What Seed Financing Is For
Marc Andreessen posted a tweetstorm last week and he talked about how to think about seed financings and how they lead into Series A and Series B rounds.
Feature request for Twitter: Please make it possible to permalink to and embed a tweetstorm. You can call this the @pmarca feature.
I replied to item 6/ of his tweetstorm:
@pmarca I assume Seed is to build product and get to PMF, Srs A is to build business, Srs B is to scale business
— Fred Wilson (@fredwilson) June 14, 2014
I feel very strongly that seeds should not be as large as they are these days and they should not be used to fund anything other than building product and finding product market fit.
It is possible to raise a large seed that, in theory, could fund all of that, plus a lot more. And all entrepreneurs are encouraged and interested in taking as much capital as they can given the dilution that they can stomach.
But I’m old school. I think of building a startup and funding it as walking up a flight of stairs. My partner Albert prefers the videogame (leveling up) analogy. Both work. I will stick with stairs.
The first step you need to climb is building a product, getting it into the market, and finding product market fit. I think that’s what seed financing should be used for.
The second step you need to climb is to hire a small team that can help you operate and grow the business you have now birthed by virtue of finding product market fit. That is what Series A money is for.
The third step you need to climb is to scale that team and ramp revenues and take the market. That is what Series B money is for.
The fourth step you need to climb is to get to profitability so that your cash flow after all expenses can sustain and grow the business. That is what Series C is for.
The fifth step is generating liquidity for you, your team, and your investors. That is what the IPO or the Secondary is for.
That is a very simple view of the world. Very few companies will walk up the stairs easily and hit each one perfectly. Shit happens. And we all know that and can deal with that.
But I will tell you that the companies that have performed best in all the portfolios I’ve been involved with over the years have climbed those stairs more or less like that.
I don’t think its a good idea to jump over the first three steps and land on the fourth even if you have the legs (and funds) to do that. It is risky. If you don’t land it right, you can slip and fall. And its hard to get up if you do that.
Well, a lot depends on how you define product / market fit. One man’s thousand users is another man’s million.
tut-tut, slapped wrist time. i wonder if any of those users are not men?
“One person’s meat is another person’s poison”– just doesn’t sound right.
one startup’s thousand users is another startup’s million.is gender relevant?
For dating apps, yes.
Some men wear bikinis, ya know. Not me. #justsayin
.Saw you in a Speedo on the subway?JLM.
Yes. I do a little modeling on the side.
Bikinis are old hat: http://www.inderwear.com/73…http://www.sunnyskyz.com/up…
Wish I hadn’t clicked.
The “man” is the person deciding whether or not you’ve achieved PM fit. Given that most VCs are men, I’m comfortable with what I wrote.
One vc’s thousand users is another vc’s million.hey, we got there 🙂
I think pmarca has so much capital under management that he needs to “seed” with a Series A size investment. I don’t think that’s right, either. But that’s my theory, and I’m sticking with it.
Marc (I say that like we’re on a first name basis) has much on his plate.Check out this page and all the bodies they have. http://a16z.com/team/That’s a ton of people to keep tabs on.Then I see stuff like this:https://www.linkedin.com/in…Someone who is a partner who graduated Cornell is 2013.And this:https://www.linkedin.com/pu…Also a partner, graduated in 2012.From my memory Fred learned his lesson in early 2k with getting to large just because he could. Most, like you, are really good looking . They might also be funny as well.
If you don’t land it right, you can slip and fall. And its hard to get up if you do that.”Help. I’ve fallen down and can’t get up my Series B round”
>’seeds should not be as large as they are these days’Fred- could you put your ballpark number on right sized seed?
Enough to build the product and find product market fit
Every product and market is different, so the actual dollar amount varies.
‘Market traction’ is up there with ‘happiness’ and ‘life/work balance’ as the most intuitively used and individualized terms there are.So important and pervasive, they mean little.Great post btw!
“they mean little” – or they mean something different to everyone?
I stand corrected and better. You are correct!
There’s a first 😉
what’s the size of some of these oversized seed investments?how much money are we talking about?
I love Marc’s thoughts. His original blog was as thoughtful as AVC is today. I stopped following him on Twitter because thankfully someone always summarizes what he says and provides links to original source material. I will be interested to watch if his tweetathons catch on with others as a means of storytelling. @nprscottsimon should have won a pulitzer for his tweets about his mother’s final days.
We posted a couple of comments on this thread & we will stop now :)We built a hack to automically summarize pmarca’s tweetstorm. A single URL of all the tweets in the same storm is posted to this twitter account:https://mobile.twitter.com/…
Thing is Kickstarter is helping to validate product-market fit these days, without a lot of upfront investment, but it’s also messing up the optics of that stairwell progression.So, if a company has a spectacular Kickstarter campaign, sells 1000 units of their product and puts $1M in the bank, they could get emboldened and want to raise a large seed. It’s tempting.What path do you recommend? a) raise a smaller seed, say under $1M, b) jump to A with a $3-4M raise?
Kickstarter great for devices, things, not so sure about SaaS software.
I have thought about that, but why not??? There’s something else brewing in that segment- Kickstarter for software.
will be interesting to see how they get customers there to download it. Apple did it, Android did it. Intuit is doing it with business apps.
There are examples of successful software Kickstarters (Mail Pilot comes immediately to mind).
elaborate please.the behavior behind KS to date, to me, is that it is there to aggregate not create markets. For people not companieshow does this relate of SaaS of a B2B product.i’m missing something
Is this really true?I hear this bandied about but would like to see some #s.Doing a successful Kickstarter is no slam dunk without a core network to begin with.
This is a real case. I’m not making-up numbers, but can’t disclose further.
got it.but single instance does not a trend make.
Kickstarter is a pyramid for sure. See “why most drug dealers live with their mother”.
Successful crowdfunding campaigns are military operations. They require careful orchestration and a ton of help from various third parties: designers, pr, media, concept creators, copywriters, growth hackers etc.Saying that my team has launched one in a day (with a fair amount of support) and it was a tough endeavour. Still we’re raising and continue to raise with some press and high profile individuals supporting our efforts. We’re hoping crowdfunding communities are a better source than investors plus it is non-dilutive.Wanted to inform the avc community about a product we are going to build in future. We believe the world would be a better place if we can build this product. If you can’t contribute that is cool we’d love it if you could provide non-financial support such sharing our campaign: http://igg.me/at/dearpenny/x #fundDearPenny
if you have obtained PMF, go for the Aif not, go for the seed
best advice on here… thanks, Fred
Here is a link to the whole thread: https://twitter.com/fredwil… Very interesting to chew on and I am not sure there is a “right” answer. All I know is the amount of equity can be thrown way off. Corporate finance isn’t just about the money, it’s a strategy for startups to survive (just like marketing)With the difficulty in raising series A (series A gap) startups are trying to raise more early when their deal is hotter. In the midwest, we don’t have as much money as the coast, so even Series B rounds can be tough here. That’s also why midwestern startups really focus on revenue.I have seen startups not raise enough <300k, get their product out there and die for lack of capital. They couldn’t buy enough time for product market fit in some cases. In others. it was just a seemingly good idea that wasn’t. (or poorly executed)It also varies depending on industry or if it’s software vs device.The phenomena also could be caused by many new entrants to the market on the financing side. They don’t have the same deal discipline as VCs.
Very interesting to chew on and I am not sure there is a “right” answer.Business is analog so there is no right answer. It all depends on a zillion circumstances and the particulars.That’s also why midwestern startups really focus on revenue.People starting businesses pre net have always focused on revenue and a business model. This shit that goes on now is an artifact of the internet age. Simply didn’t exist or was practically non existent prior to the net. You know the “eyeballs” things. But then again so were dogs in the office, ping pong tables, cutesy summaries of your team members, or even actually giving the names and contact info for people at your company so they could be easily poached. Or telling people your secret sauce.
when a company rolls out using Fred’s metrics, it’s a lot of fun!
We agree twitter has to build the feature!Till then here is the permalink of the automatically aggregated view of pmarca’s tweets for sees Vs series a financing http://vozag.com/marc-andre…We called the hack pmarca tweetstorm aggregator!Here is the twitter account that automatically posts the conversation & Permalink :https://mobile.twitter.com/…
From the founders point of view, what is the negative of raising a large seed? This just gives the startup a longer lifetime. Is this stairway analogy of benefit to the investor only? (i.e. they lose less money if things go badly)
Do you want to give away 15% to 20% of your company now? Or 25% to 50%? The more money you take, the more equity you give away, ’cause the value of the company is a constant.
Well for one thing there is always a risk to waiting for something that you can close today. We’ll call it “door number two”.25% to 50% is to wide of a range.I can for sure see reasons why to much money is not good (makes you more comfortable and less hungry for one thing). But as far as this whole “giving away to much of your company” I think that should be put to sleep for good.Anyway the journey is the reward. If you are really interested in the money you’re probably foolish for thinking that your startup is the one that is going to actually work and make you money in the end.Let’s take disqus as an example. It’s been around since 2007 so that over 7 years at this point. That’s a long time. About a 1/3 of Daniel’s life, right? I’m sure Daniel is enjoying running disqus immensely. But at a certain point there will need to be a payday for him in some shape or form. (This has nothing to do of course with your point but relates to the idea that equity isn’t the only thing that you are giving up when doing a startup. You are giving up your time and also opportunity cost of something that might have a larger chance of working out for you either short or long term.)
Oiy vey…whatevs…Umm…you’ve strolled a little too far off the reservation for me to get sucked into the vortex right now.#backtomydayjob
for me to get sucked into the vortex right nowWell then feel free to return later when you have more time! The pool is open late.
I think the core of the argument is “don’t raise/spend a lot of money” before you are ready – which we’ve seen articulated in many forms.I can relate to that. At any given time, you will have 28342348 things in the “to-do” list of your seed stage startup, but it may very well happen that most of those are irrelevant a couple weeks down the line because you’ve made a change in the product that leads you in a new direction.When you have money, you hire people to do those 28342348 things – and then you enter into biases like sunk cost – i.e., we should include that feature b/c Susie has been working on it so hard – while you should in reality ditch it because now you know more about what really matters.When you are resource constrained you only pick 1 thing at a time from the top of the pile – so when you learn more about the product, it’s easy to ditch things that are in a pile.Of course you have to deal with the stress of being ashamed by your product ( ala – reid hoffman motto ) – but I guess that’s OK.What do you guys think about this line of thought? I.e., your product should suck ?
Any list with more than 3 things on it is useless.
Agreed. When you have a larger team, you need to have larger than 3 lists to give them things to do, no?
You don’t manage teams by telling them what to do in my experience.Management is not a linear exercise to me.
You must make many trips to the market every day.
unless there is no cap on number of lists per day. then one can item on the list can simply be refer to the next list while at the market.
Are you sure you’re not a computer scientist?
I’ve never raised money – but I have talked with a lot of people about it and been in a lot of pitches…it has *never* been my experience that seed is about funding the build/product-market phase…I hear rumors and read articles/posts all the time that say it is…but it has not been *my* reality.In *my* reality, seed is for just as you are finding product market fit (and investors take the high-risk that you *really* found it and are just starting to take off)…the timing on this is super crucial…you have to have a working product, and usage has to be sparking for at least a week or two…raising the seed is going to take at least a few months, and so those sparks need to be maintained (if not turned into a full on fire) throughout those months.If you can time that moment just right, and it turns out that you didn’t quite have the early tail of product-market fit…then *yes* seed can be used to for building and finding product market fit…but in all other cases it’s really just about taking better advantage of the super early days of product-market fit…At least that’s the *view* (and my extensive experience) from this side of the street…
Yep. The timing boils down to this: contact folks after you have a kernel of something, sustain contact during the upswing, if you have one, and close the deal before you plateau.
i can see the argument that you have to build a product to get seed money. if that is the case, and it may be, then seed is for finding PMF. once you’ve got PMF, there will be Srs A investors out there and the seed investors will have missed their opportunity
I def. Think that’s the dilemma on the investor side right now…In my exp. Most are trying to see signs of pmf before committing to seed right now…it means they miss a few but it’s the safer approach overall for them…
Fred- you may be a better writer than investor! Given your splendid track record as an investor I am sure you take this as nothing but the compliment it ia meant to be. Your posts are timely, clear, concise and simple in a good way. Many are thought provoking and most are refreshing. Just saying…
Entrepreneurs jumps steps for one one reason, dilution avoidance. If they can raise a 5mm seed or a 15mm Srs A (each of which are jumping two steps at once), and do so only diluting 20% of the cap table, it is very hard from a VC’s shoes to say that’s not the right thing to do.I agree trouble will emerge when you jump steps. The most common path to success is the straight set of stairs you outlined. But the typical Founder dilution on those steps isn’t easy to take. So I know why Founders choose to jump steps when they can.
Yeah I agree. Ultimately it’s less about how much you raise and when, and more about how you spend and why.
And as it relates to each step, part of the journey is adding partners (the investors) that bring industry knowledge, supporting relationships and “done it before know how” in support of the mission in a constructive way.
Great topic Fred, and I like your stair analogy.I think it is important to highlight the journey before the stairs as well. Before building product and iterating to product market fit, there are some super important elements:- What was the hunch?- What ingredients led you to that hunch? (kind of like “Where Great Ideas come From” by Steven Johnson- Who have you spoken to, to validate that this hunch is solving a real world problem- Who have you spoken to that is going to pay (with time or money) to solve that problemSometimes the product streamlines an activity that takes place in fragments elsewhere. Etsy, check ins, picture sharing are all examples where people sold, proclaim, and share and have done so even before the Internet. But most of what is built requires Customer Discovery before product development.
While I agree that this is overall directionally correct, I fear it will be misinterpreted by many to say that seed is for “funding ideas to build a product, getting it into the market, and finding product market fit.” As a seed investor in the web/mobile space a product that is at least partially built, has material market feedback and validation and strong, but early signs of PMF.
Was talking to a midwestern angel investor. In their state, they have had 0 companies get bought by a big corp for more than $50M in last ten yrs, and 0 startup exits for higher than $50M in last ten years. In their case they structure the deal so startup never ever takes any VC money. All the money that’s around the table in the seed is all the money that will be around the the table for later rounds. They have been successful.
Neither your nor Marc’s point of view represent the *reality* of what most active seed investors are actually investing in. At least not in today’s market on the east coast.As of today, entrepreneurs are expected to build product on their own or with F&F money, and then the seed investors want to come in *after* you clearly have PMF and the upward growth trends to prove it. No traction, no deal. No sustained growth, no deal. Even at the seed level. Hell, even at the angel level.The only way around this is via personal connections. That is the reality out there on the streets of New York.
Raising funds without building a network to do it in for me is a non starter.But building a successful company requires the same.That’s why I think that raising funds is a good indicator of company success.
Based on that observation, I’d almost recommend that folks raise money with a “dummy” company, just so they can meet folks, and then loop back around to their new connections once they have a real company.I’m only half kidding.
Building nets are core to building businesses.One of my investments is in a completely different sector, with a completely different set of non tech influencers and investors with no tech-like infrastructure to speak of.Doing a round and honestly really enjoying the challenge and the process in a game with the same behaviors but different value quotients and different rules.
This is the feedback I get from angel investors as well. Harsh? Maybe.
I agree with you more than you agree with yourself.EVERYONE is looking for a bird’s nest on the ground. Two hand dunk shot.JLM.
EVERYONE is looking for a bird’s nest on the ground.Good idiom.
I agree with you more than you agree with @JLM:disqus agreeing with @Brandon_Burns:disqus more than he agrees with himself.
.Who you calling an idiom?JLM.
Exactly!Startups are not for those looking for easy money (bird’s nest on ground as you said).And what about knowing the market requirements before creating the product. there’s no sense of creating a product which lacks demand!Prince
because these people want a sure thing. they’re jumping on the bandwagon of a bubbly asset class and want all reward and zero risk, and maybe it’s because they don’t have the insight of the class to be able to pick a good investment, maybe.
Exactly — there is no insight. Less than 10% of established seed investors will lead rounds, at least in NYC. Almost every seed investor out there wants someone else to lead them to the “good deals” because they really have no clue what they’re doing. Newsflash: the emperor is naked.Actually, that’s not fair. The investors know exactly what they’re doing. They’re placing “safe bets,” and judging the safety of those bets the best way they know how: by following others who have made good bets.As an entrepreneur, there are only two ways to raise a seed round: the right personal connection, or exceptional, sustained growth.
The investors know exactly what they’re doing. They’re placing “safe bets,”As they say “agreed in part denied in part”.Investing and gambling are two different things.
Aren’t investing & gambling the same thing? Aren’t they both (rather, shouldn’t they both) determined by the intersection of probable outcomes & risk tolerance vs $ amount being ‘waged’? The difference might be that gamblers are much more ‘honest’ about the fact that losing is a real option where as Brandon is saying that for seed investors, the above equation is out of whack. I’m not sure they understand the concept of Value at Risk.
@disqus_xOUMBRJ41y:disqus – You are forgetting the golden rule. “They who have the gold make the rule(s).” 😉
I think some people want to reduce risk, but in case of Yelp it was different. Max watched Jeremy in action. He believed in him because he saw him execute and knows him. To me this is pretty different. Its one thing to back someone because they have done something before, but it is separate thing to back someone you worked with and actually know.
Completely agree with this. IF you scrap and build a beta w/o funding, smart money drags along till your forced to launch anyways. Unless your name is known from a previous project or you have a personal connection (or the worse when an entrepreneur previously worked at FB or Google and this is somehow suppose to translate to scrappiness at building a business)… who will put seed money into a financial model, a deck, and a dream? Would love to see some examples of how this is pulled off. Like @falicon:disqus I read about it a lot, but rarely see it in practice.My sense is the situation above leads to people putting money into projects that have some form of PMF, but the ‘validated’ entrepreneur falsely indicates a venture backable business. This is bad for everybody.
(or the worse when an entrepreneur previously worked at FB or Google and this is somehow suppose to translate to scrappiness at building a business)That’s just the halo effect at work. Similar to going to a top school.In theory of course such person would have less probability of succeeding that @falicon:disqus because they have done such a specialized job and haven’t had exposure to many things.But halo is really hard to overcome. Reason that brands work.
Their brands are all much more widely known and respected (rightfully so)…my brand is limited to the few I’ve worked with or built stuff for…it gets me in the door a little easier than some, but that’s about it.I’ve built a lot of stuff over the years and I *think* I’ve proven I can build just about anything…and I like to stay more active and probably expose myself to more than the average dev…but I’ve never had a runaway success and I’ve never built a killer team (I’ve never even really been a part of what most would consider a killer team/company — I’ve seen the glimpse of it a few times here and there, but it’s never stuck). Such is the world when you start out programming for $5/hour in a small market town with no tech or network to speak of…all you can do is build up from where you start and continuously evolve.Sure – I can build small businesses and products that give me a nicer-than-average lifestyle…but honestly, none of that really warrants being worthy of investor risk on it’s own.Regardless of if I ever hit it big or not…I find happiness in the learning, the building, and the value I bring to my smaller world…but in all honesty I do *still* remain very hungry and of course hold out hope that I will one day be a major part of a runaway success too…just gotta keep living the dream! 😉
The other thing to keep in mind is that it’s all much harder when you are older and have kids, a family, obligations and something to lose if you fail. You simply can’t take as much risk. Especially given that the chance of actually succeeding is not that great typically.Nobody has every done (and I suspect never will) a comprehensive study of people who are plugging away after the dream and found out:a) How many get any funding, even angel or f&fb) Of those that do what happens to them over theyears what is the outcome.c) Compared it to a different path or a path that theymay have left.When the internet became popular (95 to 98 let’s call it) many people who got involved in one way or another were able to because they were either in between gigs, graduating, or maybe involved in something that wasn’t a big deal to leave. Although I can’t present any evidence I’m guessing there weren’t many tenured high school teachers or college professors or partners at law firms, or major league ball players, that left to do something in the Internet. Probably no guy who worked for his dad, had 3 kids and a mortgage, and chucked that either.
All true – though having a wife and kids is a choice, and really just means those are things I wanted/focused on ‘more’ than other interests/wants.Those that embrace the risk do it for their own reasons (I love the adventure, the freedom, the challenge, and chance to make a difference/positive change in the world — but others do it for fame or fortune…or some other combination of interests and motivations)…I suspect it’s a bit too random for any study to really provide useful results…
How do you think it should be?
I don’t think it should be a particular way. My very limited experience and reading lead me to believe that with many seed rounds in NYC the company has already built a product and achieved PMF. This to me means two things: one, we see larger seed rounds as companies need to achieve different things to sustain growth and maintain or increase valuation at a series A, and two, SOMe firms are putting money into poor investments at the seed level because the company is raising when they have growth they can’t sustain. Why is any of this important? If seed stage deals were smaller, earlier, and to do the things Marc and Fred were mentioning I think there would be more positive indicators of real businesses and less BS series As as a result. This is again all my young, inexperienced view.
i see seed investors taking PMF risk all day long with no name entrepreneurs. i don’t buy this line of thinking that all of you are chiming in on. maybe PMF is the issue. seed investors might want to see a product, but they are very willing to invest before PMF. that’s because Srs A investors are going to be there once PMF is obtained.
Brandon – I agree and disagree. I think you’re right on pointing out the fact that this is what angels, even early institutional seed funds are pushing for but I also think it’s your job to reframe the conversation.You’d be surprised by how much more investors are seduced by a calm founder who’s clearly explaining the steps that he wants to achieve on pre-seed, pre-serie A and pre-serie B rather than someone who’s bending his/her vision to accomodate what he/she thinks the investor is expecting. At that stage of a company, the founders and the early team are a disproportionate part of what the investor is banking on and early traction, while appreciated and often seeked, is not the only metric here.Yes, one goal is to get the money in so you can build your company but if you’re doing it on a misunderstanding and with false expectations from your investors, you’re just pushing the hard convo to later, not removing it. Or you’re getting in business with the wrong investors.
I agree with you. And while, yes, the conversation can be reframed, the fact still remains that, when you walk into a seed investor’s door, the expectation is to already have sustained growth over an extended period of time.Also, if you manage to reframe the conversation, you probably also have to reframe your round. You’re not raising a $1mm seed round w/o sustained growth. Depending on the business, you’re raising $250 – $500k.
I think it vastly depends on what you’re raising for and, hence, what are the metrics you should index yourself against. What you’re saying is very true for consumer-facing product – having a functioning product, having early beta testers is a legitimate request from an investor. If you’re building, say, a data business, what your prospective investors will ask to see is some early pilots, or at least an active pipeline. Re. size of round, I think it depends more on the long term vision and market, how much you need to get to final product market fit, size of team etc. And it’s counter-intuitive but you’re often more successful raising at least $1m round than below – investors tend to be worried that raising too little will never get you anywhere knowing that the plan you’re presenting today will probably drastically evolve over time.
Fwiw this is exactly why we left NYC. Then when we got into YC, seed investors in NY complained that our valuation was going to be too high and that SV funds we’re scooping them…In three years in NY, despite launching award winning apps, keepin burn below $2500 a month, and getting real traction with strong revenue growth we found seed stage investors to be pretty timid unless it was fin tech or ad tech. There were some exceptions of course but overall we realized that NY wasn’t going to be the place for us.I think a lot of seed investors pulled back after 2012.
The geography of the market definitely plays a role, as does the industry. Even e-commerce, which was hot in NYC not too long ago, has cooled. Or its at least changed. Investors are looking for different things today than they did a year ago today.And the thing is, you can’t predict these things. If you read an article on TC about how, say, circus and zoo apps are hot… by the time you get in position to launch yours, the landscape will have changed and you’ll probably be left holding the empty bag.The only thing you can do is do something you care about enough to stick with it for the long haul, make sure you can grow and make money and sustain your business with the resources you already have at your disposal today, and position yourself to not need investors. Then you’ll find them.
That positioning yourself not to need something and as a result attracting it seems to be true about so many things in life. Although including visibility in that positioning seems to help.
No one cares about what you need.Need has no relation to success and the worst poise in fundraising is need and anxiety, the two characteristics that fundraising engenders at its core.
Things move fast. Too many entrepreneurs are reading the latest trends on TC, then trying to build a product that fits. Too late. Skate to where the puck is going to be, not where it is now.
I’ve had people say that about Valley Investors as well.
Yep, I won’t say that my experience is indicative of the total of what happens in NYC, but just anecdotally, it appears that less investors = less competition = less opportunity for new startups.But at the same time, in the Valley I’ve found that more investors = more startups = more competition for funds.But I do think that deal flow in NY is extremely sequestered, and a lot of great talent / opportunity is untapped because of (imo) lack of aggressive angels / seed funds.
One difference is that Valley angels and seed investors (mostly) made their money in tech companies and fundamentally understand the businesses they invest in. Angels in other geographies often have made their money in other ways — finance, doctors, dentists, etc. — and therefore they don’t understand the reasons why they would invest or not invest in a company.The result is that pitching a Valley Angel/seed investor means presenting to someone who has knowledge and an opinion on the idea your company is attempting to solve/pursue. They are also probably intimately aware of the problems and competition you face. Compare that to an east coast Angel who has neither an opinion nor a base understanding of the company you’re building. The pitch becomes an education session with someone pretending they already understand. It’s virtually impossible for them to make an investment decision on a company they don’t understand well enough to have an opinion about without overwhelming hard #s to back it up.There’s no question the competition is tougher in the Valley, but I’ll take an informed “no” over an uninformed “maybe” 10 times out of 10.
Hey Adrian, what company was it?
Ask David and Nicole about Dmitri and Adrian 😉
That is part of the role that accelerators do play. Examples are TechStars, 500startups, Y-combinator, Hyperdrive, Growlabs, etc… They usually provide working space, small capital and other services. This is essentially a seed fund and most accelerators judge their success by how many of their startups are able to raise a series A
“This is essentially a seed fund”As someone who just graduated Techstars, gotta disagree with you there. Investors expect you to raise seed when coming out of an incubator, not a Series A.Couple recent YC grads for example:http://techcrunch.com/2014/…http://techcrunch.com/2014/…
I’ve been on my soapbox saying this for the past 2 years! From a financier’s perspective, VC/seed/Angels are waiting for a deal to be at growth equity risk tolerances until they jump in. They want technical risk removed with a product/PMF, they want financial risk removed by being cash flow positive (or, in B2C businesses, understanding that the number of consumers you have could be advertised to for $10 CPM and yield a cash flow positive company), and they want a team in place that gives them good assurance on operational risk. The reason you see hedge and private equity funds jumping into this space is because they realize that by the time a VC invests the investment meets their risk profile (i.e. GROWTH EQUITY RISK LEVELS). I don’t fault VC for having crap returns for the past decade and getting out of higher risk investments but DO NOT call yourself “venture” if you’re taking the same risk as a growth PE firm.
“DO NOT call yourself “venture” if you’re taking the same risk a growth PE firm.”*mic drop*
love this comment
I agree, but if they can get away with investing late while keeping the same Seed valuation can you blame them? The problem is competition, or rather lack of it. It’s the same reason self-proclaimed investors who act poorly are allowed to continue to operate — startups are afraid to out them and risk reputation damage.No sense complaining about it though. Either move to SV or develop a plan that enables you to succeed despite the local seed stage financing challenges.
“if they can get away with investing late while keeping the same Seed valuation can you blame them?”nope. it is what it is.i’m not complaining. merely pointing out the Fred and Marc’s comments don’t reflect reality.
Yes – which makes no sense, otherwise why would they go look for capital – this seems to me to be a flight of risk, and that seed investors want to be VCs without understanding say, marketing costs. if you alreay have some traction, you will probably need more than seed to ramp up marketing.So the market is very misaligned
Case in point, if Yelp’s founder Jeremy Stoppelman didn’t have his connections from PayPal, raising $1mm Series A pre-launch and only have 12,000 engaged users to show for it after one year would never have been enough to validate a $5mm Series B. But in 2004 and thanks to his connections and having Max Levchin as his first investor, he was able to get a Series B. In 2014, a company like Yelp would never been given enough runway to show product-market fit. Now they’re worth over $4bn on the market. Meanwhile, my startup Localeur has raised 35% less money than Yelp, has a ton of great press, word-of-mouth and user engagement, zero VC money, zero full-time developers and is still growing even or faster than Yelp and all of the other companies in this space in their first 18 months from inception. I can imagine it’s hard in New York to raise seed money without connections for a consumer startup, but it’s even harder in Austin.
Couldnt agree more. Given that the cost of building software products is going down, angels typically dont do seed rounds based on a prototype (esp in the case of consumer mobile apps).Well connected individuals can raise seed money for PMF/building product, but successful apps like WhatsApp raised seed post traction. And that is increasingly becoming the norm.
Thanks, I needed that, or used to before I concluded something with essentially the same actual ‘actionable’ consequences.It’s like the ninth grade when the girls wouldn’t much talk to me (one did, but I was too much of a nerd to ‘interpret’ and ‘extrapolate’). It took me a while to understand that mostly the ninth grade girls talked only to boys 1, 4, 8, ,,,, 15 years older than they were and, thus, weren’t much talking to any boys in the ninth grade. So, the lesson: It wasn’t just me; the ninth grade girls regarded the ninth grade boys as children not worth even a glance. Or, if can’t get a VC to write a Series A check to pay for building the product, it’s not just you and, instead, is just the same for essentially all entrepreneurs, with a good project or not.Or, bluntly, the girls in the ninth grade clearly understood that they were young ‘women’, whom Mother Nature had already generously endowed with the ability to be good as wives and mothers, while the boys there were still just ‘boys’ and had a long way to go before being ‘men’ able, say, to support a wife and mother. The girls’ mommies likely explained that no good could come of a ‘relationship’ with a ninth grade boy.Fifteen years older? Yup. Remember Lady Di? She already knew him when she was 14; at 15 decided she would marry him; at 20 she did. He didn’t have a chance! But, poor judgment: All she got was a pair of ears that talked to plants and wanted a mother.Exceptions? Sure: One guy my age in my school had a father who’d founded what was already a famous, major, nationwide US business and still is; sooooo, sure, girls of any age would talk to him! As if the girls all already knew that “a boy being rich is like a girl being pretty”. Gee, how’d they learn that so young? Do I have to explain in detail? Not to anyone who’s been around the block even once and noticed even a little of the ‘way of the world’!Besides, since that’s the way it is, I’ll just wait until I can buy the Swedish Bikini Team or the cast of ‘Coppélia’! The French girls inhttp://www.youtube.com/watc…are especially pretty! And, that’s how I was raised to believe girls should be dressed, look like, and act! Every ballet troop for 100+ years to the present understands! The first girl who danced the lead there was 16; a girl in the ninth grade is a young woman; boys in the ninth grade, find a way to meet girls in the sixth and seventh grades!Maybe some VCs use their publicity to get ‘deal flow’? How? Sure: Ever see the movie ‘It Happened One Night’ where Clark Gable had no success thumbing a ride but Claudette Colbert pulled up her skirt a little, waved her leg, and right away the next car slammed on the brakes to give her a ride! Who expected something else? So, Ms. Colbert put out a little ‘bait’? Bait or a real ‘meal’? Just bait, not a meal! Might Andreessen be able to think of something similar, say, a Series A before product development and PMF, to get ‘deal flow’? Naw; no way; not a chance; and, besides that might be regarded as slightly manipulative! I mean, just because Ms. Colbert did it! I prefer Ms. Colbert’s ‘bait’! Sorry Marc; you can’t begin to compete!The time I sent e-mail to A16Z I got back a reply from Ronny Conway saying that A16Z couldn’t understand my math! Yup, ‘barrier to entry’! If they thought that the simple overview I wrote them was tough, good they didn’t go to my first Board meeting were I would outline the math for the next project, for ad targeting; “You see, we start with some classic von Neumann and Kolmogorov, and then …”; their hair’d curl up and fall out as they ran, holding their groins, for the men’s room which would not be close enough. Guys, it’s your mess — clean it up; the mop is in the janitor’s closet. What’d you guys expect, some junk like ‘machine learning’? Never see any good stuff before? Likely. Think of the flip side, the barrier to entry! I mean, since you guys are the smartest in the room and have “deep domain knowledge” from reading all those pitch decks from competitors for SnapChat, my work should be a piece of cake!Why? Been there or close enough! As I learned in my first year in math graduate school from the weekly seminars with a nice list of the most famous mathematicians in the world, there is little so intimidating and overwhelming as a blizzard of research-level math where hardly a single word is understood, literally! Research academics knows how to deal with such material; VC doesn’t!Yup, it’s not all trivial: My software threw an error! But, I’ve got some good error handling and saw right away where the error was and why! Digging in, looks like I’ll have to go over my math again and handle a ‘corner case’; I’d wondered about that but was in a hurry. So last night, I opened the TeX file with the math, and at page 22 started reviewing! It’s good I’ve got good documentation — wouldn’t want to have to recreate that stuff!Entrepreneurs: Don’t waste your time sending e-mail to A16Z looking for a Series A that will fund product development. Instead, Colbert’s bait is better than Andreessen’s. It’s like the ninth grade: It’s not just you the girls won’t talk to; they won’t talk to any boys in the ninth grade unless, maybe, the boy’s father owns a major company! Instead, write your software; go live; get some revenue; f’get about Andreessen.Some arithmetic: If people like your product (if they don’t, then try again), then viral growth can really take off. Heck, there’s a bubbly high school girl who goes shopping for clothes, makes simple videos describing what she bought, has a YouTube channel, and is making, what, $1 million a year? She wants what from Andreessen?Viral growth? Let t denote time in days, y(t) revenue (in dollars) per day at time t, and b your maximum such revenue as you saturate your market. With y'(t) the calculus first derivative, we have for some constant k,y'(t) = k y(t) ( b – y(t) )Solve this with freshman calculus and graph for various values of k. From early growth, estimate k and then see an estimate of the rest of your growth. In any case, see qualitatively how your viral growth likely will go.So, let’s see how the green stuff works out: Send a Web page for 400,000 bits. Get a static IP address, a domain name, and upload bandwidth to the Internet of 25 Mbps (million bits per second), maybe just from your living room and your cable TV company. Plug together a good server, say, an 8 core AMD processor or for lower electric bills a 4 core Intel processor that can run 8 threads, for about $1500. For the system software, get it, at least initially, for free, say, some version of Linux or Microsoft’s via their BizSpark program. Run an average of 4 ads per Web page. Get the ads from an ad network.[Possible? Plenty of Fish was long just one guy, two old Dell servers (used PCs are cheap, including some with an Intel i7), ads just via Google, and $10 million a year in revenue. Then he wanted what from Andreessen?}Get paid about $2 per 1000 ads displayed. On average over time, 24 x 7, half fill the upload bandwidth. Then send25 * 10**6 / (2 * 400,000 ) = 31.25Web pages a second and get paid2 * 4 * 31.25 * 3600 * 24 * 30 / ( 1000 ) = 648,000dollars a month. And you want what from Andreessen?VCs will be among the first to tell you that their money is not for everyone and that you are better off not taking money you don’t really need. But, then, almost inevitably there are projects good enough to be worth some funding but not good enough not to need it.Curious that now Andreessen is interested in writing Series A checks for the initial software development since in the past he said that each year in the US there were only about 15 projects that deserved a Series A. Yes, maybe there’s a ‘programmer shortage’, but it’s not THAT bad! But, you weren’t fooled by Colbert, either, were you?If you take money from A16Z, then Andreessen or someone from that firm will be on your Board; they will be your boss; you will have to report to them; they can fire you long before you are ‘vested’ in your part of your company, that you own 100% now and suddenly will own none of; and you will have to please them as they sit in your Board meeting reading pitch decks about competitors for SnapChat or just looking at pictures captured from SnapChat. That’s a path to a new Ferrari? You really think so?Or, now you can write code as you eat Raman noodles for dinner. But with funding, you will have to have a Delaware C corp, a bookkeeper, an accountant, a lawyer, some insurance, monthly reports to and meetings with your Board (where maybe you will pay for their travel expenses), quarterly financial statements, etc.Think that that use of your time and their check in the bank that lets you move up from noodles to Chinese carryout will let you write code faster? Nope.So you will have to hire; not so fast or easy. But you already know how the heck to write your code and now will have to be a ‘manager’. Then that check will go fast.Uh, likely your zoning laws won’t let you have your employees working in your living room, and anyway you will likely need business insurance. And the full cost of a hire will be, what, $250,000 a year? So, then you will be like others who dream of some local university training people for just what your hires will need to be productive on your project in, what, a week? How about six months? At that rate, a few hires, and your $1 million Series A check will go fast, well before those hires have written your software.Save time. Write your own code. Start and run your own company. Guys mowing grass do, and software is a big advantage; don’t blow that advantage.
I would fund you if I had money
Thanks for the vote of confidence.Actually, first, you should have my math reviewed. That alone is like being Editor in Chief of a research journal, and that job’s not easy and typically requires a long, successful career in research and paper reviewing.About the best that could be done would be for me to recommend a list of mathematicians that I know only by reputation. Then, sure, there’d have to be some NDAs, and professors are blabber mouths and would likely teach my math the next time they could give a lecture! It’s happened before!But for now I do have money enough from my checkbook. Taking a check would create so many more obligations for my time, as ‘overhead’, that progress would slow.For my project, ‘seed funding’ now should be a moot point because I should have the production quality code running quite quickly, Not taking time to post at AVC would help!But in part I don’t need to be in a rush because I’m confident that no one else in ‘IT’ will derive my math independently or even after I go live, even if I become successful. I know some mathematicians who would catch on quickly, but, curiously, they might not know enough computing to do the math so that the resulting computing is really efficient. E.g., the SSD drives are wonder material for my project because they permit beautifully fast read access to some crucial but conceptually very simple data, written maybe once a week and otherwise read only (with a LOT of reading!), and if my project becomes really successful I could use maybe 150 TB of such data — now that is entirely reasonable, even just in a spare bedroom as a ‘server farm’; amazing. And the people who have the math prerequisites typically have little knowledge of or interest in the business, that is, without a lot of help just would not see the math issues in the right context, which is crucial.So, net, I don’t know who the heck would be able both to reproduce my original math and also bring up a competitive offering. Ah, ‘barrier to entry’. And, thus, net, getting a meaningful review of my work would not be so easy either.The course seems to be to finish testing and debugging the software (everything I started out to write has been written, documented, run, and passed ‘unit test’), and then rush to go live. If it works at all well, a seed round would be not worth my time even to negotiate.For ‘go to market’ money, that high school girl with her YouTube channel on fashion did that for $0.00; I might be able to, also. For ‘build out the team’ money, just grow more slowly, let the earnings accumulate, and then hire. I want to cover the hiring from revenue, not equity funding.If Andreessen had paid more attention to my e-mail, then we might have had something to talk about, in an aviation analogy, if only as ‘reserve fuel’, but it’s a bit late now.Thanks for the vote of confidence. Being the only guy in the world going my way has some pros and cons!
If it’s so novel and unique then you’ll likely have to prove it all yourself. It sounds like you have enough resources to be able to achieve that. Wish you the best.
Thanks. The crucial, technical internals are “novel and unique”, but users don’t need to know that.As I’ve mentioned at AVC before, I’m going for the part of Internet search (discovery, recommendation, …) around the world currently served at best poorly by, say, the keyword/phrase search engines. that “part” may be 2/3rds of the content on the Internet, searches users want to do, and results they want to find. In that part of search, the users should be able to find my search engine very different but, still, intuitive and easy to use and, of greatest importance, much better for the content/searches it can handle, which initially will be focused.The keys likely will be doing well on the part about ‘focus’ (can’t be comprehensive on day 1) and, thus, have something that pleases early users and then good publicity and virality. At times, virality is amazing.If I can get the usage up to, say, 30 Web pages a second, then significantly more growth will look likely. From my software timings, it looks like the 30 pages a second could come from, say, just an eight core server at my left knee; SSDs should help but were not assumed in my timings and capacity arithmetic. The revenue from 30 pages a second should let me hire and grow and keep up with demand, say, more servers, an office, real server farm with UPS, HVAC, security, good Internet connection, etc. That’s the idea. Others have been successful; maybe I will be, too.If growth is too fast, then I will ask users to have a user ID (or accept a Web browser cookie) and then limit the number of users until I can plug together more servers. The software is written for quite a lot of parallelism now.Thanks for the encouragement.Since my work is aimed at being the best for 2/3rds or so, if I can send 30 pages a second, then I should be able to send 300, 3000, ….
as we talked about in person yesterday (great seeing you btw), i don’t see this. i see seed investors taking risk on the product and PMF all day long. i guess PMF is in the eye of the beholder.
That is spot on (eye of the beholder)…and you don’t realize how much of an exception *you* really are…
I agree. Your opinion of PMF will be likely more “lenient” on, say, a mobile bitcoin network. Your wife has a bias for food and female founders. Peter Thiel for underaged wunderkinds. Etc.The eye of the beholder lesson is one of the most important I’ve learned from you. It has definitely helped me on my fundraising journey (which, despite my original comment, actually hasn’t been bad at all).Great seeing you, too!
I’m a bit behind on my blogs and just read this – I was about to post exactly what you wrote. Well said. What’s ironic is @pmarca is even more aggressive – Series A is for PMF! Is Silicon Valley *that* much different than the East Coast?
I think atlas had done 50 seeds over the last 4 years and the majority were at basic proto stage. My company zoopla that just went public was 2 guys with slides at seed. If the seed round are smaller the requests for proof points are fewer. Remember also investors look for polite reasons to say no and traction is the most obvious (or lazy) one. I like the characterization done by Fred. Before the Lean lingo became popular we called this “prove/ build/ scale” (seed / A / B+).
“But I’m old school. I think of building a startup and funding it as walking up a flight of stairs. My partner Albert prefers the videogame (leveling up) analogy. Both work. I will stick with stairs.”Love this.
Fred,Great post as always. I totallyagree with what you said, but I believe people should even ditch the seed roundto build their product. We are so fortunate today that building a minimum viableproduct these days are probably a 10th of what it would cost 10years ago, furthermore from a backend perspective there are 3rd party vendors thatcan cover you from a scaling perspectiveif you grow quickly, etc parse. I did have a question, what if our MVP wasoutsourced by a team overseas in order to maintain a lean team. Do you feelthat a CTO or a software engineer should be employed in house prior to gettingseed funding? This is the dilemma my partner and I fight with. Should we giveup equity when we have the app done? We are well versed in the “ tech space”,however we do not have an in house developer rather they are overseas. I for one feel the user interface is moreimportant than the development itself. What are your thoughts? Lucky
Location of development–onshore or offshore–doesn’t matter to most investors. But outsourced v insource matters a lot. Outsourcing development to 3rd parties for an early stage technology company, particularly if the founders are not technical, is huge. It means you don’t really have anything beyond an idea.You don’t have the ability to iterate, change the product, change scope, rapidly expand the product, without huge cash burn. And you are always subject to the whims of your vendor, turnover at the vendor, vendor working for a competitor, etc. Outsourcing development should be a way to add capacity as you get larger, get over a particularly large, one-time development hump (the rat going through the snake), but you are lacking probably the core skill set in developing a technology company if you don’t have engineers.
Dave those are great points and thanks for thereply. I am confused on what you mean by having “just an idea” isn’t the UIwhich we have built out screen for screen via a click through app more than anidea? We do have an NDA in place. I do feel our mocks up and wireframes overthe past 6 months listening to users, fine tuning and chipping away has allowedus to finish the app which we are happy with. Do you suggest linking up with anengineer right away? Do you recommend any networking events in the tri statearea? Websites? Thanks for the help.Lucky
Lucky–Sounds like you have something going but without engineering talent on board, it is hard for a VC to see you as having a company. Engineering and product are generally viewed as core, required competencies for an early stage software company. Almost everything else can be hired (e.g., sales) or outsourced (i.e., infrastructure, financial help), but product and engineering typically cannot. Sounds like you have the product side covered but not engineering.
With the difficulty in raising series A (series A gap) startups are trying to raise more early when their deal is hotter. In the midwest, we don’t have as much money as the coast, so even Series B rounds can be tough here. That’s also why midwestern startups really focus on revenue. http://sn.im/290xdj8
Since we just went through this process and wrapped up seed, I’m curious @fredwilson:disqus what you think:a. too large of seed looks like? is it dollar amount or time-horizon of a company (i.e. a shorter time horizon drives focus/ a cliff to put talent back into the market)and b. as a corollary, the ‘giant A rounds’ happening now *feel* appropriate because with $1-5M in seed, some companies are reaching scale easier/ faster, and have the ability to attack the market early – is this “acceleration” a bad thing?In effect has everyone just mentally 1 step ahead of where they were a few years ago?
too much is measured in runway. 12 months for seed is good. 36 months for seed is absurd
Fair.Where do you stand one the “take every dollar you can get” when available?Btw heard you killed it at startup school yesterday.
hmm. i thought i was very clear in my post that i hate that idea
Had just walked out of yoga pre-comment. still reawakening to the world. Lost context momentarily. Good point.
.Any orderly approach to defining funding levels is helpful.The Rosetta Stone is a great foundation for de-mystifying the biz.Another blow for wisdom from the wiseman behind the curtain.Well played.Let the discussion explode.JLM.
it did and i was working when it happened
http://www.builtinchicago.o… I think this is an example to what Andreessen was referring to. $8M Series A of a bootstrapped company. Braintree also did their first financing with NEA. Bootstrapped from 2007-2011, first round was $30M. Next round in 2012, sold to PayPal in 2013 for $800m
This has recently become the debate between my business partner and myself. We have the $$ to self fund the seed round as part of reinvesting in our companies future but there are advantages to getting the right seed investors on board that aren’t just about the money. Like setting yourself up for the build round bc the truth is, when you NEED money, you will never get it or it will take too long.
when you NEED money, you will never get it or it will take too long.That’s really a cornerstone of business actually. You can get all sorts of money when you don’t need it and it’s much harder to do when you actually do need it.Something about the vibe that people send out when they are more desperate and the confidence that they send out when they are not in need.Part halo as well for that matter. It’s usually a good idea to squirrel things away if you can, as insurance, even if not necessary. Even if it costs you something. I say “make hay when the sun shines”. Or of course you can take your chances.
I”m in full agreement with you. My last start-up, my CTO who was also business partner was always worried about giving away too much. I”m in the 100% of nothing = nothing camp. You don’t want to take $ just because it’s being offered, it has to be right, right people, right deal, right reasons, but to NOT take it bc you are too worried about giving up too much? Not a reason for me ever.
Fascinating to me that the combination of too much angel money plus vehicles like Kickstarter have distorted the investment cycle enough that a guru like Fred is forced to comment on it. For the past several years, it has seemed angel money is so abundant that the investor is not being compensated sufficiently for the risk the capital is taking.Fred’s approach is right and makes perfect sense. But if I’m an entrepreneur raising capital in the current market, I’d take as much angel cash as I could if the valuation was remotely attractive. Perhaps try to skip the Series A crunch or at least have enough cash to get far down the path so you can raise a Series A at a later point than used to be the case (a Series A and a half…).You have to take the capital when it is available.
The more Angels you take money from, the more people you have who feel you have an obligation to them to drop whatever you are doing — no matter how strategically important to the company — and spend time babysitting their wants to know exactly what’s happening down to the minute detail and whims to be heard on their schedule. After all, most Angels are not professional investors.So, be careful what you wish for.
I understand the drawbacks and have lived them. But that is where the capital is at the moment so hard to pass up.
There is nothing in life without tradeoffs.
> it has seemed angel money is so abundantI was in for a checkup; a nurse wanted to know what book I was reading (that I brought to read while waiting), and I said that the book said that my software had something to converge to. She asked if I wrote software? I said I did, and right away she wanted to invest!
If prior cycles are any guide, the point at which my retired Mother and everyone I know buys into a given asset class–tech, real estate, etc.–it is time to run. We aren’t quite there on tech yet, but close…:)
My goal is getting revenue, not raising equity funds, and whatever happens with big barrels of WonderBubble to equity funding and IPOs won’t affect my chances of getting revenue. Still you have a good point!
“Feature request for Twitter: Please make it possible to permalink to and embed a tweetstorm. You can call this the @pmarca feature.”+1!
updated above, can’t delete tweet?
Updated, now in sequential order, for better reading.https://twitter.com/vruz/ti…
@vruz:disqus Interesting. Thanks. Guess if Fred didn’t know about it then Twitter needs to promote it better (and make them easier to curate.)
Definitely, that’s the most obscure, useful and undermarketed Twitter feature ever.It’s not too difficult to create custom timelines, but it’s a very well hidden feature.More here:https://blog.twitter.com/20…http://www.wearecollider.co…https://blog.twitter.com/20…Cheers!
Here’s a custom timeline made from @pmarca’s tweetstormhttps://twitter.com/vruz/ti…Unfortunately creation of custom timelines seems to be unavailable in the basic twitter.com client, but they can be created using Tweetdeck.For anyone interested in creating custom timelines, here’s some pointers:https://blog.twitter.com/20…https://blog.twitter.com/20…If you’re like me and haven’t used Tweetdeck in a long time, it may be news to you that you can use top-quality zero-install flash-less web-based Tweetdeck here:https://tweetdeck.twitter.com/(a previous version of this comment pointed to a different custom timeline with the tweets in reverse order)
Note you can embed a custom collection in your blog, clicking on “Embed this collection”.
In Europe Angel is when you already have a product, Seed is when you already have revenues, Series A is when you couldn’t care less…
Thanks Fred, this makes a lot of sense.My impression, though, is while this is accurate right now, it also continuously shifts over time—has been shifting for many years, and will continue to shift. For instance, ~10 years ago you needed Series A level money (~$5M) just to build and launch a product. Today you are expected to do that with only seed-level money (~$1M) or less. In another 5 years, maybe you will be expected to do that before you get *any* money. It gets easier to build, launch and get scale every year, and so the bar keeps going up.The valuations also go up, meaning dilution goes down for founders. The only thing that seems to stay the same is the rough amount of money attached to each label (seed, A, B, C).(One interesting data point on valuation/dilution: In 1958, DEC raised ~$570k (2014 dollars) in its first round from ARD, and gave up 70% of the company for it. (!))I wonder if this matches your impressions as well, having been in this business so long.
The biggest issue I see is the definition of PMF. As an entrepreneur – you naturally define it too broadly. As an investor – you see it defined significantly more narrowly. Therein lies the tension. As a Seed Investment fund with a mentor program hanging off the side (Yes, an Accelerator) operating outside of SV or NYC, we help companies manage this tension with the goal of meeting the investor definition rather than the entrepreneurs definition. Its one of the roles we should nail every time.
Fred, when you first talked to Jack about Square pre-launch, how did your view on funding them differ from other typical startups because of the product and its potential? I know they had a working prototype but am pretty sure they hadn’t yet launched to the public when they raised their Series A. You could say they reached product market fit on very small level because many people/merchants said they’d use it, but I think that’s about it.A more recent example is Coin. They have what looks like a very compelling product and raised a $15m series A before even allowing pre-orders.I know neither company falls under USV’s thesis, but am curious your thoughts with them raising a Series A largely based on the strength of the product (and team).
we did not invest in either of them
Enough said. Thanks, Fred.
Re. the Twitter feature request, Fred, are you looking for something like this?http://creamsocial.com/free…
Thanks, a clear explanation of terminology people in the know tend to throw around casually.
In my opinion the reality of the seed financing is mid way between Fred’s and Brandon’s views. I agree with Brandon that in order to receive any seed $ you NEED to have a product out there and to have tested many hypotheses, the bar is simply too high now for investors to pay for building a product, neither should they. If you are insanely focused on the execution of your idea, you need to find a way to build the product yourself with minimum resources, it is also a signaling idea, how can an investor trust you that you will build a multi million/billion dollar company if you can’t find way to bootstrap the development of at least the initial version of your product. I do agree though with Fred that seed is needed for getting to PMF, and that is not an easy task. You might have enough traction before PMF to indicate to investors that you will get there. Seed investors also prefer to get involved just before PMF because they are fully aware that once the rocket ship takes off no seats will be available for the late comers. Most of the seed $ should be used for getting to PMF, because once you get there you quickly approach Series A round. Once you have PMF you know it, as Naval has mentioned in the past. Only once you have PMF should you consider raising bigger rounds. It is not about raising money, it is about building a viable company that solves your customers’ problems and needs.
Having been on the seed funding circuit for the past several months, I can tell you out of the 30 people/firms we have talked to NO ONE wants to give you seed money for product development, product market fit, or anything alike.”Seed” people want product, PMF, and would love some money coming in the door. They are more interested in being early money in before a VC gets in than anything else.I wish Seed “wasn’t the new Series A” and one could get seed money to build product. It should be that way – but it isn’t.
I think the issue is semantics. Seed is, you are right, defined more these days as 1MM-1.5MM round, which is basically used to be called Series A. The earlier seed is couple hundred K and comes in two flavors – a) Friends and family — most often the case for first time entrepreneurs with no connections/experience/accomplishments. b) Angels — most often the case for serial entrepreneurs/accomplished folks.
here’s how it is. if you have found PMF and can prove it, you can raise a Srs A. so seed investors have to take the risk of finding PMF or they have no role to play.
I think the reactions below are based on semantics. Fred’s point is each stage is for a different milestone.The fork people are talking about is based on background and experience.If you are a serial entrepreneur, with accomplishments and connections and you are working on a big opportunity, you can pull together 500K-1MM seed pre product.If you are first time entrepreneur, with no accomplishments, and no connections and no obvious experience in the space, you can either bootstrap or pull a few hundred K round from friends and family or a handful of angels who really understand the problem you are solving and believe in you.Regardless of the fork, everything else converges the same way, and Fred’s steps are the same.
re: Feature request for Twitter: Please make it possible to permalink to and embed a tweetstorm. You can call this the @pmarca feature.Permalink—Create a Custom Timeline in Tweetdeck: https://twitter.com/PCutty/… (Pretty easy; drag and drop)Embed—Click the icon in the top right of the Custom Timeline in Tweetdeck to expand options. Choose Share > Embed which will redirect you to twitter.com to create an embeddable widget for that Timeline.
cool. i will check that out
.Nice? NOIt is empathy, thoughtfulness, kindness, gratitude, authenticity, genuiness.It is breeding, character, class.Friction reveals the character beneath.It is karma. It spawns luck, lagniappe.It is the recognition we are small in the Great Scheme.Nice? NO much more than that indeed.And, Freddie, my friend — you’ve got that mojo, the juju that makes the dice want to please you.JLM.
JLM, did you mean this to go on Fred’s post today re being nice?
Who’da known? This thread is WAAYYY more productive and insightful than a Buzzfeed thread.
“The first step you need to climb is building a product, getting it into the market, and finding product market fit. I think that’s what seed financing should be used for.”This is level 2 for most new entrepreneurs, since even seed financing probably isn’t available yet.Level 1 is building a prototype that resonates with an ever growing group of early adopters.This is what bootstrapping is for.
I’ve seen companies scale with seed and I’ve seen companies raise a B round when they haven’t really established product market fit.At the end of the day each investment at each level is to get a company to the next level and if you believe in the opportunity and the team you may continue to invest and do what would technically be considered an A or B even without the milestones being met.
I couldn’t disagree more with this statement “I feel very strongly that seeds should not be as large as they are these days and they should not be used to fund anything other than building product and finding product market fit.” It assumes that there is a such a thing as “efficient” markets around venture capital, which is definitely not the case. In this environment, as an angel investor and/or a founder why would I not take enough capital to not only get to PMF, but also use some of that to get to revenues. Having revenues early massively mitigates funding risk.Putting yourself (as a founder) in a position where each “step” is out of your control and dependent on the whims of the VC industry is not a wise strategy. So few companies actually do get institutionally funded, so why not de-risk and assume that every round is “last money in” instead of building a bridge to another bridge to another bridge, hoping that a VC funds you instead of your customers funding you?
Late to this discussion, but still enjoy the thought-provoking interactions thanks to both Marc Anderson and Fred Wilson
How can you possibly say this Fred? This is such a slap in the face to entrepreneurs who would love to raise a Series A where they’ve only achieved product market fit. Unfortunately (or fortunately), every VC wants to see startups generating $1M-$1.5M per year in revenue before funding a Series A.The reality is that you need to be past product-market fit in order to even raise a SEED round, and then that seed round needs to be used to get to $1M-$1.5M per year in revenue. Everything has pushed upstream, and this blog post feels like it was written in 2007, not 2014.I’d like to find out how many startups that have raised a seed round that have ONLY achieved product-market fit that you’ve funded with a $3M-$7M Series A. I bet zero. This post is so out of touch with reality, it’s not even funny.
This really speaks to the benefits – and illustrates why I’m such a big advocate – of milestone funding. That is, first identifying milestones and then calculating how much capital you need to raise in order to achieve them. It prevents you from raising too much, keeping dilution as low as possible. And it sets you up for step increases in valuation once you hit those milestones.
My rule of thumb is, don’t talk to VCs about A till the numbers can speak for themselves.
A reality is that Kickstarter is clouding the investment stairwell progression. KS gives you instant product-market fit validation if you have a successful campaign. Then what’s next?
what we have found is that Series A is not the place to find PMFyou need to find it before you raise the Srs A
Bad link. Are you designing a VC line of clothing?
Kickstarter = Seed Round.That is all. Everything else, the same.
Excellent summary Paul!We just commented separately on how we built a hack to automatically aggregate pmarca’s tweet storm. http://vozag.com/marc-andre…https://mobile.twitter.com/…
Hmmm. Not sure about that. KS = product-market fit validation, which can make your seed or A round easier.
Why do you need a seed round after a successful Kickstarter?
Because what you have raised on KS may not be enough for the next 6-12 months. Also, in order to get some “smart money” into your system, getting ready for a better A round.
As Fred says above:The first step you need to climb is building a product, getting it into the market, and finding product market fit. I think that’s what seed financing should be used for.Kickstarter does that, IMO.Not saying you can’t do Seed, the Sequel, as I’ll describe your model. But if the Kickstarter is a success, there should be enough intrinsic value in the company to justify an A round, which is typically used for the growth you infer with “6-12 months” path.
you are never antiquated but always uniquely yourself my friend.
Kickstarter for seed, AngelList for next round. AngelList Syndicates for rounds after that. Who needs VC?
You crack me up.I had a dream that I was walking through Whole Foods and there was bread in the non-gluten section with your picture on it, in a circle like a Lex Luthor cameo 😉
.Dreamers will do that.Well played.Voice of REAL experience.Sorry, nap time.JLM
Put that on your business cards.