7 ms·

Understand seed round dynamics in Silicon Valley

jariel 6y ago
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.
- vikramkr 6y ago
  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"
  - jariel 6y ago
    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.
    - Swizec 6y ago
      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.
      - willcipriano 6y ago
        >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?
        Swizec 6y ago
        Moat is having unique insight into the problem/domain. No moat anymore in terms of “We can build a webapp faster than you can”
        jariel 6y ago
        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.
      - jariel 6y ago
        "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.
idlewords 6y ago
Almost all these guides are written from the viewpoint of investors. Here's a brief one from the viewpoint of the person seeking funding. 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.
- simonebrunozzi 6y ago
  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.
  - deleted 6y ago
    [deleted]
  - idlewords 6y ago
    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.
einarvollset 6y ago
“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.
Hnrobert42 6y ago
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.
- RhodesianHunter 6y ago
  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?
  - ponker 6y ago
    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.
  - notforever 6y ago
    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.
  - ta1234567890 6y ago
    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.
  - bbarnett 6y ago
    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...
cjblomqvist 6y ago
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?
hummel 6y ago
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.
ncmncm 6y ago
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.

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.

vikramkr 6y ago
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"
- jariel 6y ago
  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.
  - Swizec 6y ago
    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.
    - willcipriano 6y ago
      >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?
      - Swizec 6y ago
        Moat is having unique insight into the problem/domain. No moat anymore in terms of “We can build a webapp faster than you can”
      - jariel 6y ago
        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.
    - jariel 6y ago
      "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.

idlewords 6y ago

Almost all these guides are written from the viewpoint of investors. Here's a brief one from the viewpoint of the person seeking funding. 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.

simonebrunozzi 6y ago
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.
- deleted 6y ago
  [deleted]
- idlewords 6y ago
  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.

einarvollset 6y ago

“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.

Hnrobert42 6y ago

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.

RhodesianHunter 6y ago
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?
- ponker 6y ago
  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.
- notforever 6y ago
  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.
- ta1234567890 6y ago
  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.
- bbarnett 6y ago
  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...

cjblomqvist 6y ago

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?

hummel 6y ago

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.

ncmncm 6y ago

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.