January 27, 2015
Venture Capitalist and cofounder of Union Square Ventures (USV), Fred Wilson, recently shared some of his thoughts on their approach to seed investments. His ideas can be easily taken as lessons for growing tech communities, where Seed and Series A funding rounds are crucial to early stage startups.
USV has invested in companies like Twitter, Tumblr and Etsy. Last year they raised a new venture fund called USV 2014, where they made six investments in it so far and five of them are seed investments. Understanding Wilson’s approach to seed funding can be of benefit for ecosystems looking to build a strong investment structures. Here are some take aways, in Wilson’s own words:
80% of USV Investments Last Year Were Seed Funding
The current market environment has pushed us to invest earlier. Some of it is that the Series A and particularly the Series B valuation environment has gotten very expensive relative to the risk as we see it. So that explains the move to seed as our primary entry point last year. I think it will continue this year but maybe moderate a bit as some of these developing markets mature and become more investable at scale.
The Advantages of Early Stage Investments
When the later stage rounds are too expensive on a risk/reward basis, we tend to move earlier. And when we can get good risk/reward opportunities in the Series A and Series B stages, we tend to move later. The downturn of 2008/2009, for example, led us to move a bit later in our 2008 fund because we could invest in more mature (and therefore less risky) opportunities at attractive prices.
On the Relationship With Startup Founders
We only make a seed investment if we have as much conviction on the team and the opportunity as we would at the Series A round. We are as committed to our seed investments, both in terms of the time we spend with them and the willingness to follow-on in them.
What They Look for In Startups
We don’t like investing in a concept or participating in a round where the uses of the capital will be to build and launch a product. This means the vast majority of seed rounds are not a fit for us. We pass on a lot of seed stage opportunities because it is “too early” for us.
On USV Investment Process
We will often lead the Series A (and sometimes Series B) in companies where we did the seed investment. We like to participate in syndicates in our seed investments. We don’t focus too much on ownership at the seed stage. We do focus on the investors coming together around a project. We like partnering with smart angels, seed funds, and even other VCs, if the other VCs are aligned with us on how they are thinking about the particular seed investment.
Full post here.
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