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

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

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.

Wish there was a way to solve this problem.

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?

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.

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?

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.

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.

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.

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.

So who fills the financial gap between idea and first customer? Some people can bootstrap that, but not many. If you've got a complex/big product idea, you're sunk (not everything can get to v1 in a month or two). More importantly, who fills the gap betwen first customer and substantive revenue? 37s (with a hugely popular blog and smash-hit-noteriety of Rails) took 12 months before they punted their (established/successful) consulting business to focus on their product. Said a different way– they needed 12 months of growth to get to/near breakeven EVEN WITH THE HUGE FOLLOWING THE HAD.

Bootstrapping a services business is pretty easy. Bootstrapping a product business is really hard unless you support it with an existing consulting business. Quitting your job and trying to bootstrap BOTH (start a solo consulting practice that's going to support product efforts) is nigh impossible. It's do-able, but I'd rather sell a small slice of my company to get the ability to focus.

One thing folks don't talk much about is that EIR programs can sometimes run the same risk, although not quite as much.

Would you please explain the difference? Isn't one always giving a VC such an option when taking money from them? Is it a matter of the degree of commitment? i.e. with seed they can put a little money in for 6 months and not do very much, just to wait and see, whereas with “real” money they're actually in the game now and behave accordingly?

http://www.sequoiacap.com/ideas

But like you said in your earlier post, as the problems in this model become “conventional wisdom” for entrepreneurs, VCs will start seeing less quality deal flow from these programs as smart entrepreneurs turn away.

A better model would be to build relationships with entrepreneurs more organically and provide advice without seed funding in a less formal way. That way VCs still get exposed to good companies and can gauge the quality of the team without the risk of sending a negative signal by not choosing to invest.

# the bootstrapped company starts off thinking: we need to make money.
# the funded company starts of thinking: we need to spend money. these investors have given us x million dollars—we should spend it!
# the funded company detracts away from doing final execution of the product and making revenues.
# start as early as you can. you don’t become fantastic at piano by starting at 20 or 25. you do become fantastic at piano if you started at age 5.
# price forces you to be good and better than the rest. the pressure of price is very, very good.
# pricing your product will give an avenue for the people buying your software to give you feedback on it.
# if a product is free, you don’t get that feedback.
# if a product is free, it’s just “good enough.” people will take it and say it’s just “good enough” to use for free.
# the most intimate transaction between people: money. I’m giving you this money earned by hard work because you offer something that I want.
# funding is like crack. it’s an addiction with names like Series C. Don’t keep going back for more and more funding; it’ll make your addiction worse.
# planning is GUESSING. figure out stuff as you go, because you never really know. plan some, but improvise a lot.
# I promise you’ll still be using post-it notes in 20 years. Usefulness trumps innovativeness; usefulness stays while coolness deteriorates over time.
# all the art in the world in one room won’t make a museum. the fact that it rejects 99% of art makes it a museum. apply this to software features.
# 37signals’ byproducts include Getting Real, the job board, and more. they have generated 37signals more than $1M in revenue. the job board itself has made $1.5 million.
# “we apologize for any inconvenience we may have caused you” is the worst way to say “I’m sorry”
# the best are everywhere, even outside Silicon Valley, don’t think you HAVE to be here. 37signals is based in Chicago.
# sorry, failure is not a rite of passage. you don’t have to fail. failing once doesn’t prevent another. Fried thinks the idea of “you have to fail once” and having to “learn about failure” is ridiculous.
# learning a lesson from failure is learning what not to do. learning what to do is a lot better than learning what not to do.
# other peoples’ failures are other peoples’ failures. don’t worry about them.
# anyone know how to sell things for free? you can’t. you can only sell things for money.

As an active participant in this world, I would say it is definitely a case of causation.