As I hinted at in my post last night, I kept a notebook section for topics I wanted to write more about. One catchall topic is labeled “Things You May Not Want To Hear.” My hope is that the following is conveyed economically and fairly. Most people won’t like it, but in the majority of cases, I believe the following maxims apply specifically to the noisy, murky, over-saturated world of the seed stage ecosystem:
Be Reference-able: Part of my job in the ecosystem now is to be one of the first investors a new or would-be founder may encounter. Of course, I have and will continue to make my own mistakes in evaluation, but in the pre-seed and seed stage, where there’s not much product or business yet, it all rests on how investors read people. Oftentimes, I’ll struggle to find out about someone’s background, their interests, education, previous jobs, etc. Why? There’s so many simple platforms now (About.me, Tumblr, to a name a few) where people can just write up a bit about themselves. Make it easy for me and others to reference check you through mutual connections, to understand how your background brings you to today. Online presence over time sort of acts as a de fact “peer review” of reputation, skill, and respect. It shouldn’t take more than a few hours of work and organization, but I’m surprised how many people make this hard. When there are lots of options out there for investors to fixate on, make it easy for them to understand who you are at a glance and double-click to go deeper if they choose to.
Write Things Down: I grew up working all sorts of service-related jobs, especially in restaurants. At the restaurant I worked at during high school, the GM was very relaxed about most things, though a few items would set him off: putting up chairs at closing time if people were still dining or finishing a meal; not paying out the bus boys (and girls) from the pooled tips from waitstaff and bartenders; and when waitstaff wouldn’t write down a guest’s dinner order only to submit an incorrect ticket to the kitchen. As a result, when someone is giving me information I requested, I write it down. It sounds old-fashioned now, but when asking people for feedback in any dimension, I’m surprised how many people don’t write these things down. Then again, I don’t get too worried about it, as a word to wise is also sufficient: Write it down.
Your Seed Extension Isn’t Impressive: Seed extensions happen much more now as angel/seed rounds are done with notes quickly and tranched. One effect of this easy money piecemeal is that when an extension is needed to bridge to even a small A, there’s a tension between what the valuation cap should be. In my opinion (and people won’t like this, but it’s what I feel), unless there are truly material upward-trajectory type advances in the business or product, the existing investors who bridge should get the same terms as the additional investment. They’re taking on more risk if progress is only incremental. For founders who want to split caps here, I encourage them to find new investors to do so. The market sorts itself out.
Introductions Are Now Mostly Commoditized and Have Cheapened In Value: Now that Twitter and Facebook have connected everyone in the startup ecosystem together, everyone knows everyone. Using a spreadsheet to assemble intros and ambassador advocates doesn’t often work because VCs are now inundated with intros from people they know. The trick is to be so compelling that someone takes the initiative to make a critical introduction for you. That can be hard to envision when you just want to meet that person, but if you break down how the VC may be parsing those signals, he/she likely wants to hear about something from many angles and get strong, forceful recommendations before engaging. Less is more here.
Optimize For Learning: We are in an age of abundant capital and greenfield opportunities in every industry across the globe. One result of this environment is people (founders and investors) have been trained to optimize for price in many transactions. I was walking with an older VC who has been very successful in his investments after an equally successful career as a technology founder and CTO. He remarked, rhetorically: “Why bother with people who are optimizing for price? I focus on people — founders and investors — who are optimizing for learning.” Wow. Noted, pinned to my wall. Thank you. What a great, clarifying statement.
Forcing Functions and Liar’s Poker: Any investor at any stage always has more good, viable opportunities to evaluate than they have time or mental bandwidth for. As a result, they tend to focus on ones where there’s deep conviction, proprietary knowledge, or…wait for it…a ticking time clock. Ah, the elusive forcing function. It’s a game mechanic, and if employed skillfully, a founder with real options can use time and pressure to his/her advantage and get things moving. Of course, many people are aware of this dynamic, so they try to engineer it out of thin air versus credibly building a case. Having now seen this a few times up close, it has backfired each time. Why? Because while investors may not know the ins and outs of the business they’re evaluating, they sure as hell know how to verify social information within their social networks. And, once they hear the same morsels from other investors they’ve collaborated with or co-invested with for years, this confirms their instincts, and game over. Play poker, yes, but don’t lie about the forcing function.
Seed Hubris, Institutional Realities: I like to say that in today’s environment, founders get to set terms in the seed, but VCs still (for the most part) set terms for the A. However, the huge supply of seed capital and the pace and girth of seed rounds and prices today seem to (generally speaking) empower folks who are raising money that things are all rosy. When you can set terms in your pre-seed, your seed, and your extension, and get the prices all the way from $6 to $12 to $30m on notes (I use these numbers because I’ve seen it happen up close — twice!), one can start to think fundraising is just a Mad Libs game with Monopoly money. The harsher truth is that this behavior is hard to course correct because it can be (understandably) intoxicating, but despite what you read in the news and on Twitter, while VC as a whole is undergoing changes, the best VC firms (and there are more than just 5-8 great, great VC firms) still have incredible leverage in most situations. So, I say, enjoy the bounty of seed, for it is a fine, fine ride, but then buck up and prepare for the visors, bean counters, and very smart, experienced, and networked big VCs to call those bluffs.