Five years ago, I noticed a growing gap between angel and venture investing. Venture was getting bigger and writing bigger checks, while angel checks were getting smaller and their process was becoming more cumbersome. Since it had also become exponentially easier to launch a web, and later mobile business, entrepreneurs had ideas that needed a million dollars or less to launch, but no clear path to funding. This gap which I and a few other early adopters wanted to fill is now called “seed investing.”
Nature abhors a void, of course, and the void has long since been filled to overflowing. One hears numbers quoted from 1,900 to 19,000 startups being seeded a year. Angels, super angels, celebrity investors, institutional seed funds, and more recently top-tier venture firms got in the game.
Venture entered seed for two reasons: deal flow and pricing. The best seed investors favor the fingerful of firms they already have strong relationships with, and no one else gets to see the best deals. Seed investors have also grown in size, and some, like traditional venture firms, are doubling down on their winners, which means more time for the companies to grow and higher valuations when the venture round comes.
So venture got into seed, and started throwing financial darts. Funds either assigned a partner or two to the project, or authorized partners to make small investments on their own, or with one other partner’s vote.
They thought their seed stake would buy access to the Series A and they’d be there early, but it often hasn’t. Successful entrepreneurs don’t remember the financial dart; they remember that time and value delivered. Like so much in life, it’s what have you done for me lately?
Time is hard to come by for senior venture folk. They serve on a litany of boards and work on new deals 10 to 100 times larger than the seed deal they did in a moment of passion. They just can’t justify meaningful amounts of time, beyond being responsive to e-mails and an occasional meeting, if asked.
Seed deals are prolific, interesting and early, but well over 90 percent of them never mature into Series A-level companies. The numbers just don’t add up for partner time.
Entrepreneurs don’t think that way, and those that make it, the prettiest girls at the ball that everyone wants to dance with, remember how their suitors treated them after their first date so long ago. If they never called, then the new guy with sweet nothings and promises of fidelity and “added value” will likely win her hand.
In parallel, many of those other startups who had venture one-night stands so long ago in the form of a small check, and who didn’t quite get there, assume the venture firm may still step up at the altar, but there are no shotgun weddings in venture.
So the hoped-for optionality that firms sought isn’t assured, and the specter of girlfriends past is a reputational risk. What’s a VC to do? The same thing they did before: focus on the Series A when the time comes, compete on being the best board member and company builder. Stay focused on what they’re expert in, and stay friends with the folks who focus on seed.
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