During my first year at TechStars, I’ve spent a considerable amount of time working with many founders helping them to prepare for raising their first round of seed capital. I’m sure it’s not lost on anyone reading this that seed investing has been riding a pretty sizable wave over the last couple of years. This wave has provided both positives and negatives for entrepreneurs. On the positive side, there’s more capital targeting seed-stage opportunities and methods to find that capital than I can ever remember in my career. (I’m happy to let the pundits debate the extent to which this has created a “Series A crunch.”)
However, there’s also a downside to the recent proliferation of angel investors. More and more, I’m observing angels and angel groups acting like VCs as it relates to diligence, terms and valuations. I’ve made dozens of both seed-stage and Series A investments in my career and they’re different animals.
For me, I always looked for two things in seed opportunities: 1) a compelling market opportunity and 2) an absolutely kick-ass team committed to solving it. That’s it. I never thought I deserved more than that in making an investment at a sub $5 million pre-money valuation. My Series A criteria added one more component, traction. For example, I always looked for things like a few significant enterprise contracts or $100k MRR (for a SaaS business) or evidence of a hyper-engaged customer community.
Unfortunately, I’m seeing more and more angels and angel groups looking for Series A traction at seed-stage pricing. They want to see considerable business momentum but also want pay sub $5 million pre-money valuations. They spend oodles of time doing “due diligence” when what they should be doing is spending time with the founders and determining if they think they’ve got the chops, commitment and experience to make a go at it. At TechStars we always say that we look for five things when evaluating applications: Team, Team, Team, Market, Idea. If you distill that, it’s the same thing I describe above: team and opportunity.
If you’re relatively new to seed-investing, first let me say thanks. It’s fantastic to see people wanting to support entrepreneurs and startups with their hard-earned money. It’s behavior like this that will foster the next generation of great companies and help keep America on the forefront of global innovation. One piece of advice, keep your expectations in check with regard to what to expect for your seed-stage dollars. From my perspective, it buys you a small team of bright, hardworking entrepreneurs with a vision about how to tackle a significant market opportunity who are willing to work for peanuts for a few years in order to tackle it. It doesn’t buy you more and you definitely shouldn’t settle for less…