5 ms·

Yes, all nice data, but $400,000 is, sorry 'bout that, no matter what it's called, is not appropriately called a seed round. Let me guess: The usual criteria

by graycat 10y ago

Yes, all nice data, but $400,000 is, sorry 'bout that, no matter what it's called, is not appropriately called a seed round. Let me guess: The usual criteria are all the first technical work done, traction significant, and traction growing rapidly. That's not planting or watering seeds; instead, that's a sapling or small tree. Indeed, for a Web site, costs can be so low that by the time there is significant traction, there is plenty of ad revenue for rapid organic growth and no equity investment needed. A useful seed round could be $50,000 or even $20,000 except for the legal and BoD expenses!

inputcoffee 10y ago
What valuation (or cap) would you put on that seed?
- johan_larson 10y ago
  The distinction I would like to make is whether the money comes from professional investors or amateurs. Money from friends, family, and whatnot: seed. Money from pros: A round. But that doesn't really square with how others use the words.
- graycat 10y ago
  To give a meaningful answer, I'd need a more detailed question.
  - inputcoffee 10y ago
    I guess I am curious about what range of equity one might feel comfortable asking for a $20k-$50k check.
    - graycat 10y ago
      The equity investor will likely want at least 10% of the company. So the $50,000 check would be for a company with a post money (after the check is cashed) evaluation of $500,000. If the company really looks like it has a much better than average shot at $500 million, then it's an even bet if the company has only 1 chance in 1000 and a money maker if a better chance than that. But that little bit of arithmetic is well beyond nearly all equity investors.
swampthing 10y ago
Does it really matter what it's called if everyone knows what it means? And what BoD expenses are you talking about?
- graycat 10y ago
  A BoD usually means a Delaware C corporation, and that usually has some lawyer expenses. May have some founder employee agreements for some more lawyer expenses. And there may be insurance for the board members, e.g., as at https://en.wikipedia.org/wiki/Directors_and_officers_liability_insurance https://en.wikipedia.org/wiki/Directors_and_officers_liabili... But really what I meant was that, when there is a BoD meeting, say, monthly or quarterly, the members need funds for travel, food, and lodging, and usually the company pays for those. Just one BoD member flying first class and staying at a high end hotel once a month could eat into a $20,000 seed round in a hurry. Or, one or a few co-founders, living cheaply, on their own savings, each with a $1000 computer, typing in software can be cheap and where a seed round of $20,000 to $40,000 can do well for Internet fees, publicity, maybe cloud fees. That's what I had in mind.
  - icedchai 10y ago
    For amounts that low, you're having meetings online, period. Nobody is flying out to check on their 20k seed investment. It's not even worth their time.
    - graycat 10y ago
      Moreover, they are not going to invest in a $20,000 seed round. They will say that it won't "move the needle". Well, for their 2 and 20, they are correct. For exit value, they can be wildly wrong.
ccvannorman 10y ago
The terminology has been butchered, not least because of VCs wanting to get into earlier stage and changing how they deal with companies. I've heard pre-seed as well, but realistically if you don't have significant progress, the days of paper-napkin idea => investment are pretty much over AFAIK.
- graycat 10y ago
  IMHO, for professional investors, the "significant progress* is judged by traction as I described. Then, for a Web site startup, traction means users and ad revenue, and quickly a sole founder is nicely profitable with cash enough for organic growth and no equity funding needed.
icedchai 10y ago
400k will barely get you 3 people for a year (in the US.) You'll have trouble finding anyone for under 100k in this market. For those small seed rounds you describe, you're better off self funding and saving up the money yourself.
- johan_larson 10y ago
  Traditionally, wasn't the seed round used to keep the founders going during the early months and years? 400k will last a group of founders for years if they are willing to live cheaply. Of course things change once you need to hire outsiders. But that's what the A round is for.
- graycat 10y ago
  Right. I was assuming a sole founder and not hiring anyone. Or some dedicated co-founders doing what you suggested.
Denzel 10y ago
Thank you, I couldn't agree more. Now we just need to get these people to stop calling themselves venture capitalists, and start using the correct term: growth capitalists. When your first criteria is literally a derisked company, i.e., a company needs traction, you're no longer looking to invest in new ventures; you're looking to grow an established business.
- graycat 10y ago
  Right. My guess is that the tune is called by the limited partners who are much more comfortable investing in growth capital.
ryanwaggoner 10y ago
Ad revenue is probably the worst way to try and fund a startup. The economics of ads are horrible unless you can get many millions of visitors reliably, which only works for a small sliver of startups. The rest pin their hopes on ad revenue without doing the math, look at the revenue numbers with horror, wreck their product with more and more ads, then quietly fold. Now, if you mean that the actual costs to keeping up a website can be covered by ads, then yeah, I guess. But founders have to pay rent and eat, so you're now doing this nights and weekends, and the economics of ad revenue are still the same, except now you can't focus on it much so it takes even longer. And calling a startup profitable without accounting for the cost of founder time is really misleading. Other than passion-fuels content creators, which are their own category, my observation is that there are very few ad-revenue-driven startups out there that have raised under six figures and reached any kind of success. Conclusion: raise a very small round or bootstrap, do the work yourself, and charge actual money for your product. Forget ads. Once truly profitable, raise money if terms make sense.
- graycat 10y ago
  I can easily understand that a lot of Web site startups fail. Nearly every effort at powered human flight failed until the Wright brothers did some good engineering. Actually, in practice, the probability of success means next to nothing, even if it is tiny. Instead, what does matter is the conditional probability of success given additional information. A great example is the probability of an airplane surviving after flying over Baghdad early in Gulf War I. The probability was low. But the conditional probability given the engineering of the Lockheed F-117 stealth bomber was quite high, and, indeed, the F-117s did nearly all the early bombing of Baghdad and never got even a scratch. I've carefully planned my startup. On ad revenue, the Mary Meeker reports from Silicon Valley venture capital firm KPCB have long claimed that for ads on Web sites (not merely for mobile devices), can expect revenue of about $2 per 1000 ads displayed. Sure, may get paid by the click, but can still get an average of $2 per 1000 displayed. Each of my Web pages is just 800 pixels wide with everything positioned to the last pixel with tables. The pages are all just dirt simple; the fonts are large; the contrast is high. There are no icons, rollovers, pull-downs, pop-ups, or overlays. The HTML and CSS are dirt simple and need only a standard Web browser up to date as of about 10, maybe 15, years ago. There is nearly no use of JavaScript, and the pages load nearly instantly and never jump around. There are both horizontal and vertical scroll bars, and the pages are still usable in a window as narrow as 300 pixels. So, the pages should be fine on any client device from a high end workstation to the cheapest smartphone. The UI/UX is simple and intuitive, and a child in, say, rural Thailand who knows no English should be able to figure out how to use the English language version of the site from about 15 minutes of experimentation or about 3 minutes of instruction. The Internet data rate a user needs is usually meager. For the ads, there is a banner at the top of the page in the standard size of 728 pixels wide and 90 pixels high. Down the right side of the page are some ads, at least four, sometimes more, say, an average of five, in the standard size of 300 pixels wide and 250 pixels high. The site is intended to be of high interest to everyone on the Internet -- children, adults, in the US, and around the world. The results are all not just safe for work but just squeaky clean, proper, uplifting, educational, informative, artistic, engaging, entertaining, especially entertaining, etc. The site should be especially popular with relatively good user demographics. E.g., the NYC MOMA crowd will love it! But so will the girlfriend of Joe Sixpack. So, let's see, assume: Get, on average 24 by 7, one user a second and a peak of about twice that. Due to the UI/UX, each user sees on average 10 Web pages (it's an interactive UI/UX, fun, awash in variety, something like an adventure, for some users addictive). Uh, there's no login and no use of cookies, and the site still works fine with JavaScript disabled in the user's browser. The site is one of the best on user privacy: After a user's session state times out, nothing is kept on the user. No background data is used on a user. Still from the UI/UX, there is some good data for ad targeting; I have the math worked out but have not written the code yet; I don't intend that ad targeting yet. People will want to come back for more and also tell their friends and send results to their friends -- right, virality. Each page contains one banner ad and on average five of the other ads for an average of six ads per page (the banner ads may yield more revenue per 1000, but I am neglecting that). So, for assumptions, we're talking on average one user a second; each user sees 10 Web pages; each Web page has six ads; and the revenue is $2 per 1000 ads displayed. So, in one month the revenue would be 1 * 3600 * 24 * 30 * 10 * 6 * 2 / 1000 = 311,040 dollars. With my software timings, one good server computer for $1000 (I just did some careful shopping) say, AMD FX-8350 with eight cores at 4.0 GHz and 32 GB of ECC main memory, on average half busy 24 by 7, could send the average of 10 Web pages a second. For the Internet upload data rate, each Web page sends for about 400,000 bits (the ad networks send the ads; my server merely sends the URLs of the ads at the ad servers). So, for a peak of, say, twice the average, that would be a peak data rate of 8 Mbps, now trivial for an Internet connection, say, just from next to my left knee, over coaxial cable, where the big deal is just a little extra for a static IP address, which my ISP is happy with -- they do encourage their customers to run Web servers. So, maybe I'm off by a factor or 2, 4, 5 or so in places. E.g., maybe I'll need more than one server: So, as the usage and, thus, revenue from one server starts to grow to put too much load on my first server, then, quickly, in, say, a week, there will be enough revenue for a second server, then 10 servers, etc. However fast the usage grows, if the usage does grow, it will throw off plenty of revenue for more servers. Sure, the main issue is just, will the users come. I'm betting they will. For supporting me and my kitty cat, say, food, clothing, shelter, etc., I should be able to get that out of the $311,040 a month or early on the $200,000, $100,000, $50,000, $20,000 a month. And with traction enough to interest equity investors, I will be nicely profitable in every sense with plenty of retained earnings for capacity growth, a new Corvette, etc. So, net, I see no possibility of equity funding -- by the time the equity guys are ready to write me a check will be too late for me to accept it.

by graycat 10y ago

inputcoffee 10y ago

What valuation (or cap) would you put on that seed?

johan_larson 10y ago
The distinction I would like to make is whether the money comes from professional investors or amateurs. Money from friends, family, and whatnot: seed. Money from pros: A round. But that doesn't really square with how others use the words.
graycat 10y ago
To give a meaningful answer, I'd need a more detailed question.
- inputcoffee 10y ago
  I guess I am curious about what range of equity one might feel comfortable asking for a $20k-$50k check.
  - graycat 10y ago
    The equity investor will likely want at least 10% of the company. So the $50,000 check would be for a company with a post money (after the check is cashed) evaluation of $500,000. If the company really looks like it has a much better than average shot at $500 million, then it's an even bet if the company has only 1 chance in 1000 and a money maker if a better chance than that. But that little bit of arithmetic is well beyond nearly all equity investors.

swampthing 10y ago

Does it really matter what it's called if everyone knows what it means? And what BoD expenses are you talking about?

graycat 10y ago
A BoD usually means a Delaware C corporation, and that usually has some lawyer expenses. May have some founder employee agreements for some more lawyer expenses. And there may be insurance for the board members, e.g., as at https://en.wikipedia.org/wiki/Directors_and_officers_liability_insurance https://en.wikipedia.org/wiki/Directors_and_officers_liabili... But really what I meant was that, when there is a BoD meeting, say, monthly or quarterly, the members need funds for travel, food, and lodging, and usually the company pays for those. Just one BoD member flying first class and staying at a high end hotel once a month could eat into a $20,000 seed round in a hurry. Or, one or a few co-founders, living cheaply, on their own savings, each with a $1000 computer, typing in software can be cheap and where a seed round of $20,000 to $40,000 can do well for Internet fees, publicity, maybe cloud fees. That's what I had in mind.
- icedchai 10y ago
  For amounts that low, you're having meetings online, period. Nobody is flying out to check on their 20k seed investment. It's not even worth their time.
  - graycat 10y ago
    Moreover, they are not going to invest in a $20,000 seed round. They will say that it won't "move the needle". Well, for their 2 and 20, they are correct. For exit value, they can be wildly wrong.

ccvannorman 10y ago

The terminology has been butchered, not least because of VCs wanting to get into earlier stage and changing how they deal with companies. I've heard pre-seed as well, but realistically if you don't have significant progress, the days of paper-napkin idea => investment are pretty much over AFAIK.

graycat 10y ago
IMHO, for professional investors, the "significant progress* is judged by traction as I described. Then, for a Web site startup, traction means users and ad revenue, and quickly a sole founder is nicely profitable with cash enough for organic growth and no equity funding needed.

icedchai 10y ago

400k will barely get you 3 people for a year (in the US.) You'll have trouble finding anyone for under 100k in this market. For those small seed rounds you describe, you're better off self funding and saving up the money yourself.

johan_larson 10y ago
Traditionally, wasn't the seed round used to keep the founders going during the early months and years? 400k will last a group of founders for years if they are willing to live cheaply. Of course things change once you need to hire outsiders. But that's what the A round is for.
graycat 10y ago
Right. I was assuming a sole founder and not hiring anyone. Or some dedicated co-founders doing what you suggested.

Denzel 10y ago

Thank you, I couldn't agree more. Now we just need to get these people to stop calling themselves venture capitalists, and start using the correct term: growth capitalists. When your first criteria is literally a derisked company, i.e., a company needs traction, you're no longer looking to invest in new ventures; you're looking to grow an established business.

graycat 10y ago
Right. My guess is that the tune is called by the limited partners who are much more comfortable investing in growth capital.

ryanwaggoner 10y ago

Ad revenue is probably the worst way to try and fund a startup. The economics of ads are horrible unless you can get many millions of visitors reliably, which only works for a small sliver of startups. The rest pin their hopes on ad revenue without doing the math, look at the revenue numbers with horror, wreck their product with more and more ads, then quietly fold. Now, if you mean that the actual costs to keeping up a website can be covered by ads, then yeah, I guess. But founders have to pay rent and eat, so you're now doing this nights and weekends, and the economics of ad revenue are still the same, except now you can't focus on it much so it takes even longer. And calling a startup profitable without accounting for the cost of founder time is really misleading. Other than passion-fuels content creators, which are their own category, my observation is that there are very few ad-revenue-driven startups out there that have raised under six figures and reached any kind of success. Conclusion: raise a very small round or bootstrap, do the work yourself, and charge actual money for your product. Forget ads. Once truly profitable, raise money if terms make sense.

graycat 10y ago
I can easily understand that a lot of Web site startups fail. Nearly every effort at powered human flight failed until the Wright brothers did some good engineering. Actually, in practice, the probability of success means next to nothing, even if it is tiny. Instead, what does matter is the conditional probability of success given additional information. A great example is the probability of an airplane surviving after flying over Baghdad early in Gulf War I. The probability was low. But the conditional probability given the engineering of the Lockheed F-117 stealth bomber was quite high, and, indeed, the F-117s did nearly all the early bombing of Baghdad and never got even a scratch. I've carefully planned my startup. On ad revenue, the Mary Meeker reports from Silicon Valley venture capital firm KPCB have long claimed that for ads on Web sites (not merely for mobile devices), can expect revenue of about $2 per 1000 ads displayed. Sure, may get paid by the click, but can still get an average of $2 per 1000 displayed. Each of my Web pages is just 800 pixels wide with everything positioned to the last pixel with tables. The pages are all just dirt simple; the fonts are large; the contrast is high. There are no icons, rollovers, pull-downs, pop-ups, or overlays. The HTML and CSS are dirt simple and need only a standard Web browser up to date as of about 10, maybe 15, years ago. There is nearly no use of JavaScript, and the pages load nearly instantly and never jump around. There are both horizontal and vertical scroll bars, and the pages are still usable in a window as narrow as 300 pixels. So, the pages should be fine on any client device from a high end workstation to the cheapest smartphone. The UI/UX is simple and intuitive, and a child in, say, rural Thailand who knows no English should be able to figure out how to use the English language version of the site from about 15 minutes of experimentation or about 3 minutes of instruction. The Internet data rate a user needs is usually meager. For the ads, there is a banner at the top of the page in the standard size of 728 pixels wide and 90 pixels high. Down the right side of the page are some ads, at least four, sometimes more, say, an average of five, in the standard size of 300 pixels wide and 250 pixels high. The site is intended to be of high interest to everyone on the Internet -- children, adults, in the US, and around the world. The results are all not just safe for work but just squeaky clean, proper, uplifting, educational, informative, artistic, engaging, entertaining, especially entertaining, etc. The site should be especially popular with relatively good user demographics. E.g., the NYC MOMA crowd will love it! But so will the girlfriend of Joe Sixpack. So, let's see, assume: Get, on average 24 by 7, one user a second and a peak of about twice that. Due to the UI/UX, each user sees on average 10 Web pages (it's an interactive UI/UX, fun, awash in variety, something like an adventure, for some users addictive). Uh, there's no login and no use of cookies, and the site still works fine with JavaScript disabled in the user's browser. The site is one of the best on user privacy: After a user's session state times out, nothing is kept on the user. No background data is used on a user. Still from the UI/UX, there is some good data for ad targeting; I have the math worked out but have not written the code yet; I don't intend that ad targeting yet. People will want to come back for more and also tell their friends and send results to their friends -- right, virality. Each page contains one banner ad and on average five of the other ads for an average of six ads per page (the banner ads may yield more revenue per 1000, but I am neglecting that). So, for assumptions, we're talking on average one user a second; each user sees 10 Web pages; each Web page has six ads; and the revenue is $2 per 1000 ads displayed. So, in one month the revenue would be 1 * 3600 * 24 * 30 * 10 * 6 * 2 / 1000 = 311,040 dollars. With my software timings, one good server computer for $1000 (I just did some careful shopping) say, AMD FX-8350 with eight cores at 4.0 GHz and 32 GB of ECC main memory, on average half busy 24 by 7, could send the average of 10 Web pages a second. For the Internet upload data rate, each Web page sends for about 400,000 bits (the ad networks send the ads; my server merely sends the URLs of the ads at the ad servers). So, for a peak of, say, twice the average, that would be a peak data rate of 8 Mbps, now trivial for an Internet connection, say, just from next to my left knee, over coaxial cable, where the big deal is just a little extra for a static IP address, which my ISP is happy with -- they do encourage their customers to run Web servers. So, maybe I'm off by a factor or 2, 4, 5 or so in places. E.g., maybe I'll need more than one server: So, as the usage and, thus, revenue from one server starts to grow to put too much load on my first server, then, quickly, in, say, a week, there will be enough revenue for a second server, then 10 servers, etc. However fast the usage grows, if the usage does grow, it will throw off plenty of revenue for more servers. Sure, the main issue is just, will the users come. I'm betting they will. For supporting me and my kitty cat, say, food, clothing, shelter, etc., I should be able to get that out of the $311,040 a month or early on the $200,000, $100,000, $50,000, $20,000 a month. And with traction enough to interest equity investors, I will be nicely profitable in every sense with plenty of retained earnings for capacity growth, a new Corvette, etc. So, net, I see no possibility of equity funding -- by the time the equity guys are ready to write me a check will be too late for me to accept it.