As the VC seed market has institutionalized, especially over the past five years, there has emerged a prototypical seed round profile: $1M-$1.5M raised, the first non-friends-and-family capital, comprised of one to three institutional seed investors or larger VC funds, on a priced equity structure (though sometimes convertible note), with a valuation mechanism in place priced in the single digit millions.
While there has been much discussion about the variances on syndicate composition and structure, and of course pricing variance, but essentially the “deal” is becoming fairly standard for all parties. The standard seed round will buy the company 12 to 18 months of runway as it looks to prove out early-stage milestones to raise a Series A before running out of cash.
However, also occurring are a set of “seed” rounds which don’t look like the above, despite involving most of the same players. They’re common enough to become sub-categories in and of themselves, but they are just atypical enough that they’re not as commonly discussed.
The following is a list of somewhat unusual (or at least less common) seed-like rounds. Note that some institutional VC investors who invest at the seed stage may also make these investments:
In every single venture investment I’m involved with here at NextView Ventures, I learn a lot from the Founders of their company. But in the particular case of our portfolio company TapCommerce, which yesterday announced its acquisition by Twitter a mere two years after the company’s founding (more details), there have been some key lessons which I’ll meaningfully take away from my experience in working with Brian Long, Samir Mirza, and Andrew Jones. First and most importantly, a huge congratulations goes to the three of them, as well as the entire TapCommerce team, in creating something truly special with a meaningful, asymmetric outcome is such a short amount of time.
So I thought that on the day after the announcement, it would be useful to share these lessons which they taught me that I believe have broader applicability to other startups:
- Find a team who really gels together. Of course you want the founding team to get along. That’s a given. But what bonds Brian, Samir, and Andrew is pretty awesome. Classmates at NYU B-school, these guys started with a friendship which served as the foundation for a strong working relationship and truly equal partnership in all ways. This inclusiveness and orientation toward collaboration carried into the whole company. I specifically recall one of the first post-board meeting dinners, when nearly the whole company at the time decided to join investors for barbeque and beers… we spanned the restaurant’s whole long picnic table with everyone eating together. This closeness of the entire team allowed for the company to rapidly react (see next point) in fast moving ad-tech space, empowering them to hone on product-market fit and begin scaling much more quickly than I’d ever seen before.
- Listen to the market while being “authentic.” The company’s first pre-product website promoted a broad sweeping vision to “make it easier for people to shop on mobile phones and tablets” through a “suite of products help[ing] etailers at every step in the mobile shopping funnel.” We at NextView invested behind the strong team going after this big idea, and that was certainly a big idea. Subsequently, through learning first-hand via their own experimental shopping app called TapSave -and- attending to conferences to specifically speak to potential customers about painpoints, they focused in on an initial offering which was true to their ad-tech backgrounds. Within a matter of months, a retention marketing service, namely mobile retargeting, was launched.
- Prioritize the right customers. Over the past year and half with a product in the market, the customer demand has been insane. Along the with the sales team headed by Tim Geisenheimer, the TapCommerce Founders had foresight to implement a formal program to deliberately prioritize the customers who had the potential to be the biggest down the road, instead of the natural tendency to prioritize those who were the squeakiest or showed up with the largest insertion order today. It’s easy to say that you’ll prioritize strategic revenue, but it’s much much tougher to do in practice, especially at a startup. I’ve been amazed at the discipline the TapCommerce team has instilled in prioritizing high-value clients, and even in a matter of months that strategy had just begun to pay off with notable customers like eBay, Zulily, Groupon, and Expedia among others. If there’s one thing which I saw which the team did both differently and exceptional well, it was cultivate the relationships which mattered most.
Given the raw ingredients mentioned above, it’s not surprising that the company went from pre-revenue to a substantial revenue run-rate in a matter of 18 months. Of course, the kudos go to the Founders and entire TapCommerce team, plus our syndicate coinvestors Bain Capital Ventures, RRE, ENIAC, and Metamorphic. As for what’s next, it’s clear to me that the TapCommerce team integrated into Twitter is a wholly natural fit. With Twitter continuing to push into mobile and programmatic ad buying, adding the increasingly valuable retargeting business line to their offering is a natural extension of their monetization strategy trajectory. Twitter’s advertising blog posted that “together with the TapCommerce team, Twitter will be able to offer mobile app marketers more robust capabilities for app re-engagement, tools and managed service solutions for real-time programmatic buying, and better measurement capabilities.”
Last June I blogged that “our investment in TapCommerce is the Real Deal.” That certainly turned out to be the case… as I learned a lot working with the real deal team of Brian, Samir, and Andrew.
It’s been five years now since large VC ‘signaling’ entered the seed stage entrepreneur’s lexicon. Yet even today, whether or not to take a (relatively) small check in a seed round syndicate from a multi-hundred million or even billion dollar fund is still a decision which takes quite a bit of consideration and sometimes consternation. It seems as though it’s been talked about ad nauseum in the blogosphere, but we see first-hand as entrepreneurs we’re investing in at NextView Ventures work through building their seed round syndicates, it really is a tough issue.
And although the new conventional wisdom became that it’s best to avoid a larger firm’s seed investment dollars as it depresses the ability to raise a Series A, entrepreneurs (often wisely) did so anyway. Moreover, research firms like CBInsights have recently debunked this rule of thumb with rigorous analysis. Looking at a smaller dataset of our NextView portfolio companies, we too see a higher “graduation-rate” of Seed to A when there is a larger VC which participates in the seed round.
In my own anecdotal observation, the reasons that startups which include larger VCs in a seed round syndicate are successful raising a Series A are twofold:
- There isn’t such a thing as being half-pregnant; you either are or you aren’t. It’s human nature for it to be more difficult for a VC firm (as disciplined as they may be) to completely cut off an investment after one round of funding. Or, to flip it around, a VC firm is more likely to invest more dollars if they’re already investors in the company than if they weren’t. There’s a reason that they wanted to become investors in the first place.
- There is a high correlation between the best (i.e. more likely to succeed) entrepreneurs having the opportunity to take a larger VC’s capital at the seed round. The best entrepreneurs can attract the widest options for their initial round of funding, including larger VCs. So there is an element of (positive) selection bias in the larger VC syndicate cohort companies.
Does that mean that entrepreneurs should ignore signaling risk and seek to include larger VCs in their initial rounds of capital if they can? Follow the larger VCs argument that it’s best to have accesses to capital with “deeper pockets” than exclusively seed-stage VCs? Not necessarily:
- Not all large VC seed round checks are the same. Many in the blogosphere including my partner Rob have drawn the distinction between large VCs making low-velocity high-conviction investments and large VCs writing machine-gun velocity option bets. So prevalent is this understanding that this large VC spray approach has waned (though not disappeared) in the past couple years.
- Not all startups are the same. “Seed stage” startups raising $1M-$2M rounds of pre-Series A capital come in very different flavors. Some are pre-product, while all the way on the other side of the spectrum, some have meaningful revenue and clear up-and-to-the-right metrics. The risk associated with raising a subsequent round of capital are different for different profile startups.
“Ability” to raise a subsequent Series A is only half the story. The other is valuation of the next round of Series A financing.
A larger VC in a seed round will naturally depress the price of the next round of capital because it inhibits (but not prohibits) the ability for an entrepreneur to run a truly competitive process. As soon as the “insider” VC realizes that the company has crossed the threshold for a Series A financing, s/he’ll understandably push for the round to happen sooner rather than later and lead it. External VCs realize this fact and want to avoid becoming a stalking horse for an inside deal. That’s not to say that an entrepreneur isn’t able to successfully able to bring in an outsider firm and allow them to get to their proverbial 20% ownership requirement while still holding the insider firm at bay… but it’s just that much more challenging … especially when trying to maximize valuation in the process. Again, we’ve seen all of these multiple scenarios play out within our own NextView portfolio.
So while there are clear benefits of diminished financing risk to including a larger VC in a seed round syndicate, it comes at a direct trade-off in later upside valuation.
What, then, are the takeaways for seed-stage entrepreneurs considering taking a larger VC in their round:
- Heavily bias towards a situation where the large VC partner has high conviction and only does a small number of this type of seed investment per year because it takes up a partner time slot.
- Determine given the context whether the goal is to optimize around success-rate of Series A financing -or- valuation price of Series A financing. Often, the more “raw” the startup when Seed funding occurs, the more risk there is in product-market fit, the better it is to take a larger firm’s capital. Better to be safe than sorry. Conversely, if the company already has established some early success metrics and is on a trajectory to look Series A-ready within 18 months, then eschewing a larger firm for now so that a competitive-run process then is likely a better route.
Of course, both of the recommendations aren’t to be taken blindly. Other factors include the value-add involvement of a larger VC taking a Board seat or active role, unique “value-add” portfolio services of the larger “platform” shops, valued prior working relationships, etc.
In another post, I’ll re-examine the benefits of including an exclusively-focused seed fund in a seed round even when there is already a larger VC firm involved.
Just about fifteen years ago, Josh Schanker and I, along with our co-founders Elliot Shmukler and Tammy O’Neil Bolduc started Sombasa Media together. Our company offered a series of consumer-facing properties, including our flagship property BargainDog, which was an early e-commerce daily deals email newsletter. Over the course of a couple short years, we grew that property to more than 5 million members and 250 retailer relationships, profitably selling the company to About.com. Back in those Web 1.0 days, we quickly learned the power of email in driving real consumer engagement and purchasing events.
In the intervening years while I pursued a career investing in startups rather than creating them, Josh continued as an entrepreneur starting a handful of companies including early social networking site Sconex, successfully sold to Alloy Media. Fast forward to today, and Josh and his current co-founder Nick Ciarelli (ex-Daily Beaster and more well-known as the mastermind behind Think Secret) have created another business which very much “rhymes” with what we had built together Sombasa, as it leverages the direct influence which email fosters in a buying process. On the surface, BookBub is an ebook discovery service for consumer readers, featuring acclaimed ebooks in categories matching readers’ interests. They have relationships with over 3,000 publisher and author partners, including all of the Big Five publishers and hundreds of small-to-midsize presses. And what Nick and Josh plus the team (including many with strong backgrounds from major publishing houses and traditional agencies coupled with rockstar web marketing and engineering talent) have built without a dime of outside capital has been astounding – the service is rapidly approaching 3 million members (tripling since the beginning of last year), with members purchasing 1 million ebooks through their service per month, driving millions of dollars of ebooks sales, and running profitable on top of it all.
Taking a step back and looking at the big picture, and BookBub is forging a new road in a book publishing market which is still transitioning in the wake of ebooks’ arrival. It’s no secret that the way that people find, read, and purchase books is increasingly digital. With the discovery of new titles taking place less in book stores, it becomes challenging for readers to sift through new options and for publishers & authors to get their works noticed. The result is that publishers are shifting strategies, transitioning to investing in direct-to-consumer marketing, which represents a shift in the $10B per year globally spent on sales and marketing for books. And BookBub is in the pole position to help readers and publishers through this industry disruption — today already, (outside of retailers) BookBub is the largest community of readers purchasing ebooks.
Today BookBub is announcing its $3.8M Series A financing. This funding will empower the company to hire more aggressively, expand internationally, and unveil some new products beyond its current core which will allow it to take an even bigger role in an industry in transition… more to come there before too long.
On top of it, this financing is a bit of a “getting the band back together” of sorts. Not only does our investment give Josh and me the opportunity to work together directly again (as I’ve joined the Board of Directors on behalf of NextView Ventures), but it also brings in Rich Levandov at Avalon Ventures who was our original Investor Board Member back at Sombasa. Plus, Eric Paley at Founder Collective (who has known Josh since high school and we at NextView have invested with numerous times together) and James Cham at Bloomberg beta (who has known Josh for two decades and myself for one) have joined the investor syndicate. Given the long working history of everyone involved, the trust and communication, which lay the foundation for success, are firmly in place. I’m excited about the entire band, with both new team members and old, playing a tune together which is becoming familiar to millions and millions of book readers. BookBub is already remarkably impressive, and it’s about to become something truly great.
Jay joins us from HubSpot, where he was a senior manager on the marketing team, specifically leading the blog and content strategy. In his Boston-based career, he’s also worked for Google and local startup Dailybreak, in addition to co-founding the community group Boston Content which has grown to hundreds of members.
This is a major step forward for NextView as we continue to focus on helping our existing portfolio, as well as proactively contribute to the larger Boston (and New York) entrepreneurial community.
Although the idea of venture firms developing a platform (i.e. resources, events, content, and other initiatives to help entrepreneurs) is not entirely new, to our knowledge this addition is the first such dedicated role here in Boston. Being a unique position, we were focused on finding someone equally as unique who was also entrepreneurial, energetic, and embedded in the early-stage tech ecosystem. In short, for those reasons and more, Jay is the perfect fit.
A few questions that might be worth answering right out of the gate:
Why bring on a Director of Platform?
As Rob explained in his recent post on this new role, the venture capital industry is experiencing unprecedented change, with new funds emerging and new and better strategies focusing on the needs of founders and their companies. At the core of this shift is the need for firms to add real value to portfolio companies beyond just capital and boardroom advice.
With that in mind, the three of us at NextView saw massive opportunity to better empower early-stage companies and the entrepreneurs who lead them both in our portfolio and throughout the greater Boston ecosystem.
My startup is part of the NextView portfolio. What does this mean for us?
We want to put your needs at the core of what we do even more. Over the next few weeks, you’ll be hearing from us and Jay – we’ve already got some initiatives in the works – as we hope to be more and more in-tune with your challenges to help you succeed and grow. As Rob said in that same post, the idea of a NextView platform is really dedicated to helping you win.
I don’t work for a NextView-backed startup. Why should I care?
For those who have followed the NextView story as we’ve built our firm over the past few years, we’re continually striving to advance the broader local startup community by fostering conversation and direct participation. With Jay’s arrival, we’re looking to take those efforts to a new level, so stay tuned for more news along those lines soon.