Some Thoughts On Seed Investing
We (USV) raised a new venture fund at the start of last year and started investing it in the spring of 2014. It is called USV 2014. We have made six investments in it so far and five of them are seed investments. That’s a very high ratio for USV and we do not expect that ratio to continue over the life of the fund. In fact our next investment will be a classic Series A so we are already lowering the ratio. But it is a bit of a return to form for USV as half of the initial investments in our first fund (USV 2004) were made at the seed stage.
In our core early stage funds (as opposed to our Opportunity Funds), we make initial investments at the seed, Series A, and Series B stages. In an ideal world for USV, there would be a normal distribution of these entry points with the highest percentage in the Series A stage. Over the entire history of USV, that is very much true. But on a fund by fund (or year by year basis) it varies a lot. It is mostly us reacting to the market. When the later stage rounds are too expensive on a risk/reward basis, we tend to move earlier. And when we can get good risk/reward opportunities in the Series A and Series B stages, we tend to move later. The downturn of 2008/2009, for example, led us to move a bit later in our 2008 fund because we could invest in more mature (and therefore less risky) opportunities at attractive prices.
The current market environment has pushed us to invest earlier. Some of it is that the Series A and particularly the Series B valuation environment has gotten very expensive relative to the risk as we see it. And some of it is that we are in a period of flux, where it is not entirely obvious to us where the next big things are going to happen. We have some ideas, of course, and I have been exploring them here at AVC and we have been exploring them as a team on usv.com. We think that in times of flux it is attractive to make a bunch of smaller seed investments in areas we think are going to emerge as important in a few years.
So that explains the move to seed as our primary entry point last year. I think it will continue this year but maybe moderate a bit as some of these developing markets mature and become more investable at scale.
Ok. Now that I’ve explained why I’m thinking about seed investing a lot these days, I’d like to talk about how we do seed at USV. Here are the important points:
1) We do not take a shotgun approach. We do not view seed investments as “options”. We only make a seed investment if we have as much conviction on the team and the opportunity as we would at the Series A round. We are as committed to our seed investments, both in terms of the time we spend with them and the willingness to follow-on in them. They are core investments with as much stature in our portfolio and in our firm as any other early stage investment. This is critical to understand. And it is not true of many (most??) VC firms who make seed investments.
2) We like seed investments in teams and opportunities where they have built and launched a product already. We don’t like investing in a concept or participating in a round where the uses of the capital will be to build and launch a product. This means the vast majority of seed rounds are not a fit for us. We pass on a lot of seed stage opportunities because it is “too early” for us. That is a comment on the specific opportunity however, and not seed stage investing as a whole. This confuses a lot of people. They tend not to think of USV as a seed investor when in fact we do make a lot of seeds (over 80% of last year’s investments, for example).
3) We will often lead the Series A (and sometimes Series B) in companies where we did the seed investment. We led both the Series A and Series B in Etsy and we co-led (with Spark) the Series A and Series B in Tumblr. We were seed investors in both companies. We continue to do that where it makes sense for the founders and USV. That is not a requirement or an expectation, but it does happen and I believe it is a very good thing in the right circumstances.
4) We like to participate in syndicates in our seed investments. We don’t focus too much on ownership at the seed stage. We do focus on the investors coming together around a project. We like partnering with smart angels, seed funds, and even other VCs, if the other VCs are aligned with us on how they are thinking about the particular seed investment. Our investment with Spark in the seed round at Tumblr is a good example of two VC firms partnering up at the seed round and doing a good job working together and scaling into the opportunity.
USV will never be confused with a seed fund, but we sometimes act very much like one, except that we can and will invest 20-30x our initial investment over the life of the company. That combination (a committed and active seed investor + deep pockets) is unusual. You can get one of those two a lot. But rarely both. So if you are working in an area that is interesting to USV, and if you have launched something into the market already, and if you are doing a seed round, please do reach out to us. We are in the business of making seed investments and doing a lot of it these days.
Hi, Fred. Was wondering if, when you make a seed stage investment, you also pre-allocate funds in anticipation of a likely Series A investment, or are those funding decisions made completely independently?
Each follow on investment is a separate investment decision. But we have never failed to follow on after making a seed
wow. that’s a metric that VCs ought to compete on…it indicates both ability to pick winners and willingness to support portfolio companies.
Support of investments is a key market differentiator for USV.
Has the macro environment ever forced you out the market completely? But good ideas can bloom even in an economic mess like 09/09 but then surviving.
Best time to invest is when economic times are really tough. Valuations are usually lower, and most investors sit on their wallets.
I understand “blood in the streets” but a major disruption like 08 can alter and delay growth patters too. Buying public cos in March 09 gave me a lot of sleepless nights
Agree, have to be careful where you pick your spots, but it pays to pick them. Which public cos are you buying now?
I added to my MSFT position this past week.
The markets are still near all time highs. It makes no sense to be buying now. You should be selling what you bought during the last crash!.Buy low… Sell high. Think about it. BTW I’m assuming you’re talking about the casino of common stock.
“We don’t like investing…where the uses of the capital will be to build and launch a product… They tend not to think of USV as a seed investor when in fact we do make a lot of seeds (over 80% of last year’s investments, for example).” So what’s the definition of Seed: Growth Equity? After PMF it’s 100% financial engineering. Contraction of Seed deals as reported by Mattermark is likely Seed/Angels following VC downstream to GE.
Fred, any specific sectors where USV prefers to invest in seed? e.g. food, groceries, marketplaces..where startups are generating revenue from transaction #1. How long are USV funds still available in 2015 for seed investing?
In our core sectors. You can glean them from the discussions and topics on usv.com and by looking at our portfolio
Seriously??? on top of the 100 other things founders need to do they also have to go through your site and understand your interest areas. Inspite of people asking you multiple times, this seems to be your standard answer. Interesting.
Justanother – go do what he says and you will realize that it is not a 12 word response. And he gets it asked 50 times a week.and it you wanted his interest, you would not ask the question, you would know the answer.He is actually being polite here……whereas you are justanother_____
I have no qualms what you fill up in that blank. Let me help you. How about – jerk, d***, dumb-f***, a***hole???. I was making a point. You might not like it, but thats what happens in forums. No need for you to get off-topic and personal. Sad thing is, you sound like some _____ noser. Have fun.
You got my point, any of the first three fit the bill. The good news is that is a temporary condition if you want it to be.What point were you making? The one I got was that you were ignorant of Fred’s time demands and thoughtless about eh time he already commits to this community, which 10,000’s of people enjoy on a daily basis.”No need for you to get off-topic and personal.” – that’s interesing. Have another go through your post. Its insulting and disrespectful to the host. You are getting off pretty lightly here.Knowing how to be a well behaved guest isn’t brown nosing – its knowing how to be a well behaved guest.
is there an avg seed investment size–a range for you?
250k to 750k would be typical
Can I know roughly at how much equity? Also i read an article(maybe on Forbes) discouraging entrepreneurs to raise money from VC during seed rounds because of the legal complexities. It advised to go with Angels. Have you seen any such sentiments from entrepreneurs?
So, revealing your investment strategy doesn’t erode your competitiveness. Rather, it clarifies your market intentions. That’s a sign of maturity and confidence in yourselves, because your have brand power, and you are known to be smart investors. Not all VCs can reveal their cards and retain their edge.But part of it sounded a bit like Alan Greenspan ambiguity, – “we do not expect that ratio to continue over the life of the fund.” then followed by “if you are doing a seed round, please do reach out to us.” I get it. You’re covering yourself, because you don’t want to leave a stone un-turned. Brilliant. (and I’m learning from you)That said, re: the 5 seed levels you’ve made this year, what was the Average pre-valuation, and how many had a previous angel or accelerator round before it.
I would guess around 5pre
I really appreciate when you give frank ballpark answers. There are so few people that do this.
Did they all have a prior small angel/Accelerator round?
Not sure. Did figure1?
Yes. They did a round prior to yours with Boris, Rho & some others.
USV’s comparative transparency and directness is an edge amplifier, imo.
But part of it sounded a bit like Alan Greenspan ambiguity, – “we do not expect that ratio to continue over the life of the fund.”Wow. Remember when Greenspan was the IT girl? How quickly he crashed in the end.Anyway, Greenspan said those types of things to float his thoughts prior to actually taking action in the future. Easy tea leaves to read. Fred on the other hand could be viewed as simply managing expectations in the internet age where it’s pretty easy to get called out for a contradiction.  Knowing Fred I don’t think that is what he is doing though.
“Not all VCs can reveal their cards and retain their edge.”.Keep in mind this post is marketing not an inside look into the company’s full strategy. The way I see it VCs compete on two fronts: landing the money to invest and finding the right investments. Once the money is brought in there will always be companies to invest with..What’s MOST important is bringing in the money! After that you’ll have companies coming to you asking you to invest in them. I think within the past couple years Fred stated that USV made no investments over the course of a year. But they still made big money. Again bringing in the money is most important..Again this is all about marketing and ambiguity helps at times. Ambiguity about what you’ll invest in drives more traffic to your pipeline. If you have money sitting waiting to be invested. Then a large pipeline helps you see what people are doing and lets you pick and choose instead of having to go out and find it yourself..This truly was a good post from Fred. Now if we just knew how to bring in the money we’d be in business!!!
Correction- I think Fred said that “he” didn’t make investments I believe that was in 2012, not USV.
I’m glad because I’m still learning. I asked some VCs to let me in on the behind the scenes. But the answer was always no. So I’m having to black box this stuff with the hopes of finding the “inside know how”.
I think you are correct that the risk/reward has drastically changed in the last several years. What’s funny to me is that I see a lot of money moving to go later, and sift through lots of deals rather than take a risk early on great teams with good ideas and support them through rounds. Because of the opportunity for explosive growth (outlined by Albert in his talk on the sales of mobile phones) it pays to go early on great teams with good ideas.There is also a lot of confusion in the marketplace lately about valuation on Series A and B. I am seeing come crazy money being raised in Series A’s-when it used to be a $2-4M dollar round.There are a lot of funds that say they go early, but less that actually write early round checks.
Would you do a convertible note or insist on an equity round for a Series Seed? Lots of VCs like Soft Tech insist on making it an equity round when 1 or more VCs are participating.Is this also a concern while structuring a syndicate?
We’ve done notes and the YC structure which name escapes me. But we very much prefer a priced round
Oh the SAFE dox. Are legal fees and speed a deterrent to equity rounds? esp in rounds of $2M or less?
no. that used to be true but we can close on a standard set of equity docs for as little as we can close on a standard set of debt docs
Got it, thanks!
currently developing (mobile first) real estate marketplace for homes *not* on the market. will be in touch Q1 🙂
Lemme fix that title for you…Some Lots of Thoughts On Seed Investing
Up to about 3 years ago I had a broad view on angels, super-angels and seed but not in as much depth as I have now — mostly because in institutional investment and in the VC firm we were mostly Series A to IPO. Plus any “proof of concept” type incubations of sub-$1 million were made to internal product and technical teams who had proven track records. Startups where I worked never needed to raise $$$ because they were either subscription based or charged high consultancy fees (e.g. specialist hedge fund data science) and so revenue-generating from the start.It’s not just that entrepreneurship and investment involve the considerations of high-risk. It’s that the team has to make everything TANGIBLE because intangibles are notoriously challenging to deal with on the books (accounting).Plus I heard John Doerr quote this Edison truism in a video for the first time yesterday: “Vision without execution is a hallucination.”Everyone down the pub and in business school “has a good idea”. Building it — from front-end UX design to integration with the database architecture so you can do analytics on the data — is “bloody hard” to borrow an English phrase. Add on top of that how you educate and communicate to users and various stakeholders — as the blockchain & BTC startups will be only too familiar with.Meanwhile, two days ago, Andreessen Horowitz shared the 16 trends they’re watching: “We don’t invest in themes; we invest in special founders with breakthrough ideas. Which means we don’t make investments based on a pre-existing thesis about a category.Where business intelligence before was about past aggregates (“How many red shoes have we sold in Kentucky?”), it will now demand predictive insights (“How many red shoes will we sell in Kentucky?”). An important implication of this is that machine learning will not be an activity in and of itself … it will be a property of every application. There won’t be a standalone function, “Hey, let’s use that tool to predict.”Frontier innovation is absolutely the hardest area for investors to metrify and “pattern recognize” in terms of how it fits on the books.At every conference (Le Web, Web Summit, HTML5, TechCrunch etc) there are literally thousands of startups with pretty much the same proposition already launched with some angel money — around $250,000 — that are trying really hard to get to seed by burning unnecessary marketing spend for client acquisition.With my investor hat on, I think, “Show revenue conversion not that you have a flashy stand at a conference.”With my founder hat on, I think, “I hope you make seed because then a bunch of people smarter than you will join your journey and knock your proposition into better shape so it delivers value.”
…and Vision with execution can change the world. my favorite quote – Do not reason away your vision.
Brilliant favorite quote!It’s true. Our hearts and soul makes our mind’s eye see with more focus.
V. much agree w/you on this – and especially, with both data gathering / structure as well as with predictive modeling, the optics look different from the reality when you dig in. As a first time founder where we’re working on our first version of the platform, I’m not averse to getting money but just as VCs like Fred are skeptical about a startup until there’s a product & traction / measurable growth, I too am skeptical about a VC that isn’t thinking similarly.There are of course reasons for money pre-beta, but I believe they’re more narrow than the money that early stage founders seek, and sometimes get, suggests. Edit: I should add that stronger relationships are probably built with the mindset you mention, too.
That is apparently a US Military maxim.
Here is a question: if you separated out the post-seed investments in companies where USV made the seed investments (e.g. excluding returns on the seed investments), how would the success rate compare with the non-seed investments (e.g. starting with Series A or later)? The underlying question is whether having worked with the entrepreneur/company for some time can improve a VC’s ability to evaluate the team/opportunity?
Great question. Good fodder for a follow up post
What is the difference in terms between Seed and Series A? Do you buy the same type of security? Option pool? Board representation, etc?
I think you are absolutely correct when you talk about risk/reward. It’s paying to go earlier if you can find great teams and good ideas. The whole continuum of Seed-Series A-Series B is changing. I used to think a Series A was a $2M-$4M round. Now that’s not the case.Albert Wenger talked about a billion and a half phones being sold last year. The potential to build a blowout company is there. Of course, with all the fragmentation, it’s harder to build it. (Which is why Marketing might be the most important business degree)Many funds I know are taking less risk. They are waiting and investing later. I don’t know if that’s a result of the last fifteen year returns on VC and the conversations they are having with LP’s or not. Or, it might be because the world of investing is being upended by crowdfunding etc.I have only seed invested, except once. It can be totally crazy. It can be exhilarating. It can be depressing. It’s not for everyone but it fits my personality.I also see a lot of funds saying they want to go early, but they aren’t writing checks. Money talks and bullshit walks. It’s awesome to be transparent about what you invest in, and what stage you go. Geography is also important. Some VCs won’t invest in seed outside of their local geography. Being transparent saves everyone time.
Couldn’t agree more that marketing in its broadest sense is a key cog to success. Obviously.Don’t have any idea what a marketing degree is. Sure that in the 2-300 marketing positions I”ve hired, never hired one with a degree in it.
https://business.illinois.e… Academic version. Sometimes different than the street version! I think to be a good marketer today, you need to understand stats really well-and be able to interpret what engineering is telling you into english so the product can be sold to the target market.
Marketing is an amalgam of special teams and skills.Scary to think that leadership and vision and market understanding will be stat driven.
While I wouldn’t go as far as saying that degrees don’t matter the problem with degrees (at the undergrad level) in a business subject like marketing is that people learn things at a young age and have no context to how the information applies. They haven’t had any experience and can’t make obvious connections often (to real situations) with what they are learning from a book.Plus it is probably more typical that the people have chosen that major for the wrong reasons (hmm, seems easier than Physics). In other words going into the programs I would generalize that they are really clueless about business and are just going through the motions. They have no innate enthusiasm for the subject matter. No passion. I don’t mean everyone of course I mean “most”. They aren’t living it or breathing it. Which to be successful you have to do.The thing about marketing is (or many business subjects actually) is that as long as you pay attention you can reverse engineer and learn based on observation of what others are doing. Plus there are plenty of people that you can hire to crunch the numbers. Just like there are plenty of people you can hire to put together your legal documents as long as you have a basic idea of what is going on.
agree.i was brought up in the religion of education and hard work.but–the only numbers that really matter are margin dollars and invariably they are over emphacised and misunderstood.
I have only seed invested, except once. It can be totally crazy. It can be exhilarating. It can be depressing. It’s not for everyone but it fits my personality.The way you state that it almost sounds as if you do it for reasons other than earning a buck.
No, but you have to prepare yourself mentally and emotionally for seed investing. When I traded, I experienced the same emotions. It’s a myth that investors are emotionally disconnected and robots.
I have found from my experience when making decisions (business or otherwise) that being emotionally disconnected, if that is possible is the best way to go. Not always possible. However no question that (once again from my experience) it pays to be able to not panic and view things at a distance rationally.Look at it this way with regards to health and not business. Would it be better if you felt a lump to not panic, jump to conclusions, and suffer from anxiety until you find out that the lump doesn’t mean anything? Of course it would. As long as you take the proper steps that you have to (to resolve the problem) I don’t see any disadvantage. (I’m not that person by the way but I wish I was no question about that..)My guess is that for the seed investing that you do the amount you are betting gives you upside but the downside won’t materially change your lifestyle (if the investment doesn’t work out). So the ups and downs that you are experiencing seem to be similar to perhaps the returns that I get from a negotiation which is my drug and addiction of choice.I would imagine though that when you traded (pure speculation) the chance of losing materially was way greater than with your seed investing.
works in theory. I try to emotionally distance myself too. Once I am in, I cheerlead like hell while remaining as objective as I can be in order to help out the founders. Each succeeding round is evaluated in an objective manner treating previous rounds as sunk costs.Trading and seed investing are similar,but far different. In trading, there is always an out door. It might be painful and it costs you to go through it, but there is always an out. In seed investing, it’s more like a roach motel. Everyone wants to come in when things are good, and no one can get out when things are bad. Plus, no one wants to come in when things are bad either.Trading also happens a lot. You get more bites at the apple. In/out in/out in/out in/out all day long. On busy days, I might have traded 10,000 a side contracts a day. In seed investing you get one shot. For instance, ParkWhiz.com and SpotHero.com are two companies that are trying to do the same thing. (not invested in either) As a seed investor, you get to put your money on red or black-and it sticks for 10 years or so precluding you from making another investment.Also, if you are going to be a good seed investor, it’s best that you try and advantage the companies you invest in with some real tangible benefits. Intros to customers, potential next round funders, finding employees, even rolling up your sleeves and helping to run the company. If you sit on your ass, you will lose, unless you are lucky.I expect to make money on every investment I make. I wouldn’t do it otherwise. They all don’t make money. But some of my investments are raising at significantly higher valuations than when I got in. Some are still on their first rounds of capital, some are figuring things out. It’s part of the game. The thing I have learned is that when they do that, you don’t want to find the exit door-because you need to press the good ones and kill the losers fast.
“And it sticks for 10 years or so” is really helpful for understanding your values as a seed investor.Others think in terms of 2-3 year horizons.
learned that lesson a long time ago. no quick scalps in startups. it’s a marriage, not a one night stand.
“I try to emotionally distance myself too.”.That’s how to make proper logical decisions!
It helps to view business as a game. Because that’s what it is. Yet another reason people need to ensure they don’t do the shoestring, lean, etc. methods..Entrepreneurship isn’t about staying awake at night from fear that you’ll lose everything. People need to learn that and stop hanging by a thread with their businesses.
Entrepreneurship isn’t about staying awake at night from fear that you’ll lose everything.Where are you getting that from? A business article or school professor who never ran a business? (Sorry I don’t mean to sound like a jerk..)I can assure you that if you are spending your life and trying to make something work, and assuming, and this is very important, that you have no safety net, that it is perfectly normal, expected and good to have anxiety about the “what ifs”. If you don’t then you won’t be able to cover all your bases. Because you can lose things at the drop of a hat. So you better be ahead of the curve in some way.It all depends on the downside. And the business that you are in. Have you ever had a large customer in a business where if you lost that customer your business might not survive?  Or a large accounts receivable that if not paid could cause major problems?  Or a key employee that if that employee left you would have a really hard time replacing them and much persona pain? There is a reason that people should and do take business seriously.  Because quite often you could be “this close” to losing what you have spent years working for.Growing up, the “rich guy” in our neighborhood baked donuts and had it all (had a donut factory). He lost a big supermarket contract and the next you know he was bankrupt and it was all gone. And you know I’ve got multiple examples of that “in the real world” of people who are that close to losing it all.[1-3] What is your plan b and what are you going to do to at least stand a chance if these or other events happen. It’s not all what the competition is doing you aren’t Boeing or Walmart. Just like sports and winning ever see a coach just “be cool” and not care?.
Agree. It’s not a game to me. Probably not to the majority of entrepreneurs who don’t have a trust fund behind them, either. I suspect (as Gary Schoeniger says here: http://www.siliconhillsnews… ) that a majority of us start with very little money and not much formal planning.And while I may not agree or relate to what an entrepreneur is working on, I often still have a stake in them (time + energy, sometimes $) if they are intensely passionate about it (if not to the market at large, then certainly to the people they work for – customers, investors, employees).
“Sorry I don’t mean to sound like a jerk..”.You don’t. It’s a valid question. I’m here for entertainment but if I can get some serious conversation about biz topics I’m all for it!!!.I get that from business experience not from a book or professor. People just don’t realize that the whole of the business world, especially experienced and successful business people, are not about taking huge risk like at a casino. The propaganda gives everyone that impression. But experienced business people DON’T like to lose money!!! The more experience you get doing something the better you become at curtailing your desires and sticking to a plan of action..It’s no different than most anything else. It’s all about risk! If you know a particular part of town is bad. You don’t walk down that sidewalk. You take a different route. If you know you can bench press a max of 500lbs. You don’t do that much every time you go to the gym. If you know the most you can spend on advertising is $250K/month before you’ll put the company at risk of bankruptcy. You certainly don’t spend $450K/month..People become fooled into doing things they should not. Like buy a home that costs $1M and spend $70% of their monthly income on the payment. People also start businesses, spending their savings, knowing they don’t have the funds needed to even make the first sale..That is not what an experienced business person does. That’s what an inexperienced or desperate person does. A person desperate because they lost their job or they spent their self into a bad situation. What an experienced business person does is analyze and plan properly so that they can reach their goals..Here’s an easy example that illustrates it: You have two teams that are going to climb Mt. Everest. One team is climbing dressed in shorts, t-shirts, and flip flops. The other team is climbing using the proper climbing gear. Who are the fools? Who has eliminated as much risk as possible for the climb? Who is the best investment? Who will most likely make it to the top?.I’m saying that starting a biz without a safety net is a fools errand that many suicide victims have figured out way too late..Spending your life trying to make something work is not good planning. Having an exit plan that takes into consideration cutting loses is a requirement. This is business and you must be prepared to fail. You shouldn’t make a biz your baby. But if you plan to do that you must ask yourself if you think its a good idea to not prepare you child properly before sending it out in the world..Most of what you are describing are foreseeable situations. Situations that a safety net, which experienced business people have, takes care of. BTW the safety net isn’t all about making things better. It can be what buys you the opportunity to get out while the getting is good..I’m not saying it’s an easy game. What I’m saying is that people should plan properly. If the plan is about lean or shoestring or one of any other desperate attempts to do something that doesn’t look possible. Ask yourself if you are looking for an adrenaline rush or if you are trying to build something great the right way. If it’s adrenaline you desire then make the journey as difficult as possible and enjoy. But if it’s great success your after. Then plan well and remember to look before you leap..This was a pretty good discussion. But we’re still more or less talking about what foolish things people do instead of focusing on how to do something right and increase chances for success. Just like being at a bar and seeing someone slam down 10 shots in 5 minutes. Lets not use them as an example of how things should be done. Let’s use them as an example just one road you can follow..Nice stuff. Remember: We don’t give two shits HOW technology works. We just want to get rich!
YC is now dominant player in seed investments. It’s hard for others to compete with them in US.It is the only platform–perhaps only VC–that actually exhibits strong network effects. Stripe, Zenefits and other startups benefit from the 1200 plus alumni which become customers. As the underlying companies grow, the startups grows. As such perhaps it is one of the very few–if not only VC–that help your business and revenue grow (for certain) not just add to your valuation with brand.The seed models of brand name VCs are great for funding established brand name entrepreneurs.However the seed investments of brand name VCs are quite ineffective for finding unicorn of “first time” entrepreneurs. Ironically, some of the very biggest hits in Venture have been first time entrepreneurs: Genetech, Google, Apple, Facebook, Dropbox, Whatsapp, Alibaba, and Airbnb.Today there are too many first time entrepreneurs and it too hard to sort through them.
YC can only do so many in a year. I agree with you the network effects are tremendous but only to get you started. Also location plays an advantage. If a startup is NYC based with NYC as the only market , i don’t see how they can benefit greatly from YC where you have to relocate to the valley for 3 months. It can somewhat be a distraction. In such cases raising money from Ny investors might be a better idea.
Agree. A particular choice depends on the particulars. Which is why I had a problem with (in part) the parent comment’s “go west or go home” angle.
Yep. And Silicon Valley is great to find co founders, investors,programmers, while New York is best to find paying customers. 😉
YC is now dominant player in seed investments. It’s hard for others to compete with them in US.I gotta tell you that statements like that, so definite and so absolute, really bother me. ‘YC takes the trophy all other quit the game!’ Especially when there are so many young impressionable people floating around who will read it.It is the only platform–perhaps only VC–that actually exhibits strong network effects. Stripe, Zenefits and other startups benefit from the 1200 plus alumni which become customers. As the underlying companies grow, the startups grows. As such perhaps it is one of the very few–if not only VC–that help your business and revenue grow (for certain) not just add to your valuation with brand.Ditto for the above. Perhaps everybody competing with them should just throw in the towel.
Fred, there are any number of definitions floating around these days for a Seed-stage, a Series A, and a Series B investment. Without getting into valuation or terms, can you clarify how USV defines these rounds today?
The best way to think about it is size and valuation. Seed is $1mm, Srs A is $3-5mm, Srs B is $5-10mm. Think about selling 10-20% of the company in each round and the valuation ranges will come out in the math
Fred, do you see those ranges changing significantly in other markets where you are active (ie. UK)? That is certainly the case in Latin America.
That leaves quite a big gap between $1mm and $3mm.The market is inefficient for rounds which are bigger than seed but less than series A. I’m not speculating here; I know this to be the case (at least in Europe).
Thanks for posting this Fred. A few of us in the women in tech and startup space are sharing this post with our networks. Hope to send some women-led startups your way soon.
Pls do. They should check out usv.com to get a sense of what we like to invest in to make sure it’s a fit. We have a fairly narrow focus. But regular readers of AVC and usv.com have a very clear idea of what we like and what we don’t
Allyson – Love the women who tech initiative!Fred – Thanks for posting this, it’s been very helpful reading this post and previously the valuations post. I recently started Kidhoo, which is an EdTech and HealthTech company. We are not close to raising our seed yet but, have a great start to our beta sign up. We will be launching our application in the coming month. I noticed USV invests in Education companies but all at Series A, any reason you haven’t funded them at seed?
Thanks for the shout out Meg. Great to see what you are doing with Kidhoo. Women Who Tech is organizing the Women Starup Challenge, which will help fund women startups. We’re using the awesome crowdfunding platform Crowdrise for the challenge. Feel free to email me for more details. Allyson at womenwhotech dot com.
How much importance does current traction play in your seed investments?
A lot. Traction is one of the best measures of determining product market fit
Ok. So the rule of thumb is “just” (i) build the product, (ii) get traction, and (iii) talk to USV.The approach officially taught by YC is to focus on a small audience and scale from there step by step. Roughly speaking, how different is USV approach?I understand that If some startup already has millions of users USV will need to compete with many other investors while if USV has a smaller threshold it can left many others behind.
Succinctly put on your financing plan!Like most things in life, don’t you think, you have to balance getting a good deal with getting good human to work with you. The better your bargaining position, well, the better your bargaining position.
Hi Fred,Great post and insight into USV’s investment mindset. Question: If a team has domain expertise, a product in beta or “soft-launched”, beta revenues of 60K, strategic partnerships, pipeline revenue of 250K and much more – but – is not quite at product/market fit yet because they’re still fine tuning their engine, would this be an example of something USV would entertain?Thanks,Anthony OrtizFitly.com
I have upvoted you because I love the way you stepped right out there and got your company in front of the various people that read AVC (including Fred’s competitors).  Looks like an interesting idea by the way. However your trademark says your first use in commerce was August 2012 so what has happened in the last 3 years? You could have not done this (here), in which case your chances of attracting attention or investment would have been 0.
Thanks for the upvote LE! As you may or may not know, showing “first use in commerce” could be as little as having a fully published website and concept – not just a landing page. We did what we had to in order to secure our mark. We launched our alpha in July 2013, learned, iterated and raised 150K to refine our product/service, were awarded another 50K, and slowly but surely we have continued to build, measure and learn. Many of the best companies ever built took some time to get it right. I’m proud of where we are considering we’ve gotten this far with very little funding. Now, we are ready for our first institutional round and have committed 200K of a 750K seed with some notable investors partaking in this round. I guess another way to look at it is, we’ve persevered with constraint resources. : )
Lovely pic on web- page (is there a reason for diabetes esp eg are you looking at celiac, nut allergies etc)
Thanks for the compliment James! Great question too. We are actually focusing on Diabetes, Hypertension & Heart Disease for starters. Our team identified diabetes as the ideal “foothold” segment for the following reasons: 1. the size/opportunity of this segment 2. ability to measure outcomes (e.g. Hemoglobin A1C, BMI, Waste Circumference) given that we care about delivering a true and evidence-based solution. 3. Geography – we are located in Philadelphia, number 1 city for its rates of diabetes and heart-disease. We have some Gluten Free recipes but are holding off on making this a full category (for now) due to supply chain logistics which require all products, ingredients and manufacturing facilities to be gluten free. Although, we don’t hold any inventory and leverage existing infrastructure/supplier, we would still be liable if for example we select the wrong partners/product etc. and are simply not prepared to assume this level liability.
Yes if it’s in a sector we are focused on
Excellent. We are a Healthcare IT & Food-Tech hybrid. Given your investments in KitchenSurfing, HumanDx & Figure1, I believe we may be a good fit. I am currently working on getting an intro to Andy Weissman but in the mean time may I send you an executive summary/deck for review?
yes, pls do
A large subset of seed companies we see these days look and feel like early Series A companies from a development/traction/team construct standpoint. Do you believe some of the change in your entry point is simply attributable to the institutional seed financing in many cases is really what we would have considered an A round a few years ago (perhaps not from a pure $ standpoint, but from where these companies are developmentally)
Feeling more and more like the functional definitions (stage of idea/product/team/revenue) for seed/a/b/etc are fairly static for the industry, and that it’s primarily the valuation, and other negotiation points, that get pushed around the chart to fit the dynamics du jour. Put another way, I think a fund’s investment profile never really changes, rather the market causes it to adjust accordingly to stay competitive, and that causes tolerance, or lack thereof, to ebb and flow. In turn, we wind up making seed round term sheets look more like A round sheets of yesteryear (and vise versa when things swing the other way).The more things change, the more they stay the same.
@fredwilson Not wanting to be smart but I expect you meant log-normal or Galton rather than normal distribution, Investment is inherently positive (unless you know something I dont), which means it is skewed and therefore definitely not normal, There is also a longer tail (in your case to the right of a peak with far less to the left). If you considered expected return by stage in a second axis vs # (opportunities / cost of deal-flow) you could position your sweet spotThis just happens to also be the shape of energy waste distribution in a portfolio of buildings – Below is a picture of waste that our software generated of a top UK supermarket portfolio of buildings last week that I happened to blog on http://blog.kwiqly.com/2015… . They also are investment opportunities – (for our clients) and we help pick them. If you imagine series seed then a – e along the bottom axis you will see the point.My view is once you understand distributions well – you cannot but use the knowledge (hence blog post title inspired by The Matrix Red Pill or Blue Pill
BTW Fred – If you wanted to put some numbers on your assumptions and history I would be happy to help you visualise it (discetion assured) – It would be interesting to see if your successes matched you sweet spot perception – or maybe the # datapoints would be to low for any validation.
There is a shift in institutional rounds. Seed is the new series A.
we are not partaking in that nonsense
More a SV phenomena. Some funds are very disciplined about valuations.
This is a good post with good information..I think the problem of perception about doing seed investing is not with USV. It’s with the industry as a whole. Seed, Later Stage, etc. all mean different things to different people. That’s where the confusion comes from.
Interesting thoughts on the increase of seed stage capital…Given the preference by USV and others to invest more in seed stage deals, are angels losing out on more good opportunities that may have been more accessible in the past?Are the economics for angels who only do seed deals and don’t invest in later stage funds different than they were five years ago because of the shift in seed stage capital?
Great post, thanks Fred. You say don’t regard seed as optionality and that you go in with the same conviction as for later rounds yet you seem to draw a distinction between optimising for the investment syndicate at seed vs optimising for ownership later on. Why is that?
Because we have the capital to buy more equity in the Srs A and B rounds and beyond. Most seed funds and angels do not
Two graphics:(1.) CB Insights list of 100+ most active seed investors 2014.(2.) European landscape for pre-seed.Two fun stories:(1.) A known London angel proposed I build a European version of CB Insights because of my experience with a financial data startup (which was a joint venture with the FT), and their angel syndicate would fund it.But who wants to do the same thing they did when they were 23 when there are bigger problems to solve; ones that challenge them and open up their potential to really do something meaningful?(2.) In 2013, a friend approached me about creating an incubator and investment fund. He has 100,000 sq feet space.Whenever I see information about investment levels and the parties in the landscape, I wish they’d do infographics like mine.Eat your <3 out Porter-BCG matrix and lists.
Would you be up for a chat on Skype?Easy contacts for me on my website – jameshrh.com .JHRH
Wow, you’re from my aunt’s “neck of the woods”: Alberta.We’ve driven past Calgary lots. I had a mad idea it’d be cool to heli-ski on Whistler. Mad because I can’t even do baby slopes skiing much less heli-anything. Haha.Let’s Skype next week when I’m in SV and on PCT.
Our mission is to make the home buying process easy, efficient and cost effective. We are building a transactional online real estate marketplace. Our business model allows us to give back 1.5% of purchase price at closing to the buyers, who use CityRaven’s patent pending online buying platform to buy their next home. I think what we are doing is very relevant given USV’s topic of the week “What will undo today’s incumbent marketplaces?”We are too early for USV but if there is general interest potentially we can initiate preliminary discussions. All my current investors I have known for many months and this is how I prefer to build relationships with the investors in my company, I believe you feel the same way when it comes to entrepreneurs. We have already received angel investments for our convertible notes round but in a few months we plan to launch our priced in seed round.
Timely…’Investors want PROOF you’re high fantasy’* http://techcrunch.com/2015/…
Great post as always but the only item I take issue with, and it is not USV specific, is to say a Seed round is “too early.” In horticulture, it all starts with the seed. Unless we want to call the first funds (or sweat equity + founder’s prop capital) into a business the Soil & Water round, the industry should stick to first funds in are Seed (actually the old A round) and all else are lettered rounds.For optics, too many want to play the game and make the A round a large one after the company has generated a lot of traction w first funds in so I know the game, but a lot of this is due to the dynamics around venture firms acting more like PE funds these days than they ever have in the past. One can argue that is good or bad, which is for another day, but Seed should be first funds in and thus no way should it be “too early.” Someone tell me where I’m going wrong!
Some info on investments usv lists as seed on their website.
“if you have launched something into the market already, and if you are doing a seed round, please do reach out to us”What would be a good way to reach out if geographically a warm introduction is not an option?
Hi Fred, we operate a B2B restaurant community but also advise food/restaurant tech companies in the three areas they all seem to need (1) corporate development (2) product distribution; and (3) corporate finance. One company is ready for Series A but it seems a lot of VC’s have already made their bets in this sector. Is the restaurant Internet commerce sector still of interest to you?