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The Series B Investor

Tuesday, February 7, 2017 7:41
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There are a lot of VC investors that prefer not to mess with early rounds.  They would rather initiate the investing cycle at Series B.  There are a lot of logical reasons for this.

  1.  Their funds are too large.  Spending time doing intake/diligence/support on a seed or Series A deal isn’t a good use of their time given the risk/reward.
  2.  They need to write a big check to get bang for the buck.  Writing a $250k-$500k seed check doesn’t do it for them.
  3.  The scrum to get into seed deals is a lot of work.  It’s not a good use of their time.  There are a lot less deals to comb over at Series B than there are at seed.
  4.  The metrics around writing a check at Series B are different than they are at seed.  It’s almost a different skill set and different analysis.

I was reading this article from CB Insights about exits in tech.  The incidence of “unicorns” has gone down.  By the way, I detest that term. Instead of focusing on building a unicorn based on some arbitrary valuation number, entrepreneurs should focus on creating great company culture and building a sustainable company.

There were 65 down rounds in 2016.  This isn’t surprising as valuations got ahead of themselves.   I predict that we will see more down rounds in 2017.  While venture financing isn’t directly correlated to stock market performance, there is some synching.  There were events in 2015 and 2016 that threw cold water in the face of VCs and they responded accordingly.  2017 might be an interesting year given all the changes.  My friend Josh Brown thinks you should prepare for the bear.  I am not so sure.  Lots of cross-currents in policy and there is no telling what they will bring.  Uncertainty and rising interest rates don’t lead to bull markets though.

Here are two quotes that jumped out at me:

Investors that take early-stage stakes continue to rank the highest among VCs in terms of prolific activity and subsequent exits, which is no surprise: the total amount per deal is much lower, allowing them to spread their bets more widely.


Other notable findings in the report: the researchers found that some 44% of all tech exits are being made of startups that have not raised past Series A; and 68% of exits are of startups that had not raised any funding at all.

Many VC’s are bemoaning the lack of IPOs in their portfolios.  Cheap money, Sarbanes-Oxley and Dodd-Frank have effectively closed the spigot on VC backed firms coming to market.  Most VC’s are in the home run business.  A friend of mine said they don’t understand a business model where you invest in 30-50 firms and 1 pays for the portfolio.

What I’d like CB Insights to delve deeper into is “acquihire”.  Since Google is one of the largest buyers of companies, how much of it is pure acquihire and how much of it is because they love the business and want to build it?  My guess is a lot of the M+A at early stages in the Valley is acquihire.

On the flip side, we have seen companies really strive to drive top line revenue growth.  Bob Geras favorite adage is “the best way to build bottom line growth is increase top line revenue”.  I am seeing more of that included in pitches.  We are hearing the line, “We will be cash flow positive by xxx.”  I think a lot of entrepreneurs have always used that line but in many cases, it’s getting achievable.

That being said, the cost of marketing is going up.  There is so much noise in the market, it’s hard to get your message out.  It’s much cheaper to start a company these days than ever, but it’s harder to sustain one.

In the Midwest, companies often don’t raise a lot of VC money.  There isn’t a lot of capital laying around like there is in the Valley.  Entrepreneurs are forced to be grittier.  They have to think about revenue to manage their burn rates.  They have to think hard about sustainability, because it can be a desert in between rounds.

If I was only a “Series B investor”, I would develop a strategy around finding ways to partner or get into a Seed round.  As VC Tom Tunguz says, Win with the data.


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