How Do You Raise A Little Bit of Capital – Part 2

One of the fun things about co-authoring a blog is that you get to modify / improve or even disagree with the responses of your co-author.  Jason and I have been working together since 2000 so we’ve had plenty of chances to discuss, argue, and disagree – one of the things that I love about our working relationship is that we understand how to do this in a way that makes both of us smarter.

Yesterday, Jason wrote a post that answered the question “How Do You Raise A Little Bit of Capital?”  The question was “Our company is trying to close series A funding of approx. $1M by April 30. VC’s we have spoken to say the amount is too small and to contact them at B/Mezzanine stage? What does this mean? Are there options for us?

His fundamental answer was a good one – “Your options are to seek angel funding, or find a VC that does seed deals.”  However, the lead in to the answer wasn’t as nuanced as it could have been.  Bijan Sabet – a partner at Spark – wrote a nice add on post where he explains that it’s not so much about the size of the firm, but the style of the firm.

The key nuance is an important one.  Some VCs are comfortable doing seed / early Series A deals; some aren’t.  History is a good guide here – if the partner / firm has a history of doing Series A investments under $1m, they are a good target for you.  If not, they aren’t.  When I started doing VC investments in 1996 (after a two year stint as an angel investor), a typical “VC Seed Investment” was $250k – $500k.  This was plenty of capital to fund a small team (three or four people) on low salaries to get from “idea” to “something more substantial that could justify a real venture financing.”  The mortality of these deals was pretty high – many times either the VC, the entrepreneur, or often both realized that the deal wasn’t going anywhere and it was better to spend time elsewhere.

In the 1999 – 2000 period, a “seed deal” became a $5m financing.  I know situations where a VC led a “seed round” of $20m with a $10m financing.  That’s not a seed deal – but if you are investing a $1.5b fund, it’s hard to get your mind around doing a $250k investment.  Of course – we know how that cycle ended – so it’s pretty safe to say that the strategy of “over funding seed deals” is not a particularly effective one.

Seed / early Series A investing has had a nice resurgence since 2004.  In addition to established funds (Jason mentions CRV in his post) “going back to the basics”, a number of new firms, like Bijan’s (Spark), Union Square Ventures (Fred Wilson and Brad Burnham) and the guys at True Ventures have seed investing as a key part of their strategy.

I’ve always been a active seed  investor – I’m sure some of it comes from my roots as an angel investor and some of it comes from a few of my big successes that were seed deals (I define big success as a 20x or greater return.)  I’ve also been through the “this isn’t working – let’s shut it down now” cycle on a number of seed deals.  So – I agree with the notion that Bijan adds – it’s definitely style – and seed investing is a “different sport” than Series B+ investing. 

The key – as with most fundraising – is to make sure you are targeting the correct audience.  Trying to raise $1m in a seed deal from a late stage investor is a waste of everyone’s time.