BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

January 11 2010
by Scott Johnson

Follow-on Capital

I see seed stage investing happening all around me.  Angels appear to me to be very active as individuals although I have nothing but anecdotal data to support that.  Dedicated funds doing seed investing are gaining traction with LPs who want their piece of the next super-deal.  We at NAV do the occasional seed deal, and will continue to do so.  But all of this seed investing has created a big need for follow-on capital from venture funds.

Seed funded companies launch their service, get some good early traction, and start climbing the SEO/viral adoption/digital marketing learning curve.  But that magic moment, where customer value exceeds customer acquisition cost, is a long ways off.  The companies that get this far all get a grade of “B+” by follow-on investors.  We see “A” companies only very rarely, where SEO or viral adoption is really catching fire.  But most fall in this “B+” category.  Many of them might be great companies one day, but investors I know find them very hard to sort through.  Sometime I feel great empathy this time of year with the college admissions folks.  Many great candidates for so few enrollment slots.

The B+ companies that we find most interesting, and ultimately succeed in getting additional capital, generally have several of the following attributes:

  • Very low burn.  As in $500K buys a year of runway.  Not a six figure salary in sight.
  • Unusually strong management team.
  • A truly unique scheme for acquiring customers/traffic on the cheap.  Something a great deal more than “we are SEO geniuses.”
  • Early leadership in an important emerging category.
  • Existing investors that are experienced, attractive co-investors.
  • A warm introduction from a trusted source.

The hell of this is that, so many seed deals are getting done that,just as some of the greatest applicants will be arbitrarily denied admission from the college of their choice, some potentially great businesses will not find additional capital and will fail.  So focus on the above bullet points when you take your first money.  Be careful who you take money from, be resourceful, execute relentlessly.  Ideally, operate as if you will never get another dime of capital.  You will be amazed at how freeing that is.

COMMENTS

January 11 2010
by NewAtlanticVentures

From the NAV Blog: Follow-on Capital http://bit.ly/7Fz29q

January 11 2010
by Martin Soorjoo

Seed funding in spouting everywhere. Useful VC investment criteria http://j.mp/4HMPxh

January 12 2010
by Joe Venture Capital

RT @navfund: From the NAV Blog: Follow-on Capital http://bit.ly/7Fz29q

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