course you know whether this works in that situation if you are doing it so I could be wrong about this.

  21. Abdallah Al-Hakim

    It makes intuitive sense to me for some funds to follow a barbell strategy of investments. In other words, invest in both series A but have followup money to invest in series B, Cs. This should create a nice balance of high risk/high reward and lower risk/lower reward in the portfolio.

  22. Dwight Miller

    I gues the issue for every startup that isn’t in the VC network. So what are the options for early stage funders and how do you find them? We have a startup that is industry disruptive, we are getting traction from the content creators, the app is cloud and mobile based but we are still having trouble connecting with early stage funders.

  23. pointsnfigures

    I really want to raise a fund. As I went out to talk to potential investors, I learned A LOT. One was, no one wants to be in funds. So, I came up with a hybrid model and now am taking it out and we will see if it works. Unfortunately for me, I did due diligence on a business since Sept, had it blow up on the 29th, and found out the potential partner wasn’t truthful about one statement they made; not one….blew my mind. Worst of it was the entrepreneurs were left in the lurch, and so I patched that up. Then one of my best buds was diagnosed with stage 4 pancreatic cancer. It’s been a wild turn of the year.

    1. fredwilson

      Oy. And I thought my 2012 was shitty

      1. pointsnfigures

        gets worse on the death front. but, the sun comes out and I live to fight another day.

    1. fredwilson

      This is in that same vein


    Very True!

  25. Will Luttrell

    Great post.Despite a lot of early success, a steady “up and to the right” revenue history, proven business model, excellent early series investors, high customer acquisition and pipeline, large/solid partnerships, etc. etc. etc. . . . being a middling ‘tweener’ round made things more difficult.I shudder to think of how challenging this would’ve been if we had experienced a revenue plateau, client turnover, or some other company hiccup.