Last week I attended the 9th Annual Spartina Offsite – a two-day retreat hosted by David Hehman and Howard Love. I have known and worked with David and Howard for almost two decades, having first met David in the mid 90’s when he was fresh out of Berkeley and starting his first successful startup, HealthDesk. Through David, I met and started working with Howard as well. And, over time the three of us have worked together supporting and co-investing in an assortment of startups. Our first “liquidity event” came from an investment in a startup called Mongo Music (which MSFT bought in 1999), and we have had the good fortune of enjoying seed investments in OpenTable, Trulia, Hotel Tonight, among others.
“Spartina” is an umbrella under which Howard and David house the investments they co-fund. And, with a portfolio of dozens of companies, the agenda for the retreat included hourly sessions allocated to each founder/CEO during which each company gave a brief update, and then posited one significant business challenge for the group to discuss. Mind candy! And, the conversations this year were incredibly frank, candid and illuminating.
In any event, one of the more memorable conversations involved the market for that “second infusion” of early-stage capital. Keep in mind that all of the attendees have already raised some seed capital. But, the bulk are facing the need to raise a new round over the next 12-24 months. So, our conversations centered around raising that second chunk of funding.
To start, we discussed the clear shift over the past decade by traditional VC funds toward later staged investments. Series B is the new Series A after all! So, we discussed where early-stage entrepreneurs find that second infusion of capital to help fuel that critical stage of market penetration and expansion.
Manu Kumar of K-9 Ventures (http://www.k9ventures.com/blog/2014/04/10/new-venture-landscape/) shared his view of how the seed market has fragmented into four stages: F&F/incubator, pre-seed, seed and Series A, and he discussed his perspective on the differing capital sources for each stage. This segmentation resonates with me, and is consistent with what I am seeing (albeit from my standpoint the percentage of startups that emerge from incubator rounds remains a minority of our firm’s “portfolio”). Here is my slight twist on these stages:
Pre-seed: To me, this category encompasses the classic “two entrepreneurs and a business plan” up through the startup that has an “MVP” or “proof of concept” and is sampling market demand around one or more fundamental hypothesis. In the “portfolio” of clients with whom the Perkins Coie “ECVC team” works, these companies typically assemble funding rounds ranging from $250k to $1.0m. And, substantially all of this capital comes from the Three Fs (friends, family and former colleagues). We infrequently see “seed” funds or VC funds invest at this stage – with exceptions when there are unique characteristics (e.g., serial entrepreneurs, unique IP, compelling distribution opportunities, etc.).
Seed: Once a startup moves past the proof of concept stage, and has a somewhat “commercial product” in the hands of customers, it becomes a seed-stage deal. The big questions remaining include (a) does this product solve an important problem, (b) will customers/users pay for the solution, or (c) is that customer/user highly reproducible. As this is becoming increasingly clear, the “seed” funds become more likely source of funding. And, as these rounds come together, we are seeing proceeds ranging from $1.0 – $2.0m from a syndicate of seed funds and professional angels.
Series A: As reproducible customer traction becomes obvious traditional VC funds become increasingly interested. These business often justify investments of $8-10m (or more), as the focus transitions from product and customer validation to aggressive commercialization.
There are of course exceptions to the above. But, as I look back at the hundreds of startups my team and I have formed this past year, the above seems to cover most of our early-stage financings.