There are essentially two distinct basic strategies for startup entrepreneurs to raise a seed round of capital:
- Subscription approach – An entrepreneur sets a structure (usually a convertible note) and recruits individual angel investors who subscribe to the round, all without a term-driving lead investor.
- Term-driving investor approach – An entrepreneur finds a lead (quasi-)institutional venture investor to price and set the structure/dynamics of the round, working together to bring in additional syndicate partners (either/both other funds and individual angels).
(Sometimes the subscription approach works to include venture capital firms, but only for very “hot” company or in a competitive environment, like at a Y-combinator demo day. )
Reaching a decision between the above two options is a post for another day, but when entrepreneurs select the latter route, they are then faced with the daunting task of navigating the murky waters of the myriad of firms who at least market themselves as active seed venture capital investors. While we’ve seen an increasing amount of information and transparency about the players in this market, it can be challenging to embark on a set of meetings raising seed venture capital without a structure to think about potential funders. Every firm, whether it follows a dedicated seed venture strategy or a full life-cycle approach or somewhere in between, has a set of qualities that affect how they would fit into a seed venture round syndicate:
- Check size – Some firms have a typical seed check size which is their standard bite size (as low as five-figures as high as seven-), some are agnostic therefore very flexible because it’s just about the option on the following round, and some have different processes/decision-making for different check sizes within a seed round. Unfortunately, this figure is rarely if ever on a firm’s website, and must be asked during the first meeting.
- Willingness to lead – This leadership dynamic is important especially when talking with seed-only focused funds, as many have an explicit strategy of only participating in a round coming together with a third-party lead syndicate VC partner. I’ve seen many entrepreneurs can find themselves with numerous parties “interested to follow” but without a firm willing to catalyze the process. There is some correlation here, but not complete alignment, to check size (i.e. larger check writers have a greater tendency to lead rounds).
- Active partner involvement level of lead partner post-financing – Venture firms approach involvement after a seed round wildly differently. For larger life-cycle firms which make a myriad of seed investments, partner involvement can be little to none after a seed round. Or, it can be meaningful if the company “counts” as a full investment within their partnership dynamics. Similarly, for smaller dedicated seed firms, partner involvement can vary depending on strategy. In both cases, the amount of time spent is generally inversely proportional to the number of new seed investments the firm does a whole each year.
- Board seat requirements – Partner involvement post seed financing can, but doesn’t always, require codification with a board seat. The board seat dance at the seed stage can be challenge on either direction, with occasionally no firms wanting to designate someone’s time for the role and sometimes more than one looking for an official board role that isn’t a fit at this stage. This dimension moves in similar direction as the previous point of partner involvement (i.e. more time spent translates into more desire for board seat), but some firms are satisfied with “in-between” measures like official board observer status and defined information rights.
- Additional systematic value-add after investment – Strategic venture investors can add a unique set of benefits, firms with large portfolios have network effects where many institute systematic sharing among the companies, some larger VCs offer a range of “full-service” including PR and recruiting and other functions. There are many ways that venture firms can help their portfolio seed CEOs in lieu of or in addition to partner involvement which can be a real plus but isn’t immediately obvious.
- Geography – It’s always easiest for an investor to make an investment in her own backyard, and especially at the seed stage with partner involvement, geography becomes a more acute issue. So as a general rule, seed-stage firms have more of a tendency than larger firms to follow a strategy which limits geography to a particular city or region. Of all the firm attributes, geographic preference one is the easiest to discern from a portfolio company list on a VC’s website. But actions speak louder than words – sometimes VC firms would like to market geographic focus or agnosticism, but in practice it deviates. No matter what a VC says, the proverbial bar is higher in making an investment outside their typical geography, however that’s defined.
- Sector-focus (or lack of it) – Like geography, sector focus can be more readily gleaned from a portfolio-company list than from other marketing, with the two sometimes meaningfully differing. Where a firm has been and where it wants to go are two different things. Some funds promote themselves as completely focusing on a particular space, while others take a broader approach. It’s important for the partner and firm to have some background in the area of a new investment, but extremely heavy investor concentration in particular space can have both risks in addition to rewards for an entrepreneur.
- Follow-on capital and strategy – Many people have covered this topic in the blogosphere about the perils of venture firms’ signaling in follow-on financing subsequent to seed rounds. It’s not worth rehashing here, other than to say that signaling issue of larger life-cycle VCs is real. Period. We’ve seen it directly in our portfolio companies raising successive rounds. That being said, there are indeed clear benefits to having deep pockets at the table immediately from the seed round. I think that the most important aspect of this issue is for a venture firm to state a clear follow-on approach and be consistent in implementing it. The most trouble comes when a player’s intentions are unknown (or undefined) or inconsistently applied so that there are surprises in the subsequent follow-on process.
- Conflicts of interest in existing portfolio – Especially given that some seed-only funds follow a rapid deployment strategy in making dozens of investments annually, competitive conflicts of new investments and even existing investments with others within a portfolio can be a real factor. Some firms are lax about these conflicts (which indeed are sometimes inevitable when startups pivot), while others are very strict about not having more than one company in a general space. But I have observed VC firms intentionally invest in competitive offerings.
- Prestige – Nobody explicitly talks about it because it’s implied: prestige matters. It matters in a lot of things all the way from recruiting to especially in attracting that next round of financing. On the margin, higher-prestige seed investors attract higher quality Series A investors.
- Institutional LPs and standard VC fund structure – Why their investors’ fund structure matters to an entrepreneur isn’t immediately obvious. The more the traditional plain-vanilla the structure of the VC fund, the more consistently financially motivated the investors are going to behave. That is not to say that these VCs are not going to behave badly… just that even the bad behavior should be consistent in trying maximize return. So at least you know the driving force motivating actions. Whereas less formalized sources or non-traditional structures of capital can sometimes (yet only sometimes) risk exerting more erroneous and erratic non-financially motivated behavior. This dimension is about structural bounds and consistency in investor actors and avoiding surprises further down the road.
- Personal dynamics – Last on this list but certainly not least, as it’s about answering the extremely important question: do you want to work with both the person and partnership on the other side of the table? Are you merely holding your nose because the money is green or do you truly want to work alongside this person for the months and years to come?
Dedicated seed firms often have a fairly set and consistent answer to most of these questions, as participating in seed rounds is their bread and butter. But it’s surprising that it’s not always the case. And sometimes larger life-cycle VCs ones aren’t as consistent in their approach to the above because the exact parameters of a seed investment aren’t clearly defined internally.
Putting together a seed VC syndicate of one or more firms is like fitting together many puzzle pieces. There are different “right” attributes for a startup’s round depending on the situation, and then those characteristics can be assembled by selection one firm which most closely matches or by aggregating a series of participants which bring a couple of those attributes to the table. The key in building the optimal seed VC syndicate is to figure out what qualities should be present and then construct a scenario which includes them with one or more partners. Without doing easy homework and asking the right questions up front, entrepreneurs can miss out on including valuable investors in the round -or- add too many non-valuable or “redundant” constituents which just complicate the composition and communication going forward.
One of the things that surprised me most about venture capital when I got into the business is how much VCs seem to like to meet for breakfast. VCs usually typically reserve dinners for portfolio companies’ CEOs and board members. And “doing lunch” doesn’t happen that often because VCs don’t like going out of the office mid-day much. But breakfast for venture capitalists is an open free-for-all for all sorts of networking meetings and conversations.
Along the way, I’ve noticed that there’s a pattern to what VCs order which shows what kind of VC he is. Like my previous post about what the founder’s email address says about your startup, I thought I’d turn the tables a bit with a light-hearted look at what a VC orders at breakfast says about him or her:
- Full breakfast of eggs, bacon, hash browns, & toast – newly minted post-MBA Associate just getting into the business… (you can’t eat that big of a breakfast three or more days a week for long).
- Bowl of oatmeal – standard VC breakfast for those who schedules a morning networking meal almost every day of the week; this guy just follows the herd and isn’t going to pay attention as he eats.
- Bowl of oatmeal but he barely touches it – he eats a networking breakfast every day of the week, but the oatmeal is really just a prop as he’s really engaged with what the other person has to say.
- Eggs Benedict – VC partner who just had a monster exit and is in the mood to celebrate.
- Veggie omelet with egg beaters one yolk no onions double tomatoes – overly-detailed nit-picking VC who will pick apart an entrepreneur’s pitch and board deck without seeing the big picture; tough guy to deal with on the board.
- “Breakfast” brought into the office – overscheduled VC who doesn’t even have time to meet in a diner; on dozen+ boards and doesn’t have time for his portfolio companies.
- Yogurt fruit parfait – Venture guy who doesn’t care what others think about him; leads new off-the-beaten-path investments with conviction and without following the herd.
- Nothing – uber-networker who is already on his second breakfast meeting of the day; is a huge help to his portfolio companies with recruiting and BD intros for his portfolio companies.
- Just coffee – jittery VC who is on the fundraising trail struggling to close their next fund.
- Triple order of bacon and nothing else – signals “I am the king of my firm and I don’t give a sh*t.”
What else am I missing?
A few weeks ago, a very good friend who works at a growing startup emailed me with the following question (in which I’ve masked just a few of the identifying details):
- What does it mean when almost all of a startup’s early employees have left the company?
By almost any measure, [our company] is doing phenomenally well. We’re coming up on our 5th birthday; we have ~250 employees with offices in New York, SF, and London; we have contracts with 70 large customers, including most of the biggest in our space; our investors are [three top Silicon Valley firms].But by the end of the month, we’ll have only 5 of our first 10 (including the two founders) employees and 10 of our first 20. We’ve been running at 20-30% attrition over the last 9 months. Our CEO is entirely dismissive that there could be any sort of attrition problem. No one has ever been promoted onto the management team, only hired in from outside.
I guess the “myth” of the startup is that companies that beat the odds and “make it” do so in such a way that those that entered on the ground floor leave, eventually, have accumulated a great deal more responsibility. In your experience, is this myth true? As an investor, how would you evaluate a company that has such high turnover but still manages to dominate its space?
My email response to his question was (with the bolding added to this blog post):
- You’re asking quite a bit in this email, both explicitly but implicitly underneath.
To the direct inquiry about attrition of early folks in startups generally, I think that’s very natural. People who are suited to building a ship aren’t always the best (or have the interest in) sailing the ship, and vice versa.The skillsets required for being effective in an organization with two dozen people or less are very different from those from being effective in one with a couple hundred. The roles transition from being broad ones with high impact to specialized ones with focused results. Additionally, the financial risk-reward profile of the company changes with this progress. So it doesn’t surprise me that the early employees who joined with you are leaving; the situation has changed. That being said, it sounds like there has been a spate of departures recently, which sounds like a different set of issues which may be affecting the company.
But I also think you’re asking a career question about tenure at a startup company, to which my answer (an opinion) is very binary: I am of the opinion the best route is go early and stay until a successful exit -or- stay until you vest your initial grant and not a day longer. Given the dynamics I mentioned, tenure at a startup should match an individual’s interests/skills, but also synch with financial/career milestones. As an early employee with the company taking off, staying through to an exit will be rewarding both financially and also from a leveraging career trajectory. But after you’ve initially vested (after three or four years?), there aren’t as many marginal benefits in either category (additional option grants are less significant and responsibility accumulation is incremental) until the company hits that very important exit scenario.
A lot has been written about a formal “VC Pitch” meeting with advice about how to handle those interactions with venture capitalists. But not all conversations with venture capitalists are formal pitches, nor are they expected to be. And sometimes it’s unclear if it’s a pitch meeting or not.
Of course it’s productive to follow the mantra of “always be selling” in business interactions no matter what your business is, entrepreneur or not. But it’s helpful to understand (with perhaps a bit of a cynical perspective) how a VC views your discussion with him so that you can match the tenor/tone/formality of the dialog appropriately.
The majority of meetings a VC attends are in his/her conference room. After all, his day is often packed full of meeting after meeting so the location is dictated by optimizing his convenience – despite it not always being the case VCs like to think of themselves as especially busy (as if entrepreneurs are not?), so they’d often prefer not to venture out of their own offices unless it isn’t perceived to be essential. Almost all formal pitches are in this context. If you’re meeting in a VC’s office conference room, and you’re an entrepreneur, then the default assumption is you’re pitching your startup. Especially if the administrative assistant asks if you’d like to project a presentation… you’re definitely in a pitch meeting.
Yet VC’s also seem to have this habit of inviting to people (entrepreneurs and others in their network) to their office for “coffee.” But the “coffee” designation is code that the conversation isn’t expected to be a pitch conversation, but rather a general networking one to connect more broadly. Very often there isn’t any coffee to be seen! Also, there are some days when a VC has so many numerous “coffees” on his schedule that he’d be well overly caffeinated if he actually literally drank that much. If you’re meeting a VC for “coffee” at her suggestion (regardless if there’s coffee or not), no formal pitch deck is expected.
Or Starbucks is sometimes an option. In some cases, VCs do actually want coffee (see above), abhor the coffee machine in their office, and suggest meeting at a proximate coffee shop instead. (Note that I’ve seen this issue solved by VCs purchasing a couple-thousand dollar coffee machine for their own office personal use – everything just shy of platinum plating.) As per above, the actual physical presence of coffee is irrelevant; it’s the tone of the context.
And then there’s breakfast. Since VCs perceive themselves to be busy and take meetings all day, they don’t like to run around outside of the office for meals like lunch especially. But breakfast is well-positioned at the beginning of the day so that the location can be mutually-convenient along the way to work for both parties. The signal here is that this breakfast meeting is not a pitch meeting, but likely more important that a pseudo-coffee conversation in the VCs office. VCs love to eat breakfast with other VCs, with some partners at some firms having the reputation of actually eating breakfast twice in a morning to network.
You wouldn’t expect it, but the rarest of locations for a VC meeting are in a startup’s offices. Who knew startup investors would be so averse to actually visiting startups? There are only two reasons VCs typically visit a startup’s office. Either he’s in from out of town (e.g. the hoards of Boston VCs taking the Acela to Manhattan looking for investments) –or– he’s pitching the entrepreneur and not vice-versa. One of the best signals that a VC really wants to invest in a company is that he visits that startup’s office. And the earlier in the “process,” the better. Whereas if a VC is visiting a startup at the end of his diligence process, he’s really just checking boxes that he visited the site. But if he’s visiting on the first or second meeting, then he perceives the company to be “hot,” and wants to show his enthusiasm for selling his firm to the entrepreneur by coming to them. This situation rarely happens on a first meeting, but it certainly does happen.
So in the end, location matters for setting context to a VC discussion. And that location shares a lot about the expectations for the discussion before a single word is said. But that doesn’t mean that context cannot be changed…
As a VC, I end up meeting some amazing people of many different backgrounds and profiles. But there are two categories of people which are tightly correlated, but distinctly different. The difference between what I’d call an “Inventor,” someone who has many ideas for businesses to start, and a “Founder,” an entrepreneur who starts a company, is subtle. Many of the qualities of the former are necessary, but not sufficient attributes, for the latter. In my observation:
- An Inventor generates ideas; a Founder pursues them.
- An Inventor is always brainstorming; a Founder is brainstorming for his next company.
- An Inventor wants to see his concepts come to life; a Founder wants to bring them to life himself.
- An Inventor looks to others to turn ideas into reality; a Founder naturally attracts people who want to transform ideas into reality.
- An Inventor wants to see his vision eventually realized; a Founder wants to be there when his vision is realized.
- An Inventor relishes in concepts; a Founder relishes in the details.
- An Inventor wants fulfillment; a Founder wants to build.
- An Inventor is passionate to imagine; a Founder is passionate to create.
There isn’t a value judgment inherent in the above distinction, that one is somehow “better” than the other. But rather, it’s only true Founders who should be starting companies. And the self-awareness of the two profiles is certainly a quality which not everyone of either type necessarily possesses, though the most enlightened of both groups do.
According to Wikipedia, French economist Jean-Baptiste Say coined the term entrepreneur as “one who undertakes an enterprise… acting as intermediatory between capital and labour.” Now we could argue about the modern definition of the word, but I’d include in the notion of entrepreneur being a facilitator among capital, labor, AND ideas… but certainly not just ideas solely. Great Founders do so much more than conceive.