SA国际传媒

The Seed Series of 2019 had so much good advice we had to break it down into two pieces. Here is our second set of the key takeaways from interviews with leading seed investors as we move forward into 2020. Satya Patel and Hunter Walk, founders of Homebrew, lead off this article by defining a Homebrew company, Jana Messerschmidt from #Angels discusses founder terms and The Engine’s Katie Rae talks about the timeframe for patient capital. The rise of cloud and APX is explained by Accel’s Vas Natarajan, Shuly Galili of UpWest shares how to build distributed teams, and Beezer Clarkson of Sapphire Partners covers returns for early-stage funds. It continues to be a busy time in seed. Part 1 of the Seed Series key takeaways can be found here.

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Key takeaways

Seed funds are highly selective. Seed funds do not scatter their investment and hope something takes off. On average, seed funds invest in 8-20 new companies each year, but meet with hundreds and get sent thousands of pitches. Seed funds tend to have one or more sector theses about the market driving their investment strategy.

Seed folks like to stick to seed. Why? They could move up the stack, raise a bigger fund and make more money. However, seed investors like seed because it provides an opportunity for them to see themselves making a return — provided their thesis and network is strong.

Seed funds raise like it’s 2009. Seed funds prefer to raise a new fund every 3 to 4 years, unlike more recent trends in venture with larger funds raising every other year. This time horizon for raising funds is fitting since the companies in a seed fund鈥檚 most recent portfolio will take time to prove product market fit and grow their valuation.

Fun fact: Hunter Walk on theYouTube acquisition by Google back in 2006. 鈥淚t was called Google鈥檚 folly. They鈥檙e spending a billion and a half dollars for dogs on skateboards. Is this even legal? The hosting and streaming costs were high. At one of the internal TGIF versions, [Schmidt] announced the acquisition. Somebody asked Eric, 鈥榶ou paid a lot of money, how do you know that was the right amount?鈥� Eric paused for a second and said: ‘It鈥檚 definitely not the right amount. It鈥檚 either way too high or way too low. And we will know in 10 years.’ 鈥�

Highlights from seed investors

7: Satya Patel and Hunter Walk, Homebrew Founders

Hunter on the market gap at venture

鈥淚 was surprised to find that the market gap at venture was returning emails, showing up for meetings [and] spending more than 51 percent of your calendar with the companies that you funded versus that next company, that next fund to raise, that next conference to speak at. We took a model that basically says we will pick up the phone, we will answer the email, we will be on the whiteboard with you.鈥�

Satya on the three things companies have to do well

鈥淎ll companies at this stage really have to do three things well: they have to build a product, distribute that product and build a team. So that鈥檚 where we spent a lot of time.鈥�

Satya defines a Homebrew company

鈥淎 Homebrew company is one in which there is a mission-driven founder who has a firm belief about how the world should operate and a strong set of hypotheses for how to help get there. He or she has experienced the pain being addressed firsthand, has empathy for the customer and a deep appreciation for the target industry, disrupting it with love rather than contempt. The founders want to build a cap table that acts as extensions of the team, helping them increase the scale, velocity or probability of the company鈥檚 success. The company is building something that democratizes access to products, services, data or customers for constituencies and industries that haven鈥檛 had access previously. When we come across like-minded founders operating in industries in which we feel we have expertise, relationships or know-how, we think of those as Homebrew companies.鈥�

8: Jana Messerschmidt and Katie Stanton, Founding Team #Angels

Jana on founder terms

鈥淲hen you鈥檙e a founder, the terms that are set are ultimately driven by your ability to negotiate. Certain founders may only get one term sheet, so that鈥檚 the deal they have to accept because they don鈥檛 have as much negotiation leverage. But other founders might go to Sand Hill Road and get six term sheets in a week; they鈥檙e going to drive the negotiation, they鈥檙e going to have lower dilution and higher valuations, and they鈥檙e going to set the terms. That鈥檚 something we talked about a lot in our group. Do women have as many options when they go out raising? Are they able to command and demand that same sort of excitement about the companies that they鈥檙e building where they鈥檙e able to drive the negotiation process and set those terms?鈥�

9: Katie Rae, The Engine CEO

On the second thing

鈥淭he second thing I learned is that the effort you put into this and the love you show for the entrepreneurs is so fundamental to great outcomes. You really learn to trust each other, because without that trust people just block each other off and stop telling the truth or stop revealing what鈥檚 actually happening. It was so shockingly apparent to me that you have to be genuine in these relationships. It鈥檚 not a transactional business, and certainly not in the seed stage. These are early companies where a hundred things could go wrong, but only one needs to go really right to win. If you鈥檙e focused on all the wrong, you will kill these companies. That鈥檚 what I learned.

鈥淚t鈥檚 a lesson that gets replayed in almost every piece of life, whether it鈥檚 your relationship with a spouse or your children. It鈥檚 always the same lesson.鈥�

On the time frame for patient capital

鈥淲hatever the biggest technical risk is, you want to take that out in the first four years. That鈥檚 what opens all kinds of capital to the company, whether it鈥檚 venture capital, non-dilutive capital or project finance capital. Most funds are 10 years, which means you must be in the market truly deeply within the first four years. Otherwise, you鈥檙e not going to get to exit within 10 years. We like to have a slightly longer time frame than that, ours is up to 18 years. And that allows us to take a different set of risks in technologies that we think are really important.鈥�

10: Vas Natarajan, Partner at Accel

On the Rise of Cloud and APX

鈥淭he cloud is redefining how end users are working together and collaborating with one another. We spend a lot of time thinking about the future of work [and] the rise of new collaboration productivity systems, and how the cloud has been a major enabler for that.

鈥淧art and parcel with the cloud is the rise of the API economy we call APX: the X means everything. What APIs do is actually integrate multiple different subsystems, so data is no longer siloed and workflows are no longer siloed. You can actually stitch together work across multiple different things. It has allowed entrepreneurs to create new cloud categories that are almost super-sets of individual pieces of workflow.

鈥淭he rise of cloud and, in particular, the rise of APIs, are big themes for us right now. We think the combination of those two is going to create a next set of cloud companies, both at the application tier, but also the APIs themselves will become interesting businesses.鈥�

11: Shuly Galili, Co-founder of UpWest

On the challenges of building distributed teams

鈥淚t takes specific founders. Ultimately the sacrifice is on the CEO who has to be very communicative. He needs to create a cohesive environment, even though the team is distributed, ultimately live on an airplane, and not say 鈥榃e鈥檙e a U.S. company, and you over there are some sort of an offshore.鈥� It鈥檚 actually the other way around; our goal is for our CEOs to share best practices with each other.鈥�

12: Beezer Clarkson, Managing Director, Sapphire Partners

On returns for early-stage funds

鈥淲e look to聽 underwrite Series A funds with 3x net, and a seed fund [with] 5x net. We have to believe that鈥檚 possible. We will look at when you鈥檝e made investments, how many of them have become a 5x or 10x return and how many of those need to be true. And who鈥檚 in the team? How big is the team and what are the team dynamics?

鈥淣othing guarantees you returns. We have yet to find a fund that has had a significant return, call it 5x, that has not had either a decacorn type exit or multiple billion-dollar exits. If you鈥檙e a $50 [million] or a $75 million size fund, you still need to have multiple billion-dollar exits.鈥�

On fast in Venture

鈥淭he feeling of fast in venture is actually the growth of the companies, and not the management of the funds.鈥�

Main photo courtesy of Frank Vessia via Unsplash.