When Chad Pytel introduced me to Bryan Helmkamp, CEO/Co-founder of Code Climate, I knew that I had to pay attention. Chad is the CEO of thoughtbot, a consulting firm that makes web + mobile apps for early-stage startups. The two companies had been working together for a while, especially as both are deeply embedded within the Ruby on Rails developer community, with a strong following for their respective offerings. As an Advisor to thoughtbot the past couple years, I’ve come to place a lot of weight and trust in Chad’s opinion.
The stats behind what Bryan and the team had accomplished while bootstrapping the business were incredible, including signing up over 1,000 paying accounts and analyzing over 30,000 code repositories EVERY DAY. In the three years since launching the business, they’ve become the clear market leader in SaaS static analysis.
But what impressed me most is what happened next.
I shared a link to Code Climate with a number of CTOs/VPs of Engineering in my network, both inside and outside the NextView portfolio, just asking for their quick opinion. I expected to hear a balanced set of positive and negative feedback, after which it’s my job to sort through it as part of our diligence process. Instead, the response was overwhelmingly positive. Their teams were either already customers or they had immediately become customers after learning about it. Just a sampling of quotes from these responses:
- “I think it’s a great service for developers. I consider it a must-have default for most projects.”
- “I’m quite bullish.”
- “I can definitely see it being pretty big.”
- “I really like CC, and we’ve integrated it nicely into our workflow.”
- “It’s indispensable.”
Today Code Climate is announcing that they’ve raised a $2M round of financing, led by us at NextView Ventures. Joining us in the syndicate are Lerer Ventures, Trinity Ventures, and Fuel Capital.
Code Climate talks about a world where static analysis is as critical to every developer as GitHub and their text editor/IDE… and this new capital will help make that vision a reality. Chad Pytel at thoughtbot, many of the NextView portfolio companies, tens of thousands of developers, and I are already believers.
Mass transportation is the largest single source of travel within metropolitan areas across the globe, but our current fixed infrastructure approach hasn’t changed since the 19th century. Here in our innovation hub of Boston, the country’s oldest subway tunnel built in 1897 is still in use as part of the MBTA Green Line. Each day thousands of people commute to work on a system that is literally over a hundred years old.
This year, though, a local startup called Bridj has been making headlines by taking a fundamentally new approach to thinking about mass transportation. On the surface, the company is running mini-busses between popular commuter pickup and drop-off locations. More fundamentally, however, Bridj is leveraging layers of technology including mobile connectivity + big data coupled with flexible vehicle assets to create a dynamic transportation network. The startup utilizes machine learning algorithms to become smarter as more users enter the system, striving towards the goal of a “living, breathing, and thinking” transportation system.
Today Bridj announced that it has raised $4M from our team at NextView Ventures, alongside Atlas Ventures, Suffolk Equity, and many of the original ZipCar investors like Jill Preotle, Andy Ross, and Peter Aldrich.
Coming straight out of my first meeting with Bridj’s Founder, Matthew George, I called both of my partners to share my excitement about what I had been immediately convinced was our next investment. Not only did Matt share a crisp and articulate vision about transforming the future of transportation, he was an extremely authentic founder who had discovered the opportunity through operating his own profitable bus shuttle business which he had started literally out of his own college dorm room. And it is clear given the reception that the company has received since launching the beta service that it has struck a chord with consumers – I see it daily in the feedback tweets of riders using the service.
All investments which we make become a journey along with the Founders. I know that this one is going to be particularly special because of Matt, his vision, and the real impact he’s going have on the lives of people living in cities around the world.
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.