My partner Seth Levine has a detailed post up today titled Trada – from the beginning that describes the creation and financing of Trada. Foundry Group is the seed investor in Trada and Seth’s post describes one example of what I think is effective VC seed investing.
The meat of the funding story follows:
“Of course coming up with the idea is the easy part. Executing against that idea is another matter. In this case neither Niel (nor I) had any interest in creating a traditional syndicate to fund the company. Instead we quickly put our heads together about a financing (we like to say it was over beers, but the truth is more mundane – we hammered out the details in a 10 minute conversation in the conference room of the Foundry office). We decided that we wanted to bring in some experts to help us with the business and together flew around pitching the business to a small handful of strategic angel investors to pull together a small syndicate that became the initial Trada investor base. Niel and I hammered out a second financing in similar fashion (again around the Foundry conference table, this time without the need for an angel roadshow). It’s a great example of how we like to work with entrepreneurs – especially those that we have a long history with. We like to be involved early (in this case before an idea for a business even existed) and we think of our angel investments as a down payment on a subsequent investment in the business (we’ realize that we need to give early businesses some time to develop).”
The short version is that the seed round was figured out in ten minutes – this was the “Series A”. A few strategic angels were added to this round. We did a second financing by ourselves at an increased valuation – this was the “Series B”. Recently Google Ventures led the a $5.75m “Series C” round.
The terms on the Series A and B were straightforward as Niel Robertson, the founder/CEO of Trada is a sophisticated entrepreneur (Trada is his third company) so he had no patience (nor did we) for silly, complex early stage terms. More importantly, the two key aspects of any deal – price and control – we able to be negotiated quickly between Seth and Niel, partly because of their long history working together which was built on mutual respect and trust.
When we funded the Series A (the seed round) of Trada, we fully expected we were at the beginning of a multi-round journey. Seth does a great job of explaining how it got started – I encourage you to read his post for an example of one of the financing cases where I think a VC can be an excellent seed investor.
Last week saw an explosion of discussion around seed investing, including plenty of negative comments around VCs as seed investors. While I agree that many VCs are crummy seed investors, I think there are some that are excellent seed investors. This prompted me to write a post titled AngelList Boulder and Some Thoughts on Seed Investing where I promised to write up some of my thoughts on how and why VCs could be good seed investors.
Before I got around to starting, there were three excellent posts that, if you are interested in this topic, are must reads. They are:
All three of these posts lay out clear points of view on the authors seed strategy. And importantly, Mark encourages all entrepreneurs to make sure they understand a VC’s seed strategy before taking money, which I strongly agree with.
Before I start talking about good and bad VC seed strategies, I thought I’d explain mine. For context, about 25% of the investments we make at Foundry Group are seed investments. But before Foundry Group, my partners and I were involved in many seed investments, both at Mobius Venture Capital. In addition, I’ve made many seed investments as an angel investor in two time periods,1994-1996 and 2006-2007, and seen many more through my involvement as a co-founder of TechStars. Our strategy has evolved from this experience and is different from my angel investor strategy (which I’ve explained in my post Suggestions for Angel Investors.)
As a VC, I do not differentiate between a seed investment and any other investment that I make. At Foundry Group, we are comfortable investing as little as $250k in a round (a seed investment for us) all the way up to $10m in a round. We think about each investment – whether it’s $250k or $10m – the same way, and commit to participating in the business for the long term.
Specifically, our seed investments are not “options on the next round.” We price our seed rounds as equity investments, always lead or co-lead (as Fred describes in Lead Investors, Dipshit Companies, and Funding Every Entrepreneur), and treat them the same way we would with a $10m investment.
I have three partners and all of us are involved in all of our investments. So, when we make a seed investment, it gets everyone’s attention. We try hard not to smother it with love, but we recognize that we usually each have something unique to add to a seed investment and try to help accordingly. As a result, we are all emotionally involved in the investment (a phrase you’ll see in later posts about this topic) which I believe is both beneficial to the entrepreneur and extremely important to the VC firm.
When we make a seed investment, we fully expect to invest at least the same amount that we invested in the seed round without thinking hard about it. One of our strongly held beliefs is that it often takes several years for a company to find its mojo and we are willing to work through the challenging first few years. As a result, we don’t believe that there is a particularly critical “go forward or not” decision point immediately following the seed round. Now, this doesn’t mean that the follow on round is blindly done – we are very internally critical of the progress a company is (or isn’t) making, but we try to firmly put ourselves on the side of the entrepreneur in this discussion and work together when things start off slowly, or differently, than expected.
At Foundry Group, we describe ourselves as being “syndication agnostic”. This means we are completely indifferent as to whether we fund something ourselves or with other VCs (e.g. each are equally happy situations.) In addition, we are equally delighted to co-invest with angels and super angels, or not. Basically, we are happy in any case, are making a decision to invest independent of anyone else, and defer to the entrepreneur on who they want to have involved.
Finally, we are deliberate about the areas we invest in (our “themes”). We see a ton of seed investment opportunities, but only invest in a few. Many of the opportunities we see are outside of our themes. We have consciously decided to only invest in areas we know well and think we can be meaningfully additive to and constrain our focus to these themes (although the themes expand and evolve with our experience.) This lens allows us to spend the vast majority of our time on companies we are either investors in or likely to be investors in, and limits our time “exploring lots of things that have a low probability of being an investment for us.”
Taking Mark’s lead from his post, I’m going to put up a more specific post on the Foundry Group blog that lays this out in a very specific way. I’ll also follow this post with some examples, as I’ve got seven to choose from: AdMeld, Gnip, Lijit, Mandlebrot, Next Big Sound, Standing Cloud, and Trada. And, in case you are wondering, here are two recent examples of how seed investments blossom: AdMeld Raised $15 Million Round from Norwest Venture Partners and Time Warner and Trada Raises $5.75 Million Round From Google Ventures.
Ah – well – another day passed and there was once again a ton of chatter around angel investing. A lot of it was prompted by AngelConf 2010 which you can watch recordings of on Justin.tv (AngelConf 2010 Part 1 and AngelConf 2010 Part 2). While there continues to be plenty of negative VC tone and “disruptive change is here” (ala traditional VC is over), there were also some great nuggets, including my favorite line from Joshua Schachter of typical VC behavior of SHITS (Show High Interest Then Stall).
But I think the two best posts to come out of yesterday are Lead Investors, Dipshit Companies, and Funding Every Entrepreneur by Fred Wilson and MoneyBall for Startups by Dave McClure. While they come at things from very different angles, they are both very insightful and important. Importantly, they are willing to use words in their posts that Goldman Sachs has apparently banned in email as of yesterday.
We are packing up the Homer house today and I’m looking forward to diving back into the fray next week in Boulder.
I was in a meeting with Rich Miner from Google Ventures on Friday with some entrepreneurs we are working with on a potential investment. While the team isn’t a rookie team, they’ve never worked with VCs before and they’ve been wrestling around the dynamics of how to interact with the two VCs in the room (me and Rich) and the various angels that are part of the seed round we are planning to do.
In the middle of the discussion, Rich used a brilliant metaphor of “VC as produce suppler”. The CEO was talking about how she realized she was the lead chef in the kitchen, but viewed us as some combination between sous chefs, owners, and the diners in the restaurant. This was apparent in the interactions – was she trying to “please us”, listen to us and do what we said, or put us to work? This was made even hard with the handful of angels involved – where did they fit in? And, it was clear that the kitchen was getting crowded.
In this middle of what was a rambling conversation, Rich said “think of us as produce suppliers.” He said something like: “We bring you produce. Some of it will be awesome and you’ll want to use it immediately. Some will be moldy, or won’t fit in your recipes, or you won’t need any more of it. And sometimes we won’t show up. Occasionally you’ll want to put us to work in the kitchen teaching you how to make a new dish with our produce. Other times you’ll politely ask us to get out of the kitchen so you can get some work done. And – ultimately – all of us – the investors (VC and angels), the entrepreneurs, and the employees are the owners!”
I’ve editorialized, but I stopped, wrote it down, and asked Rich if I could blog it. It’s one of the best, freshest, and crisp metaphors for the VC / CEO relationship that I’ve ever heard.
The video from the second panel I was on at Google I/O 2010 – Technology, innovation, computer science, & more: A VC panel – is up. Dick Costolo – the COO of Twitter – is the moderator and my fellow panelists are Albert Wenger, Chris Dixon, Dave McClure, and Paul Graham. Someone didn’t like the title so it was renamed “VCs Who Code” but apparently that didn’t stick with the official event panel namers.
While I stopped writing production code in the early 1990’s, I still fuck around with something each summer when I’m in Alaska (in past years it has been Perl, Ruby, and PHP.) I haven’t decided what it is going to be this year, but it’ll probably be Python as I’m seriously considering taking 6.189 using MIT OpenCourseWare.
For the curious ones in the crowd, I’m a self declared “excellent BASIC programmer.” When I got my Apple ][ in 1979 the only choices were BASIC and 6502 Assembler. I learned each, but only wrote commercial software on the IBM PC in BASIC (and compiled BASIC, back when getting a BASIC program to compile was a trick in and of itself) between 1983 and 1985 (using Btrieve as the database manager.) By 1986 I was doing a lot more work in Dataflex and Pascal. At MIT, I learned Scheme (via 6.001) and was ok with it, but never did any production work with LISP even though every time I looked at a Symbolics machine I drooled. I learned a handful of other languages in school, such as CLU and IBM System/370 Assembler (and something on a Prime computer – I can’t remember what) but never used any of it outside a class. Feld Technologies did most of its work with Clarion, although I never really learned it well enough to do anything production quality since by that point I wasn’t coding regularly anymore. While I was proficient with a bunch of database languages such as dBase, Paradox, and R:Base, I never liked any of them and we never really wrote production systems in them (although we took over and managed a lot of crap that other people had tried to write.) Oh – and I was pretty good with Lotus 1-2-3 Macros.
In some parallel universe, I sit in front a computer all day and write code.
While some people hate the phrase “failing fast”, I find it instructive when it’s used to signify that one isn’t going to pursue a particular path in the context of a larger set of activities. A few weeks ago, I wrote a post about The Proliferation of Standardized Seed Financing Documents. It generated several hundred email responses and a handful of phone calls. A week or so later, my partner Jason Mendelson wrote a post titled Why There Will Never be a Standard Set of Seed Documents. I’ve concluded that Jason is right so rather than torture myself, I’m failing fast with regard to trying to help create a set of standardized seed documents.
Since I received so many private responses to the original post, I thought I’d summarize them here by type of respondent.
Lawyers: By far the largest numbers of responses were from lawyers offering to help (thanks!) I didn’t count them up, but I got well over 100 emails from all over the US. In many cases, the lawyer offered to come to the meeting, share their seed documentation, and work to make sure that seed documents were complete and acceptable to their firm. The vast majority of lawyers provided solid background on all the seed investment work they had done. Several weighed in with their views of the potential issues, often sighting the NVCA standard document process which everyone seemed to refer to as some version of “a mess.” A few made sure to remind me that east coast lawyers needed to be involved or the docs wouldn’t work on the east coast. A few brave ones told me why I was destined to fail but wished me luck anyway. Fortunately, due to the magic of Gist, I now have contact information for a whole bunch of lawyers I didn’t know before.
Entrepreneurs: The next largest number of respondents were entrepreneurs. I think all of them cheered me on, told me how much they hated paying lawyers for their seed documents, and asked if there was some way to reduce everything to a few standard pages, not unlike a mortgage document. A few told me “don’t include lawyer X in the process – he charged me $70,000 for my seed deal” and a few suggested that lawyers should have to use paper and crayons instead of word processors. Several asked if I’d be interested in funding their companies. All demonstrated a sense of humor about the situation.
VCs: The VC comments came in a few different flavors. A few said “I don’t see the problem – it’s fine having multiple seed documents.” Another reminded me that “great is the enemy of good” (although the real, and more relevant quote is “The perfect is the enemy of the good”) and the existing forms floating around are “very good – much better than they used to be.” Another suggested that none of the standard docs worked for him, but he was perfectly happy to sign the forms from Law Firm Z without any modification. Several asked me whether I was still watching 24 (yes, I will watch it to the bitter end.) I received private emails from each of my partners containing a slightly different version of “are you out of your fucking mind?”
LPs: I only had one email from an LP. It was a short one. “Don’t waste your time on this.”
After pondering all of this, I realized that I was both trying to solve a problem that didn’t really want to be solved while at the same time falling into a common trap of working on something that, while on the surface seems like a good idea, isn’t really my issue to solve, at least not in this way. As many of you know, the issue is not only the term sheet, but also the underlying documents supporting the deal. I think this is a nuance that is often missed, as the seed docs need to be robust enough to easily support a next round financing (Series A or Series B) since the seed financing is rarely the last one. So, while a simple term sheet might be able to be agreed on, I realized that getting the actual docs agreed on would be a miserable, and likely impossible, thing to try to deal with.
Hence my failing fast. While in theory this might be a great idea, I’ve concluded that I can’t be successful at this. There are plenty of people – namely all the lawyers that work with startups – that have a much greater incentive than I do to get this right, be efficient for the entrepreneurs they work with, and be cost-effective for the companies they bill. So, I’m going to leave it to them.
My monthly column in Entrepreneur Magazine is up (and on the newsstands). This month’s article is titled VC or Angel Money? and has some suggestions for how to think about whether you should be approaching VC’s or Angel’s when raising a round of financing.