My two cents to the enduring discussion:
- There’s no dispute that the pace of innovation and the forces that support it are as aligned as anything we’ve seen. Much more so than the last bubble.
- Maturation of the web, cloud & mobile platforms have truly changed everything about how products & services are be built. And how users are targeted, marketed to & sold.
- High velocity business development models like freemium distribution paths enable high margin businesses to be built using lower capital amounts.
- Speed to market, lower early capital risk through easier validation paths, disruptive new platforms, an over-supply of capital, and investor froth have created a Perfect Storm.
- The fundamental operating models & time models involved in building great businesses have changed.
- And as Fred Wison says, it’s in vogue an entrepreneur.
It’s crazy out there.
- Everybody is an angel investor. Entrepreneurs, venture investors, serial advisors all have day jobs + angel jobs.
- The availability of capital comes from an incredible amount of sources. Small venture funds, large venture funds. Angels. Micro-VC funds. Super Angel funds.
- Everybody wants in. It’s not only in vogue to be an entrepreneur — it’s in vogue to be an angel. And to do Seeds. (Disclosure: we did well over 25 in our last fund).
- That said, not everybody investing in Seeds is demonstrating the capacity to help the entrepreneur develop his/her idea. And their business. Nor to help them to build a foundation for a great company to be built on that great idea.
- One can argue that too many Seed financings are getting done. Measure this by the ratio of Seeds deals which are getting follow-on financing.
The “Cash Crunch” of those follow-on rounds is harsh. Those uniquely-compelling Seed ideas nothwithstanding, too many Seed companies — with a finite amount of venture interest to lead follow-on financings = high supply & low demand.
So both the entrepreneur and the cause of innovation suffer.
What to do about it? Simple question to a complicated issue. Some starting thoughts:
- Entrepreneurs should raise enough in their Seed to absolutely, positively, (I-mean-no-kidding) ensure that they can validate their opportunity and model. Though thoughtful inflection points of progress.
- As early as possible and as appropriate, they should run those progress metrics by potential Series A investors whom they know. Maybe folks they respect who they met during their initial Seed discussions who might have shied away from the Seed.
- Always be selling. The networking and discovery process with folks who can help and invest in an entrepreneur’s company should be continuous. Entrepreneurs have a great opportunity to do continuous diligence on potential future investors.
- Everybody wants to go to Heaven, but nobody wants to die. Seed valuation, terms and dilution are critical. But not as binary as running out of runway & cash before the above is achieved. Best to optimize around long-term value & the milestones that help the company get there over time.
- Investors need to demonstrate to entrepreneurs that they have both the means and time to best support founder innovation. Helping to build companies is not Blackjack. A good proportion of investors of all types have the means, time, relevant experience, interest & commitment. Not all do.
- Entrepreneurs should think carefully about the mix of talent, experience, network & resources around the Seed investor table. Can the Founding team rely on the investor team to give them help with technology? Team building? Business Development? Financial advice and networking leverage when the need arises?
What Success Looks Like:
- Entrepreneurs have a clear vision of what will be achieved during the Seed Period. And how to measure it. And what they’d like from existing & future investment partners for the next phases of the company growth journey.
- Investors have a clear vision of what the Seed company’s opportunity is all about. And what their specific role is in helping the company achieve that vision. And they are committed to help.
A beautiful thing.