There’s been a lot written lately about VC seed programs and some of the issues they present for entrepreneurs. Most notably, Chris Dixon has written a number of excellent posts on the topic. See here and here.
We’ve approached seed investing at Spark a bit differently, and we think it helps alleviate some of the concerns Chris and others have raised.
The basic premise of Start@Spark is that we want companies who ‘start’ at Spark to ‘finish’ at Spark.
This first principle is the key driver of how we think about seed investing, and it has a number of very important implications for the firm as well as entrepreneurs:
1) We approach seed investments with the same level of scrutiny that we do all investments.
2) We take active roles in all the companies we seed.
3) We go into seed investments expecting to fund companies in subsequent rounds.
4) We are flexible in how we structure seed investments as well as subsequent rounds of financing to not disadvantage the entrepreneur.
This ultimately results in only a handful of seed investments to which we bring everything Spark has to bear. While we may be giving up the option value of having many small seed investments from which to cherry pick, we in turn gain a much closer relationship with the companies that we do seed which goes a long way towards ensuring that they get subsequent financing.
So why do we do seed investments? Fred Wilson wrote an excellent post recently on slow capital. There are many benefits to taking a staged approach to investing. It gives everyone a chance to learn, get to know each other better, understand business and capital needs more clearly, create a disciplined, milestone-based culture and generate results that help attract new investors. And in the off-chance it becomes apparent that the business prospects are not what everyone hoped, reach the appropriate but difficult conclusions together.
There is also the macro reality that capital requirements for many web services businesses have come down precipitously. It is important that venture firms adapt to this landscape and continue funding the best and the brightest at the earliest stages of development.
There are many advantages to taking seed money from a quality venture firm. It just needs to be done right.
gbattle sez:
This is great to know Mo, but it still doesn’t answer my take on Chris Dixon’s very simple but telling questions:
What percentage of Start@Spark companies get follow-on funding from Spark, and of those Start@Spark companies you choose not to fund further, what percentage of them receive funding from other sources?
Respectfully, everything else - your scrutiny, active role, future funding expectations, and flexibility - does not speak as clearly or directly to the needs of the entrepreneur with regards to your staying the course and his/her funding lifeline through the Start@Spark program as those two percentages.
Transparency matters. This should not be a hard number to ascertain and benchmark against other early stage VC firms. I’m not picking on Spark specifically here, but I am being critical of a growing community of VC who claim that the “entrepreneur is the customer.” If this is the case, give the entrepreneur clear and auditable metrics to make informed decisions about future liquidity/funding. What’s good for LPs in terms of auditable return metrics should at least be as good for your alleged customers. The two percentages I’ve defined as per Chris’s original post are the return metrics for the entrepreneur customer of an early stage VC.
Greg doesn’t pull any punches. He’s exactly right. Data is better than promises.
