Love & Flux in a Time of Seed

I was at a panel earlier this week, when a question was asked from the audience.  “Are we in a seed bubble?”

Well, between the rise of super angels, the proliferation in micro-cap funds, and a shift in some LP interest towards the seed stage or emerging managers with small funds, it does not take a lot before we see significant changes in the available capital for seed.  Combine that with how capital efficient companies are, and you get seed stage activity at a level that did not exist before.  Admittedly, the fact that these companies can achieve material traction with much less money is a driver for the phenomenon.  But divide more dollars in the asset class by fewer dollars required per company and the output is many more companies.

What happens to those seed companies?  Typically, if a company does a good job executing on their seed round, by being capital efficient, they can quickly raise a Series A round of capital.  Some don’t need it, but generally in an era of easy “me-too”, expanding to all markets in parallel or staffing up quickly to feature differentiate usually necessitates venture capital.  The problem is that the venture industry at a macro level is in a not so healthy state.  LPs are having their own macro difficulties, and investments in the asset class are coming down materially.  Many funds from the prior climate are actively reducing fund sizes, by choice or otherwise.  And we in venture believe this actually is a good trend (at least those of us performing!).   

What does this all mean?  Combine the increasing number of seed companies with decreasing venture capital dollars, and you potentially have a tough situation.  Not every seed company that does “well” will have the opportunity to be fully capitalized.  There are only so many times a seed investor can tell a VC “no, no, THIS is really a hot deal”.  And so the bar will go up dramatically.  This is a good thing in that much better companies will get funded beyond the seed.  And in many respects the bar for a Series A deal these days will start to resemble a Series B deal.   But it also means lots of failure.

For entrepreneurs, a few things to think about.  First, think about the composition of your seed round.  Take the time to build the best network around you for information flow.  Create a good mix.  Make sure you have a strong group that can be your advocate and can give you credible advice about how to navigate the market.  Second, work actively with your seed investors to define real value creating metrics and what ‘clears the bar’.  It used to be 100K uniques was interesting, then it was 500K, six months from now it might be much higher.  Having institutional money as part of that syndicate can be helpful as we are actively in the transaction flow of real companies graduating from the seed to A and beyond.  Third, make sure you have the capital to achieve those objectives.  Don’t just take $1MM because that’s what is “typical”.  Map your capital to milestones in a disciplined manner.  This is not for investors, it’s to make sure you can grow your company seamlessly, keeping fundraising tasks to a minimum, and emerge owning a huge chunk of your business!

Announcing FirstSteps & Our Tenth Seed Deal

Today, we are excited to formally announce our seed program, FirstSteps, and our tenth investment from that program.  FirstMark Capital has had a long, successful history of investing at the seed level (Riot Games, LiveGamer, Clickable and others) and even starting companies from scratch (Dovetail, EagleEye, Outlooksoft).  But it’s clear there has been a real change in the last few years.  Companies now can get started at a fraction of what they could in the past and can accomplish more with less than ever before.  As the entrepreneurial climate has changed, we wanted to ensure our considerable resources were available to the best entrepreneurs at the earliest stage.

 What do we look for in seed companies? 

  • We start with capital efficient technology and technology-enabled businesses.  The types of businesses we will look to back will mirror the themes we have successfully invested in over the years. 
  • We look for strong founding teams.  While we back many serial entrepreneurs, we have backed as many first time entrepreneurs that have gone on to build great companies.  A common trait across both groups is demonstrated excellence in life.  This could mean being one of the best sales rep in a prior company; being a scholar athlete; generating outstanding customer traction with no resources.  We fundamentally believe that people who overachieve tend to do that consistently.  We also like our entrepreneurs to have domain expertise.  If you want to start a gaming company, do you passionately game?   
  • We prefer our founding team to include the technical co-founder.  This is the age of iteration and having a technical partner who wakes up in the middle of the night with you to help A/B test and optimize every button, menu and screen is critical.
  • We look for large markets ripe to be disrupted.  More and more we are seeing new companies that are technology enabled and leveraging the connectivity of the Internet to launch new business models. 
  • We want a shared view on capital usage and value creation.  Because so much can be accomplished so quickly, we love when entrepreneurs have a very clear view on how much (or little!) they need, why, and what they will be able to accomplish.  We want our entrepreneurs and employees to own the majority of their companies!  We get nervous if you’re willing to give away too much!  Many things will not move in a straight line, but we are now in an era where the cost of planning is significantly higher than the cost of failure.
  • We invest nationally, but prefer to invest in companies that can benefit from our strong NYC presence.  We want to ensure we can add value every step of the way.

 How do we partner with seed companies? 

  •  We look to invest anywhere between $50K and $1MM in our seed companies.  Typically we write between $250K – $500K.  Total round size is usually between $1 -2MM.  Our investments are typically a simplified preferred equity structure. 
  • We lead transactions, write term sheets, and often help syndicate rounds.  Or sometimes we simply join in a round that is already being syndicated.  Because we believe the seed round is an opportunity to set up an early and strong network around a company, we usually syndicate with other seed firms and leading angels, playing an active role introducing our entrepreneurs around to other partners who share our values and thinking.  Recent co-investments have included folks such as First Round Capital, Genacast, Metamorphic Ventures, IA Capital, Accelerator Ventures, New York Angels, Ron Conway, and others.
  • We do not view seed as an “option”.  We are excited about every seed deal we go into and want to provide those companies with every opportunity for success.  Our entire organization thinks about you and your success.

 Why work with FirstMark Capital?

  •  We are deep thematic investors that have spent over a decade watching a portfolio of over 200 companies start, grow and succeed.  We bring that institutional knowledge and relationships to bear for you.
  • We have created dedicated programs, networking, and infrastructure for our seed program.  Our companies are actively engaging and learning from one another, sharing insight and helping avoid pitfalls together.  In addition, our seed companies benefit from the larger events we host for our entire portfolio – such as our Annual Marketing Summit – and our more intimate targeted events with leaders in industry.  Our seed companies also learn from some of the best practices of a much broader portfolio of companies that have grown to achieve breakout scale.
  • Our base in NYC leads to having exceptional relationships across many of the industries that are now getting disrupted, from financial, retail, education, healthcare, gaming, publishing, advertising, media, and more.  NYC is the world’s business capital and we leverage that density for our companies’ benefit.
  • We have a deep bench of venture partners who have decades of operating and entrepreneurial experience, and often can be mentors to our young companies.
  • As a result of our large footprint, we touch a lot of talent.  We work hard at building out the best teams for our companies – finding, interviewing, referencing, and selling.  Execution and team make all the difference on an idea.
  • We support you through fundraising processes.  We do not front run, we do not put our interests ahead of the Company’s.  Instead, we work with you to identify the best possible partners and help you navigate the complexities of raising subsequent capital. 

 Our portfolio of seed companies has already enjoyed tremendous early success.  We invite prospective entrepreneurs to reach out to any of our companies to get a sense for how actively we work with them to build value together.  And if you think you’d make for a great investment, feel free to reach out to us through our network or apply HERE!