Random Notes From The Early-Stage Investing Field (Fall 2013)

One of the activities around here I truly enjoy is helping people raise angel, seed, and venture financing. For someone like me, relatively new to the whole ecosystem, it’s a great way to learn about new products as well as the various tastes of different investors and investment groups. Lately, however, I’ve observed an uptick in the confusion between founders and investors. Briefly, in no particular order, here’s what I’ve observed (with a Valley focus, which is where I live/work):

1. Young founders are incredibly influenced by the online brands of certain investors. In the back of my head, I knew this was important, but boy, it’s just incredible how much of an influence a blog with no real additive value can have. Perhaps I was naive to begin with. This has bigger implications than I originally thought. First, it means that firms which need more deal flow need to start marketing (usually through content) ASAP. Second, it means that there’s surprisingly more space for people to advertise and market themselves in. I can’t believe I’m writing that, because just the other night, I was thinking to myself, it’s all gotten out of hand. Nope, more white space.
2. Founders raising money are often blind to the stage-preference of the firm they’re trying to pitch. I had a good friend try to bark up the tree of a known growth-specialist fund for an early Series A. No way in hell that was going to happen. Of course, sometimes serendipity can strike in a meeting (“Instead, let me introduce you to…”) but mostly it’s just passing off and/or a big mismatch between interests. And, firms rarely make exceptions outside of their wheelhouse, no matter how much blogging they do to the contrary. Firms have sweet-spots and generally, unless you’re like Jack Dorsey or Brett Taylor, you are not an exception.
3. Individual investors (or angels) are hard for people to think of and put on a list. All individuals are associated with a bigger fund and/or investing out of another vehicle. Most of the last crop of individual angels have ended up on Sand Hill Road.
4. Speaking of individuals, many young founders find themselves attracted to the younger, more visible faces of larger firms. In some cases, I’ve seen them ask if that person could just invest individually, as if to subconsciously hint they don’t want all the trappings that come with a firm at-large.
5. Founders are increasingly going to AngelList earlier in the fund cycle, largely because fundraising itself is a very disruptive endeavor. A platform like AngelList gives them time back, if done correctly. Moving forward, AngelList syndicates will be (in my opinion) very disruptive to many things, such as typical associate jobs in venture. Instead of a founder trying to “pull” requests from various, fragmented sources of capital, the founder will essentially “push” their requests and let the system sort out who is in and who is not.
6. There are a lot of seed and Series A deals happening now that aren’t even hitting the public wires. Companies with experienced founders working in competitive spaces are staying stealth (I’ll write more about why stealth mode can work, despite claims to the contrary) to avoid the noise of the market.
7. A handful of institutions are still actively investing in seed rounds. They set the price low and grab ownership and an option, and given the fragmented climate, founders can take advantage of a few bigger checks rather than going piecemeal and wasting time. Yes, signaling is an issue, but as I’ve seen with other products, if the product is good, signal or not, it will get funded.
8. The amount of cash (liquid, money) sitting on the campuses of Apple, Facebook, Google, Amazon, and others means that literally over a quarter-trillion dollars of cash can and will be used to acquire teams and technologies. This creates a massive, long-term incentive for leaders who can build teams and/or technologies to defect and go out on their own. If they’re able to secure the right investment partners and keep the valuation modest, they’re almost guaranteed a soft-yet-lucrative landing. And double the amount if you can whip together a mobile team.
9. Consumer-oriented apps face steep funding hurdles. A good team will always secure seed funding. After that, it’s all numbers and momentum. Investors have essentially given up trying to predict consumer behavior (a good thing) and focused on research, data, and ear-to-the-ground gumshoeing to figure out what the next SnapChat is, or the next Pinterest, etc. That means for consumer-oriented founders, you need something special — a team, a competitive moat, some type of technology that’s defensible — to even capture the interest of an early-stage investor. Otherwise, build and fund it on your own and hope you strike lightening.
10. Demo Day charades are grating on everyone. For founders and investors alike, the efficiency of a Demo Day (at any incubator — this statement is incubator-agnostic) feels like it has been overshadowed by the perception that these types of events are forced, staged, and kind of a meat market. It happens on both sides: Founders don’t quite appreciate that the biggest draw for investors to go to Demo Days is to bump into their peer investors and shoot the breeze, and many attending investors at Demo Days don’t quite appreciate the fact that the best founders in each batch have likely already synced up with a sophisticated investor who doesn’t bother him/herself with the noise and pomp of these events.