November 7, 2010
Last March the Tech Cocktail crew rented a house in Austin for SXSW and was happy to have some entrepreneurs from both coasts stay at the TC Headquarters. One of whom was Dave Lifson, Founder and CEO of NYC-based Postling. Dave came to Austin with a mission – to meet with a number of investors and raise money. And he did that very successfully. But as many of you know, angel round one is usually not the last. As Postling has grown, Dave has continued to seek investors and has opened up the process to our readers. Enjoy his notes and observations about the process of raising money for an early-stage startup.
Spray and pray angels are fatigued. These are the guys who have been writing $10-50k checks for the last 6 months. Now that they’ve done 10-15 investments, they’re tired and cutting back. “Spread too thin” and “too scattered” are phrases I’ve heard.
Micro-VC’s are swamped. With all the talk of their being a seed bubble, the real truth is that the bubble was in “spray and pray” angels, and that bubble is over. Raising a couple hundred thousand is enough to launch a product, but it’s not nearly enough to build a business. So Micro-VCs are now the new Series A investors (though the rounds may be called Series Seed). They are seeing hundreds of companies who have built a product on $250k but don’t have product market fit. It’s going to take real investor skill to pick the winners (because there are few meaningful metrics at this point), and the variance in IRR of these funds will be huge. Dave McClure’s approach of being “spray and pray” and Micro-VC (investing twice pre-Series A) is smart if you have the energy to execute. If I were to be an investor in startups, this is exactly where I’d want to be.
Real VCs aren’t getting into these deals. Why should an entrepreneur take on signaling risk unnecessarily? This is causing the Series A bar to increase, which may be counter-intuitive. Because startups have already raised $1M+ across two rounds and diluted by 35-40%, the A round pre-money valuation needs to be high ($8-12M) for the founders to maintain meaningful ownership. So the A round has become the new B round.
The real winners in this are entrepreneurs and AngelList. Entrepreneurs have access to capital from sources that are comfortable with sub-$30M exit scenarios. The guys who who aggregate all of these early investors together, get incredible deal flow. If I were them, I would raise a $50M fund and adopt Dave McClure’s approach of investing $25k into most companies who pass the AngelList application process and then invest $100-250k in the ones who deserve to come back for more. [Editor’s Note: Dave made a great call – the guys AngelList just announced they are raising a ~$40 million dollar fund next year]
I realize the irony of the fact that the hated signaling issue blamed on VCs is shifting to Dave McClure and other Micro-VCs who might follow his model (like I recommend for AngelList). I’m not sure yet how serious the concern would be, given the much lower bar, the increased supply of capital, and the smaller dollar amounts.
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