Understand seed round dynamics in Silicon Valley(thevalley.substack.com)
thevalley.substack.com
Understand seed round dynamics in Silicon Valley
https://thevalley.substack.com/p/understand-seed-rounds-dynamics-in
39 comments
Yes. I'd go further to say that mathematical returns (IRR) are a small part of why angels invest.
The author is both a former entrepreneur (Sysdig) and a current investor, but I agree with you that the viewpoint is more investor-centric.
Your suggestions are interesting, but I'd rather focus on the real customer, and have the numbers speak for themselves, rather than simply perfecting the art of raising money.
I've founded startups in the past, raised money, and also invested both as angel investor and as a founding member of a micro-VC fund (and currently operating partner at a large VC fund, but not too relevant here).
In my personal experience, building a strong company most often trumps a founder's ability to play smoke and mirrors in front of an investor.
Your suggestions are interesting, but I'd rather focus on the real customer, and have the numbers speak for themselves, rather than simply perfecting the art of raising money.
I've founded startups in the past, raised money, and also invested both as angel investor and as a founding member of a micro-VC fund (and currently operating partner at a large VC fund, but not too relevant here).
In my personal experience, building a strong company most often trumps a founder's ability to play smoke and mirrors in front of an investor.
Here to second this. I’m by no means a heavily experienced VC but I’ve made about a dozen seed stage investments. And would have been pitched to hundreds of times.
The founders that over index on what they think an investor wants to hear almost without lose me within the first minute. I’m not buying your 5yr projections. It’s not believable that you’re literally the only other company in the top corner of a competitive quadrant. Try and pitch me about the tax efficiency of my potential investment and we’re done. Sometimes a founder forces a deep dive and what typically surfaces is they have a pretty superficial understanding on most of this stuff and we end up a multitude of holes or inconsistencies in what got pitched. It’s not their fault, they’ve only learnt enough of this stuff for the sake of fundraising because that’s what someone somewhere told them they had to do. A meeting that ends with the overwhelming sense you didn’t know your stuff isn’t going to end with an investment.
Contrast that to the founders I’ve invested in. One I contacted originally because I was building a competitive product. A few referrals from people I know with “they could use a little help, would you mind having a chat and giving them some advice?”. More than one of those I thought was not a particularly viable idea and planned to help the founder map a path to working that out themselves as quickly as possible. Instead I walked away from all of those conversations feeling like a knee nothing. That I’d just been gifted a brain dump from one of the most insightful people I’d come across. And that they’d introduced me to a whole exciting new area of potential I’d been completely oblivious to only an hour earlier.
I definitely want to hear a different story to what you’d represent to a customer. I think people would be more successful if they gave me the version they’d give their first dozen employees and not the one they think investors want to hear.
The founders that over index on what they think an investor wants to hear almost without lose me within the first minute. I’m not buying your 5yr projections. It’s not believable that you’re literally the only other company in the top corner of a competitive quadrant. Try and pitch me about the tax efficiency of my potential investment and we’re done. Sometimes a founder forces a deep dive and what typically surfaces is they have a pretty superficial understanding on most of this stuff and we end up a multitude of holes or inconsistencies in what got pitched. It’s not their fault, they’ve only learnt enough of this stuff for the sake of fundraising because that’s what someone somewhere told them they had to do. A meeting that ends with the overwhelming sense you didn’t know your stuff isn’t going to end with an investment.
Contrast that to the founders I’ve invested in. One I contacted originally because I was building a competitive product. A few referrals from people I know with “they could use a little help, would you mind having a chat and giving them some advice?”. More than one of those I thought was not a particularly viable idea and planned to help the founder map a path to working that out themselves as quickly as possible. Instead I walked away from all of those conversations feeling like a knee nothing. That I’d just been gifted a brain dump from one of the most insightful people I’d come across. And that they’d introduced me to a whole exciting new area of potential I’d been completely oblivious to only an hour earlier.
I definitely want to hear a different story to what you’d represent to a customer. I think people would be more successful if they gave me the version they’d give their first dozen employees and not the one they think investors want to hear.
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Most funded startups don't end in a strong company, but all (by definition) are successful at persuading someone to write a check. The rational thing to do if you want the investment is to optimize for the storytelling, which is a factor of 10x or more more effective than the notional business.
This is only true of getting the investment is your terminal goal. If it’s just a proximate goal on the way to actually building a successful company, getting stinking rich or many other things that’s not true. If the investment is an end you’re right. If it’s a means to an end...
> optimize for the storytelling
What has been your experience using this strategy? Is there anything in particular that makes you say that?
What has been your experience using this strategy? Is there anything in particular that makes you say that?
>In my personal experience, building a strong company most often trumps a founder's ability to play smoke and mirrors in front of an investor.
Building a strong company also requires a different set of skills and much more work. Not everybody has those skills, or would want to develop them if their goals can be achieved by hacking the system.
Looking at cases like Theranos and WeWork, there's definitely something wrong with the game itself. The fake it-till-you-make-it culture is a little too prevalent to dismiss.
Building a strong company also requires a different set of skills and much more work. Not everybody has those skills, or would want to develop them if their goals can be achieved by hacking the system.
Looking at cases like Theranos and WeWork, there's definitely something wrong with the game itself. The fake it-till-you-make-it culture is a little too prevalent to dismiss.
This is a good articulation of the modern view of SV captial, but it is somewhat problematic.
In a nutshell, 'Round A' is now a form of scaling money. Early, but essentially: you need to build a product that the market really loves, before you get any substantial money.
It would seem that VC is really de-risked themselves, obviously to their advantage. This is somewhat the natural equilibrium in a world where it's easy to start some kind of companies with little effort.
However, there are always going to be a lot of initiatives that require some capital to make it work. This is of course, very dangerous territory for VC to play in (i.e. before Product-Market-Fit) but then, they do have 'Venture' in their titles.
It's to the point wherein we could start to consider Round B and later firms merely a slightly different form of Private Equity.
Is anything really that important going to be 'productised' for $500K-1M i.e. on seed money?
And really, it's interesting in that, if a company does actually have good product market fit ... traditional VC terms might seem a little expensive.
In a nutshell, 'Round A' is now a form of scaling money. Early, but essentially: you need to build a product that the market really loves, before you get any substantial money.
It would seem that VC is really de-risked themselves, obviously to their advantage. This is somewhat the natural equilibrium in a world where it's easy to start some kind of companies with little effort.
However, there are always going to be a lot of initiatives that require some capital to make it work. This is of course, very dangerous territory for VC to play in (i.e. before Product-Market-Fit) but then, they do have 'Venture' in their titles.
It's to the point wherein we could start to consider Round B and later firms merely a slightly different form of Private Equity.
Is anything really that important going to be 'productised' for $500K-1M i.e. on seed money?
And really, it's interesting in that, if a company does actually have good product market fit ... traditional VC terms might seem a little expensive.
That doesnt jive with the string of spectacular silicon valley blowups recently. Hype seems to be just as good a substitute as product market fit. And it seems that derisking unit economics to show you can be profitable doesnt matter at this point if you've got a bunch of "growth"
For example?
Having massive customer traction and 'blow up growth' is a valid form of customer interest, what matters is the post-blow up economices.
Uber, WeWork etc. will all make money for investors in the long run.
The concern is that there is zero real R&D or product development spending.
Having massive customer traction and 'blow up growth' is a valid form of customer interest, what matters is the post-blow up economices.
Uber, WeWork etc. will all make money for investors in the long run.
The concern is that there is zero real R&D or product development spending.
I don't think it is that hard to get traction (even massive traction) if you are giving more value than what you are charging.
I work in early stage product startups.
What R&D do you need? CRUD is solved, hosting is solved, UX is solved, scaling is solved, marketing is solved ...
Everything to do with web and mobile is very solved at this point. Most problems come from tripping over ourselves and cobbling things together to fit new domains.
All real hard R&D happens inside faang these days. At least for web/mobile consumer stuff.
What R&D do you need? CRUD is solved, hosting is solved, UX is solved, scaling is solved, marketing is solved ...
Everything to do with web and mobile is very solved at this point. Most problems come from tripping over ourselves and cobbling things together to fit new domains.
All real hard R&D happens inside faang these days. At least for web/mobile consumer stuff.
Okay, so that's not all startups, as it turns out. Some of us are actually solving hard technical problems -- the FAANGs aren't actually solving all problems. Yes, it's different to raise a hard-tech seed, but let us please not pretend that just because you yourself don't do it, that those of us who do don't exist...
You exist and you’re hard to find among a sea of “Take existing tech, apply to new business domain” product startups.
Ergo what GP said
> The concern is that there is zero real R&D or product development spending.
PS if your R&D is in AI that does not fall under my original comment on “web/mobile stuff”
Ergo what GP said
> The concern is that there is zero real R&D or product development spending.
PS if your R&D is in AI that does not fall under my original comment on “web/mobile stuff”
Fair enough -- I'm probably still a bit prickly from raising a hard-tech seed! (For which, if it needs to be said, most of the dynamics described in the article do not apply...)
"Everything to do with web and mobile is very solved at this point."
"640K ought to be enough for anybody." - Bill Gates 1981 (or supposedly.
So there is a long way to go in all of these areas, and there is even a longer way to go in adjacent areas, and we're not even touching all the other things startups can do - you know - the other 95% of the economy?
Healthcare, biotech, materials, energy, construction, auto, food services. You know 'everything that's not your iPhone'.
If VC were structured differently I think we'd have a solution to hair loss and possibly sagging skin by now. Those two markets are worth 2x Google and Apple put together. People will pay for their 'youth' before they give 2 cents for a mobile phone. As the tip of the iceberg.
"640K ought to be enough for anybody." - Bill Gates 1981 (or supposedly.
So there is a long way to go in all of these areas, and there is even a longer way to go in adjacent areas, and we're not even touching all the other things startups can do - you know - the other 95% of the economy?
Healthcare, biotech, materials, energy, construction, auto, food services. You know 'everything that's not your iPhone'.
If VC were structured differently I think we'd have a solution to hair loss and possibly sagging skin by now. Those two markets are worth 2x Google and Apple put together. People will pay for their 'youth' before they give 2 cents for a mobile phone. As the tip of the iceberg.
Hair loss is on the precipice of being effectively solved (infinite transplants via stem cells) and the price will likely go down over the next 5 to 10 years as the technology to produce hair follicles and perform robotic transplantations matures.
Skin is also a largely solved problem: use moisturizer/sunscreen/Vitamin C/Retin A, avoid the sun as much as possible, wear sunglasses, drink lots of water, eat healthy + high antioxidants, sleep well, get minor amounts of Botox occasionally for some parts of the face, microneedling occasionally, maybe a face lift (these days a more or less perfected procedure with low risk) somewhere in your 40s/50s. That plan will basically take you into your 60s looking really good. Even if you can't stick to that plan, the various restorative dermatological options will still give you a fantastic result. But most people are some combination of too apathetic, too lazy, too financially-constrained, or too afraid of more invasive techniques.
Skin is also a largely solved problem: use moisturizer/sunscreen/Vitamin C/Retin A, avoid the sun as much as possible, wear sunglasses, drink lots of water, eat healthy + high antioxidants, sleep well, get minor amounts of Botox occasionally for some parts of the face, microneedling occasionally, maybe a face lift (these days a more or less perfected procedure with low risk) somewhere in your 40s/50s. That plan will basically take you into your 60s looking really good. Even if you can't stick to that plan, the various restorative dermatological options will still give you a fantastic result. But most people are some combination of too apathetic, too lazy, too financially-constrained, or too afraid of more invasive techniques.
"Hair loss is on the precipice of being effectively solved "
They have been saying this for 50 years. Even the technology we use today is sketchy.
"Skin is also a largely solved problem: "
This is ridiculously false.
>70% of women do many or most of those things, and they still mostly look their age. Those things help, but very mildly. There are no 55 year old women who look 30 without airbrushing + tons of makeup + facelifts.
And 80 year old women mostly look 80.
The amount of money and effort, especially women spend on this is breathtaking, considering that most of it doesn't work better than the cheaper products.
If there was something that would make 50 year olds actually look 30 it would be would have 'infinity' market value.
They have been saying this for 50 years. Even the technology we use today is sketchy.
"Skin is also a largely solved problem: "
This is ridiculously false.
>70% of women do many or most of those things, and they still mostly look their age. Those things help, but very mildly. There are no 55 year old women who look 30 without airbrushing + tons of makeup + facelifts.
And 80 year old women mostly look 80.
The amount of money and effort, especially women spend on this is breathtaking, considering that most of it doesn't work better than the cheaper products.
If there was something that would make 50 year olds actually look 30 it would be would have 'infinity' market value.
You're well behind the cutting edge of hair loss science [1]. It's quite clear from your comment that you haven't read anything about the most recent developments.
If you want a good example of what's now possible with anti-aging, look at Tom Ford. He's 58 and could easily pass for a 30 year old. The techniques he's using to look that way will be further refined and become more widely accessible (economically) over the next 10-20 years.
You really have no idea what you're talking about and you're clearly not someone who's actually read any related research or studied these subjects in any kind of depth. The irony is that you first pointed out the tremendous economic incentive to solve hair and skin degradation and then engaged in incoherent contortions in order to argue that these problems have somehow magically remained unperturbed by profit-maximizing agents. A mind-boggling cognitive dissonance.
[1] https://www.theatlantic.com/health/archive/2019/07/hair-for-...
If you want a good example of what's now possible with anti-aging, look at Tom Ford. He's 58 and could easily pass for a 30 year old. The techniques he's using to look that way will be further refined and become more widely accessible (economically) over the next 10-20 years.
You really have no idea what you're talking about and you're clearly not someone who's actually read any related research or studied these subjects in any kind of depth. The irony is that you first pointed out the tremendous economic incentive to solve hair and skin degradation and then engaged in incoherent contortions in order to argue that these problems have somehow magically remained unperturbed by profit-maximizing agents. A mind-boggling cognitive dissonance.
[1] https://www.theatlantic.com/health/archive/2019/07/hair-for-...
This is why I don't consider most CRUD/mobile/web app companies to be "tech companies". If there's no R&D, you're not producing technology.
>What R&D do you need? CRUD is solved, hosting is solved, UX is solved, scaling is solved, marketing is solved ...
If you don't need R&D, doesn't that mean your competitor also doesn't need R&D? Where's the moat?
If you don't need R&D, doesn't that mean your competitor also doesn't need R&D? Where's the moat?
There are many moats to businesses, often they are not dervied from tech. Most monopolies are operationally incumbent. Amazon (just the retail part) doesn't have any truly special tech, but reams of know how and operational competence with scale.
Moat is having unique insight into the problem/domain.
No moat anymore in terms of “We can build a webapp faster than you can”
No moat anymore in terms of “We can build a webapp faster than you can”
“Ten years ago, the Seed round was a single event, and companies ended up raising a few hundred thousand dollars from angel investors”
Well.. 10 years ago there was no “seed” rounds. Airbnb raised a $600k series A right before demo day in ‘09. That round got rebranded as a seed round later.
Well.. 10 years ago there was no “seed” rounds. Airbnb raised a $600k series A right before demo day in ‘09. That round got rebranded as a seed round later.
Nobody involved in venture capital has incentive to tell the truth.
In a clear majority of cases, a startup closing its doors after two years is not considered a failure by the VC fund. The startup successfully spent the money the VC firm was contractually obligated to invest, may have employed the VC's choices of officers for a significant period (providing them income and experience), maybe purchased a great deal of tech from suppliers the VC officers are themselves invested in, and may have left valuable assets that could be snapped up at auction.
The biggest problem a VC firm has is the five billion dollars of others' money they have to "place" in only 30/60/90 days. What happens after placement is much less their problem. They know most of their placements will be duds, but they and the actual investors knew that up front. Once the money is "placed", though, much of it can be siphoned off for the benefit of the VCs' cronies or one or other non-dud. Maybe, after collapse, a non-dud or non-startup can buy up assets of a dud for pennies on the dollar, and extract something usable, like patents or equipment. Sure, the investor lost that money, but somebody got it, and somebody ended up with what the money bought. Just not, often, the founders.
None of this is good for most people who do a startup, unless they happen to be chosen as a non-dud. The chosen duds are valuable for money laundering, which few startup principals really meant to sign up to be. Although some did.
In a clear majority of cases, a startup closing its doors after two years is not considered a failure by the VC fund. The startup successfully spent the money the VC firm was contractually obligated to invest, may have employed the VC's choices of officers for a significant period (providing them income and experience), maybe purchased a great deal of tech from suppliers the VC officers are themselves invested in, and may have left valuable assets that could be snapped up at auction.
The biggest problem a VC firm has is the five billion dollars of others' money they have to "place" in only 30/60/90 days. What happens after placement is much less their problem. They know most of their placements will be duds, but they and the actual investors knew that up front. Once the money is "placed", though, much of it can be siphoned off for the benefit of the VCs' cronies or one or other non-dud. Maybe, after collapse, a non-dud or non-startup can buy up assets of a dud for pennies on the dollar, and extract something usable, like patents or equipment. Sure, the investor lost that money, but somebody got it, and somebody ended up with what the money bought. Just not, often, the founders.
None of this is good for most people who do a startup, unless they happen to be chosen as a non-dud. The chosen duds are valuable for money laundering, which few startup principals really meant to sign up to be. Although some did.
The thing that confuses me is, how can you have great metrics (needed for Seed rounds) without already having product market fit? If you have great metrics, then are you not already a scaleup just waiting for some money to do the scaling? Then you don't need to experiment anymore because you already know what makes your metrics work?
The dynamic is very simple. It's called plutocracy, and it's as old as the Roman Empire. If you're my friend or I know you, you get funding, your business model or your metrics are not relevant. That's the excuse to exclude the other 99% and in this case you and your project.
I stopped reading at the first use of emojis. It may be harsh, but I am not a 3-year-old. I don’t need a picture book, so I am clearly not the target audience.
Why do you feel that characters that together compose words are adult, while characters that form an image conveying human emotion are not?
Is a laughing emoji not the most efficient way to convey that you're joking or think something is funny?
Is a laughing emoji not the most efficient way to convey that you're joking or think something is funny?
Agreed. There are in fact many languages (e.g. Mandarin and Japanese) that use symbols, in their written form, to represent concepts instead of letters, and some of those symbols were originally pictures, just like emojis.
The cool thing about emojis is that not only they can represent whole concepts in one character, but a lot of them are almost universal across languages and cultures. Pretty much anyone in the world understands an emoji of a laughing face.
The cool thing about emojis is that not only they can represent whole concepts in one character, but a lot of them are almost universal across languages and cultures. Pretty much anyone in the world understands an emoji of a laughing face.
Some sitcoms use laugh/fake audience tracks, and some people hate those too.
I think parent should have used 'formal', as there are still different writing styles. Formal, business, intimate, friend, etc.
Many do find emoticons inappropriate in some formats...
I think parent should have used 'formal', as there are still different writing styles. Formal, business, intimate, friend, etc.
Many do find emoticons inappropriate in some formats...
Emojis have their place, but this article uses just literal emojis right next to the actual word they represent. It's pretty much the most pointless use of emojis that I have ever seen.
For me personally there is something about letting words conjure an image in my head instead of relying on pictures. A good joke is funnier without a laughing emoji. And what's the point of emoji's in "but this journey is a marathon ️, not a sprint ️" sentence for example. For one, marathons are still run just slower.
I suppose because the author used both the word running and the emoji, the implications is that I need the emoji to understand the text.
I agree that emojis which express emotion not conveyed in text are useful. ;-)
I agree that emojis which express emotion not conveyed in text are useful. ;-)
You are selling a product to a single customer (or small group of them). That product is an investor story that can sell for hundreds of thousands or even millions of dollars if you tell it ably enough, so it's worth putting in the time in to tell it well.
If necessary, you can even write a little toy website, and entice people to sign up for it, in the service of that story. If you can get yourself to believe in the story, you will be all the more persuasive in convincing that key customer.
But never forget that your primary focus is that customer—your investor. Learn their interests, learn to speak their language (perhaps by reading posts like the parent), learn how to flatter their sense of self until they feel like a genius visionary for finding you.
Startup investing is a luxury lifestyle product for the very rich. The art of selling that product well is pretending that the transaction is something different than what it is.