cdixon - Latest Comments in The most important question to ask before taking seed money

Re: The most important question to ask before taking seed money

Mark Essel — Sun, 29 Nov 2009 13:44:54 -0000

First popular post read, I mark it 7/10 Chris. An absolute must read if your concept needs funding from the start. And generally good advice for startups that pursue funding later.

Many startups aren't even looking for funding. It's much better to focus on business and revenue building, and seeking out outside money only when absolutely necessary.

How about splitting your startup to two external seed investors? Is that only applicable in selling one's
soul ;)

Re: The most important question to ask before taking seed money

empresario1 — Sat, 14 Nov 2009 22:34:23 -0000

Good post...I came across your post by looking for commentary/insight on whether or not it makes sense to take money from a "seed fund" that is really part of a larger VC. Our situation is slightly unique in that we have commitments from friends, family and angels to account for just over half of what we are trying to raise. The "seed fund" wants the rest of it, but wants an option to invest at a discount in the subsequent round. Initially, we thought it made a bunch of sense to be associated with this "brand name" VC, but the more we think about it and see commentary like your post, we are thinking we don't take their money? Any advice would be appreciated...

Re: The most important question to ask before taking seed money

ShanaC — Tue, 10 Nov 2009 20:57:06 -0000

There are certain business that fall in between. Those scare me the most...

Re: The most important question to ask before taking seed money

john_vrionis — Thu, 05 Nov 2009 21:10:35 -0000

Hi Chris - this is John Vrionis from Lightspeed. I think this is a great discussion topic, thanks for posting. I appreciate your views and frankly agree with a number of the posts. There is certainly risk in seed funding from a VC and a possible stigma if that VC doesn’t want to continue investing in the next round. For the purposes of this thread I want to briefly explain our motivation behind our summer program. I look at it this way, at Lightspeed we’re in the business of fostering entrepreneurship. I started the program in 2006 because we had the resources and desire to provide students the platform they need to dedicate 100% of their time during the summer to their startup ideas. As a grad student, I (like most of my entrepreneurial classmates!) had to take jobs to pay the bills and therefore startup time was left to nights and weekends. When I joined Lightspeed and saw there was willingness to offer something better, we decided to give it a try.

We don’t ask for equity or a right to invest. We never intended it be an incubator or a seed program. We honestly feel it is a privilege to work with such bright, energetic people at this stage in their careers and enjoy building the relationship. Of course if an investment opportunity is created (post summer experience or at some point down the road), we'd be thrilled, but that’s not the primary goal. We’ve enjoyed working with dozens of teams since the program began and are always tinkering with the format based on input from the students.

Re: The most important question to ask before taking seed money

bkcookiemonster — Sun, 01 Nov 2009 20:07:52 -0000

That makes sense, the seed investment itself will get the fund very small % ownership to begin with if you hold Y combinator/Tech Stars/etc. avg valuations as comparable examples. No fun without the option.

Wish there was a way to solve this problem.

Re: The most important question to ask before taking seed money

chris dixon — Sun, 01 Nov 2009 15:39:36 -0000

But the big VCs don't really care about the seed investment itself - the whole point is to get an option on putting in a lot more money later on. Hence #1 would undermine this goal.

Re: The most important question to ask before taking seed money

bkcookiemonster — Sun, 01 Nov 2009 14:30:53 -0000

If you're a typical VC fund trying get in on seed deals, is it possible to fix the situation by doing the 2 following things:

1) Having a policy such that once invested in a seed round, the VC will make a strict policy to not re-invest/re-up.

2) Assigning each seed deal an official venture partners (who maybe is required to co-invest?) so that the seed guys get some attention and mentorship even though they represent a very small portion of the fund's asset allocation. Maybe the venture partner could be a seed/angel fund as well.

This way, there are no "mixed signals" as to how interested the VC fund is in the given team post investment. The price of losing the option shouldn't be *so* bad since they're already in at a time when valuation is lowest.

What does everyone think?

Re: The most important question to ask before taking seed money

chris dixon — Sun, 01 Nov 2009 06:49:28 -0000

not sure what you mean I don't do seed?

Re: The most important question to ask before taking seed money

Doug Coyle — Sat, 31 Oct 2009 22:06:49 -0000

Chris, good dig at Charles River (awful fund) but pardon me ... you don't do seed either.

Re: The most important question to ask before taking seed money

chris dixon — Sat, 31 Oct 2009 19:48:50 -0000

sure, didn't occur to me, but good advice, thanks.

Re: The most important question to ask before taking seed money

davemc500hats — Sat, 31 Oct 2009 19:46:13 -0000

(btw chris: love your stuff & generally agree with your observations above, but given your investing role you might want to make that disclosure at the top, rather than bottom, of your post ;)

Re: The most important question to ask before taking seed money

davemc500hats — Sat, 31 Oct 2009 19:43:32 -0000

>> Y Combinator simply doesn’t do follow ons, so there is no way they can positively or negatively signal by their follow on actions.

hmm, i don't believe that's correct. at the very least, i'm pretty sure PG & PB have done follow-in investments in a number of YC companies. you might want to ask Paul or Jessica to confirm.

---

personally i don't think there's anything wrong in setting up funds to do follow-on, but most large VCs don't have the capacity to do very much of it... thus the bad signal you speak of. in our case, we have 2 seed vehicles: fbFund (an incubator program that's a joint venture with Founders Fund, Accel, & Facebook), and FF Angel (an associated seed fund i manage that focuses on ~$100K investments).

when we planned out fbFund for 2009, we specifically made the point that neither Founders Fund nor Accel would likely be leading subsequent rounds, and for Founders Fund we would mostly be doing any follow-on via my FF Angel program.

of the 22 companies we invested in for the incubator program, 6 have currently received financing, and it appears likely at least another 4 more will receive financing by Q4/09 or Q1/10. (note: ~4-5 other startups are profitable or close to break-even and may choose not to raise capital, but i'm guessing most of them will).

to date FF Angel has invested in 1 of the fbfund 2009 startups (Thread.com), and we're likely to do 2-3 more. however, we aren't leading on any of those rounds, and there are simply just too many potential opportunities for us to invest in all of them -- in fact, i missed investing in one of them because other investors moved more quickly ;)

in summary: our "success" rate for follow-in financing and/or break-even looks like it will be above 40%. that exceeded my expectations of 25%, but perhaps we just got lucky this year. we will likely do follow-on financing in 15-20% of the companies, which i would also consider to be higher than my initial expectations.

so while i don't disagree with your general observations, i think there are a few structures that can be successful. by explicitly not leading in follow-in rounds, but still participating, it forces other VCs to make their own decisions.

the above aside, it's still early and we're still learning how all of this works best. as we advise our startups, we'll watch, measure, and iterate on our approach.

Re: The most important question to ask before taking seed money

joseggonzalez — Sat, 31 Oct 2009 09:58:28 -0000

Thank you very much !!
-www.google.com/profiles/mat...
Connect, tag & stalk me !!
Jg

Re: The most important question to ask before taking seed money

chris dixon — Sat, 31 Oct 2009 07:37:55 -0000

There are certain businesses that simply require big up front investments - e.g. a search engine, biotech, etc - where VC financing makes sense. If you are making lightweight web products like 37signals, VC financing might not make sense. I think there is definitely a place for VC financing and there is also a good case to be made for bootstrapping a lot of companies that raise VC today.

Re: The most important question to ask before taking seed money

chris dixon — Sat, 31 Oct 2009 07:35:06 -0000

Dan - Good question. It comes down to the amount of money and % ownership the VC has. Big VCs are in the business of trying to get for themselves, say, $50M from winning investments. That means the exit needs to be, say, $300M, and they need to own 15-20%. Seed rounds are just options to put more money in, where there is no way (except in very extreme outlier cases) that they could get such a return without putting in more money, because they don't own that much and the company and will own even less as the company gets further financing from others.

What this boils down to is if you roughly: if you are taking less than <$1M from a >$300M fund, it's a seed round. They care more about the option than the actual money invested.

Does that make sense?

Re: The most important question to ask before taking seed money

chris dixon — Sat, 31 Oct 2009 07:26:19 -0000

I am talking almost exclusively about seed programs / incubators / summer programs run by big VCs ($300M plus funds), not techstars and Y combinator etc which I think are playing a very valuable, positive role.

Also, I agree there need to be more micro-VCs.

Re: The most important question to ask before taking seed money

UltimateFootballNetwork — Sat, 31 Oct 2009 01:04:16 -0000

I have a slightly different take on this. The problem is not in the seed programs per se (unless they are tied to a fund that is $100M>), the problem still lies in the VC business itself.

Of course a large venture fund isn't going to be comfortable enough to know that there is a $100M+ exit after only a few months.

Once there are enough funds (and there will be) that are in the <$50M less range that will be fine with $5-$25M exits there will be far more options for entrepreneurs coming out of these programs.

This "problem" should be seen as part of the lingering VC shakeout and not an indictment of seed programs like YC/Techstars etc, which are playing a very, very valuable role.

Re: The most important question to ask before taking seed money

chris dixon — Fri, 30 Oct 2009 20:37:11 -0000

I guess the cynical view would be they have a good cover story to protect
their startups from negative signaling. The optimistic view says they are
just good people (which, incidentally, I've found the Lightspeed team to be)

Re: The most important question to ask before taking seed money

jessicamah — Fri, 30 Oct 2009 18:21:37 -0000

Haha - I asked them the same question, and John Vrionis' response was "because we want to build relationships." It's their way of having fun with a group of college students, and it might lead to an investment down the road. But I felt that they were very genuine, and that they weren't doing this to bring in more deal flow.

It's the VC firms that don't give grants that are more problematic... the VCs that have the right to invest in future rounds, but Lightspeed wrote us a check without any legal parameters. I doubt that many VCs would do this.

Re: The most important question to ask before taking seed money

chris dixon — Fri, 30 Oct 2009 17:50:15 -0000

Hmmm... If it's not to find deals, what's Lightspeed's motive for
running the summer program?

Re: The most important question to ask before taking seed money

jessicamah — Fri, 30 Oct 2009 17:39:15 -0000

Hey Chris,

My company took some grant money from Lightspeed Venture Partners over the summer, and I thought about how this would affect raising money in the future. What happens to the companies that don't ultimately get money from Lightspeed?

The thing is, very few of them even pitch the firm after the summer. Lightspeed typically invests $3M+ into companies, and never is a company ready to raise that much money after 2 months of building a product. That just doesn't make sense.

I asked John Vrionis, one of the partners at Lightspeed what his thoughts on this were. Exactly the same -- every company that passed through the program was comprised of college-age students, which meant many of them were still in school. Not to mention, as I mentioned earlier, 2 months isn't much time to build a company worthy of $3M+ of venture financing.

So they do something similar to what YCombinator does: bring in the early VC firms, like Baseline and Maples. Companies that live past the summer often need $250-$1M to continue, and a large VC firm simply isn't interested in the smaller deals.

Re: The most important question to ask before taking seed money

jessicamah — Fri, 30 Oct 2009 17:38:59 -0000

Re: The most important question to ask before taking seed money

Vaibhav Domkundwar — Fri, 30 Oct 2009 17:13:28 -0000

Chris, couldn't agree more. But with VC requirements of a startup shrinking, its also becoming important that you raise seed money from the "right" set of angels/incubators, who I believe are increasing serving as "screeners" for larger VCs, who don't/can't spend time looking at all early stage deals. So a bootstrapped startup that is ramen profitable on its own, suffers from a disadvantage of not being able to potentially get in front of large VCs because they are not "screened" by the prominent angels/incubators.

Re: The most important question to ask before taking seed money

reece — Fri, 30 Oct 2009 16:01:59 -0000

Makes sense. Thanks Chris.

Re: The most important question to ask before taking seed money

chris dixon — Fri, 30 Oct 2009 15:48:51 -0000

VCs definitely talk to each other a lot, on both coasts. Outsiders
don't realize how much.