There’s been a lot of debate recently in the market about what kind of investment structure is best for angel and seed arounds.  Mark Suster, Seth Levine, Fred Wilson, and Chris Dixon have all weighed in and there’s more on RWW.

Here’s my own personal take, not any kind of official First Round take:

You should read all of these posts, instantly forget everything you read, and then do what it takes to go out and find the investors who are most passionate, most willing, and most able to help you create a huge business.

According to Paul Graham, “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”

Don’t think for a second that what happens in YCombinator is indicative of the whole seed funding market.  Paul has been able to create (and transfer to the companies in YC) a valuable, and unmatched brand.  Moreover, because of his investor relationships, YC has immense momentum around Demo Day.  Seed investors trip over themselves to get a look at the latest YCombinator deals and the entreprenuers in the hottest companies are in the drivers seat on terms.

Unfortunately, that’s really not the case for most startups.  Sure, if you’re Jack Dorsey, creator of Twitter, you can dictate your terms, but last I checked, most of the entrepreneurs First Round and most of the seed stage firms back don’t have that same kind of track record.  Many, if not the majority, are first time CEOs.  Most deals aren’t obvious winners and have lost of risk still left on the table.  There are the no-brainer winners, the no-brainer passes (which a brain often screws up the ability to distinguish between the two), but most are somewhere in the middle. 

That’s why, for the most part, the first investor willing to commit to your deal is usually in a good position to influence the terms.  In all four deals that I’ve worked on, we were the first ones to the table.  We negotiated fair deals—all equity—in a timely manner.  I think the entrepreneurs were just happy to close and move on to building great companies.  Sure, there will always be another investor who hears that you’ve got a term sheet that is willing to one-up it on price, but it’s really hard to get that first one in the pool. 

When you see all these seed stage investors debating on Twitter and blogs what structures they support, take it for what it is—a marketing exercise.  The investor water cooler occasionally falls victim to reputation racketeering.  An investor says something that makes them *seem* entrepreneur friendly, and then, because the early stage is very competitive, every other investor playing in that space has to follow suit—otherwise they look bad.  At best, they can counter with some thoughtful points, but saying nothing often makes them seem absent from the conversation.

The truth is, for most of you actually reading this, it simply doesn’t apply to you—similar to most of the prescriptive stuff about fundraising written by the top investors.  You’re out there scratching and clawing just trying to cobble together enough angel investor money to feed yourself while you code into the wee hours of the morning, and there’s a debate going on as to what kind of paper stock you should use to print out your legal docs on.  There’s another debate somewhere else going on about which impossible to get into restaurant you should take a supermodel to.  Nice work if you can get it.

What you really should be concerned about is who is in your deal—and who’s really going to help you drive value.  Too many entrepreneurs I see are concerned about optimizing around price.  Sure, you don’t want to get screwed—but if I was building a SaaS tools company that sold to sales teams or plugged into Salesforce, I’d be an idiot not to take money from Mark Suster.  (If you’ve turned down money from Mark, I’m not calling you an idiot—I’m just saying that *I’d* be the idiot)  Similarly, if you’re doing something in eCommerce, and you get a term sheet from Josh Kopelman (ok, so I’m biased there), I can’t imagine another person more able to build value in that area.  I just saw a network effect driven reputation company and immediately sent it over to Chris Dixon to try and get him as a sydicate partner because of his SiteAdvisor experience.  Of course all of these investors add lots of value to a wide variety of companies, but sometimes it’s pretty obvious when an investor is in a unique position to really drive a company forward.

Not all investors add the same amount of value and entrepreneurs need to think long and hard about who they include in a deal if they have that luxury.  There are a lot of folks out there that write small checks and aren’t really as active in the formative stages in a company.  That’s fine if you’re looking to fill out a round—but someone needs to be depended upon to drive value as an active investor—because management teams need all the help they can get to achieve success.

In fact, I’d venture to say that perhaps getting people on board who are purely momentum driven, who ignore terms and are willing to sign up for any term sheet recardless of whether its an uncapped convertible note, might actually be adverse selection.  They may have unlimited tolerance for pricing, but you don’t have unlimited resources as a startup.  Will this investor help you show prudence as a decision maker?  Can you afford to play the “pay up to move ahead at all costs” game as a startup with just 9-12 months of capital in the bank? 

It’s a bit like dating.  You absolutely want to feel special, even fawned over, by the person you’re with—but there’s a limit.  You don’t want the person most desperate to date you—the one who is willing to put up with any terms (like only showing up at their house at 1am, never introducing them to your family or friends, etc). 

There’s nothing wrong with entrepreneurs trying to get the best deal they can—but the “best” deal invovles assembling the best supporters.  Price is a relatively small piece of that at this stage, and professional investors shouldn’t get dinged for trying to negotiate a price that is reflective of the kinds of risks they’re taking.  When Fred Wilson was an angel investor in my company, he told me that he didn’t want to take equity risk and get debt in return—and so we changed over to equity from a convert to make sure he was in. 

Was that entrepreneur unfriendly?  Not at all.  Writing the check was the friendliest thing he ever did.

A lot of times, people tell me they like a particular founding team because they’re really smart.

I’m not 100% sure what that even means, nor am I ever in a position to counter that.  I fact, I don’t think I’ve ever taken a meeting where I didn’t feel like I was sitting across the table from someone intelligent.  So, if everyone is smart, why even bother mentioning it as a differentiating factor?

At the same time, I certainly don’t feel like startups that go out of business are a function of founder stupidity.  Therefore, is raw intelligence even that important and, if so, how can I measure it?  If we gave IQ tests to the most successful founders, would they be smarter than the ones that failed?  I think something like endurance would be a more deterministic factor. 

Obviously, you need *some* amount of intelligence to start and run a company.  However, what if your key to success isn’t raw intellectual processing power.  What if it’s a world-class ability to sell?  I’d say salespeople probably score very high on empathy, emotional intelligence, etc.  Those, to me, seem like much more important qualities for certain businesses.  If I’m depending on someone to sell to the retail merchant population, a notoriously tough nut to crack, I think I’d rather walk out of a meeting with the sense that “That guy can sell” or “I’d trust her as a partner” than “That person can solve a quantum physics equation.” 

In the same way, you could present a team that is *the* team you’d want building big databases around big data, but that doesn’t mean you’d want them designing a fun dating application focused on teens.  I’m totally generalizing here, and it’s very possible that a bunch of big data quant geeks would be awesome at designing Match for teens—but it wouldn’t be their quant skills that led them there.  It would be their other, more empathetic, creative soft skills that would probably make them a good fit for this design challenge. 

So when I’m looking at teams, I don’t think about whether this team is “smart”.  I think about whether they’re the “right” team for the challenge.  Do they have *any* domain expertise whatsoever?  Can we discern anything about their past experience to indicate that they’re any better than the next person to solve this particular problem?

In other words, if you made it this far—attracting a team, coming up with an idea you felt had enough legs to cause you to quit your job, building a prototype—you’re probably pretty sharp.  That doesn’t, however, mean that your team has any kind of a distinct advantage over the next team, who is also pretty smart.  You graduated Harvard, you’re smart.  Your competitors, also Ivy League, also smart.  Smart only gets you so far.  Being the absolute *right* person for the job, in my opinion, is better than being the *smartest* person.

“Private Twitter for small groups”

“BBM for every platform”

“Reply-all for SMS”

I could describe GroupMe in a lot of ways, but “really exciting” would have to be the most accurate one, and we’re very excited to announce it as one of our newest investments at First Round (See the Techcrunch article here). 

Personally, I’m incredibly psyched about the scope of the vision and feel very lucky to be working with such a promising young team.  They also couldn’t have asked for a better syndicate of investors.  When First Round started talking with the Steve and Jared, we introduced the company to Betaworks and to Ron Conway’s SV Angel fund.  Both groups signed up for the deal, as did Lerer Media Ventures, and several other prominent angels—including Josh Stylman and Pete Hershberg, who backed my previous company.

The path to our involvement with the company dates back to last December, actually, when I attended a Gilt Groupe “Expert Talk” run by Josh Knowles, formally their VP of Engineering.  He introduced himself and we kept in touch through all the various social media channels—until I heard he was leaving Gilt.  I reached back out to him and we reconnected for lunch at Coffee Shop right before the Techcrunch Disrupt conference.  Knowing I was there, he told me that I had to meet his friend Steve, who had hacked up something cool at the pre-conference Hackathon.  I was actually at the Hackathon, too… but had missed Steve’s presentation.

We met the next day, along with his partner, Jared Hecht.  I knew Jared from his time at Tumblr.  They showed me a very lightweight HTML5 mobile site that enabled you to start a group chat that fell back to just text messages when you logged off the web.  Built on top of Twilio, it was pretty simple from a technology standpoint—but what got me was the enthusiasm of the team and the scope of their vision.

GroupMe is more than just a way to text in groups.  It fits the way mainstream users want to communicate.  I’ve always believed in small, private groups—dating back to when I first started blogging.  I acknowledged that most blogs were private and only read by a handful people—like on Live Journal and MySpace.  Believe it or not, the average person doesn’t want to talk to 5000 people.  They want to talk to their four closest friends—the same people they look to go out with on Saturday night, or the friends from home they left behind when they headed off to college.

Jared and Steve understood this intuitively.  Moreover—they understood how a lightweight communication app without a lot of structure to it had the potential to be a lot of things to a lot of people—the Twitter phenomenon.  What we saw here was Twitter built for the way mainstream users want to connect.  What you might lose in the power of search and virality, you gain in the additional ways users will interact with you.  I wouldn’t negotiate weekend plans via Twitter, or debate a feature with a product team.  Nor would I share important job news before sharing with just my immediate family members.  Being the place where you communicate privately with the most important people in your life, or the small groups you see the most, is a critical part of the communications stack addressed very poorly at the moment.  E-mail reply-alls aren’t a permanent solution.

You see this kind of behavior in BBM—Blackberry Messenger.  Unfortunately, that’s stuck on the Blackberry platform—tied to a sinking ship in my opinion.  GroupMe has a chance to be BBM for the rest of us, but also to be an open platform that other interesting group functionality can be built on top of—sending casual invites, starting a flashmob, group buying, quick conferencing (via voice, too!).

Right now, the app is extremely early—just a few months old, but the the team is making quick progress in an interesting area.  They’ve met some great developer hires and are cranking away to launch new features for the TechCrunch Disrupt in SF—quite fitting given where they started.

As a personal note, I’m excited to finally get to announce a First Round investment in a company that I was involved with in New York City.  The next two should get announced in a couple of weeks. 

This is me and my own opinions talking, not the firm that gives me money to eat...   hopefully, that's pretty clear.

In the past, I've heard lots of arguments about how New York City needs its own [insert something national]. 

"We need our own Techcrunch!"

"We need our own SXSW!"

"We need our own Google!"

Honestly, I had never really put much stock in those ideas.  I pretty much thought the Google of the New York tech scene was, in fact, Google.  The world is a global place, made even smaller by technology.  I didn't quite understand what the point of recreating what was easily accessible, just not native.  I didn't mind that Techcrunch did Disrupt here--I thought it was great for New York.

However, I've interacted with a couple of outside groups lately that have pushed me to rethink my opinion on the value of being native to New York City.  More and more, I'm seeing it as important to the process of shepherding local efforts to building great businesses.   

You see, New York is the most infinitely complicated city in the world.  Nowhere else do you have as many industries converging in one place--which creates the best potential for idea cross-pollination on the planet.  Unfortunately, that potential goes largely untapped, since New York is also one of the most siloed places.  

It's not that we don't want to interact with others who aren't doing what we're doing--we're all just pretty damn busy, that's all.  That's why there's a lot of potential low hanging leadership fruit for anyone who cuts across several industries--like Julia Kaganskiy of the Arts & Tech Meetup.  Similarly, it's not surprising to me that Evan, Hilary, and Chris--the founders of HackNY--are either New York natives or have been here long enough to feel like natives.  

New York geography also has it's subtle influences on the social and business dynamic--perhaps not so subtle to natives.  If you live here, you know having an office too far west of a subway is like getting banished to a desert, what it means when people say you can't get to Brooklyn to Brooklyn (you have to go through the city!), and why checking in above 59th street gets you a special badge.  

New York is also a city of aspiration--which is great for the most part, but it also means you get a lot of dreamy eyes getting in the way of the heads down crowd.  Understanding whose stars you want to hitch a ride on is a function of seasoned discernment.  It's not a small town--and you can hide a reputation pretty easily.  Is there a story behind the breakup of that management team?  Did you talk to the co-founders?  Was it really just an intern that got fired from posting to that Twitter account?  What's the real story behind that investor's track record?  Who really has influence and who just has a bunch of Twitter followers--and who's completely under the radar?

People ask me how much time it takes for me to put out my NYC events list each week.  My first response is usually "not nearly as much time as it would if I didn't know most of the people putting on events."  After a while, you get a sense of who's really pushing the envelope to create great experiences and draw in top professionals.  

New York has become a very attractive place for outsiders--venture capital funds, accelerators, etc.  They're all looking to tap the potential of the Big Apple, work with local talent, and help build local startups into great companies.  The question is whether or not these professionals provide nearly as much value as the potential of those who are deeply rooted in the ecosystem?  

I've said before that innovation is a ground war--it's house to house.  You can't fish out the best entrepreneurs without trying to turn over every rock possible--and in NYC, that's a lot of rocks.  It's also a function of building trust--and people aren't going to trust you with their startup ideas unless they see you around, know other people that know you, and hear that you're already out their providing value.  That's what brings the right people together.  If you believe that the best programs are the ones that bring together the most innovative startup professionals, you'd be hard pressed not to accept the fact that there's a home field advantage.  

Owen Davis has done a great job this summer with SeedStart, and there's certainly room for even more supportive programming for the innovation community.  My growing sense is that the best efforts to help the NYC scene are going to be similar to what we've seen over the past five years--natives, like SeedStart, who understand what makes NYC a unique place to build a company helping themselves.  They're also potentially more committed to the long term viability of their programs--because they have nowhere else to go or be distracted by.  New York isn't part of a portfolio--it's home.

Don't get me wrong--there has been and will continue to be lots of value contributed to the community by newcomers, but I think there's something to be said for participating, listening, and learning about what we've got here before you just march in as "liberators".  

They say people won't pay for content.  They say that paywalls are stupid and that its just not monetizable.

Remember when they said that people wouldn't pay for music?

What Apple proved, and what I suspect is the issue with web content, is that monetization was a product problem.  I never would have paid for music back in 1999 or 2000 when I was sporting my 64mb Creative Nomad, powered completely ilegally by Napster.  Why?  Because it was a tremendous pain in the ass.  Search quality was low, I had no means of music discovery, and the device has what might have been the worst piece of software ever written.

Enter the seemless iPod + iTunes experience, and the next generation goes back to paying for music again as if no one had ever heard of Shawn Fanning.

Same goes for television.  Why hasn't Avner Ronen taken over the world yet?  Because plugging a computer into your TV is still just too goddamn hard for the average person.  Cable is easy.  You call them up, they send a redheaded guy with a box and you're done.  People pay for cable because its one less thing they need to think about.

The same absolutely can't be said for web content.  Despite over 15 plus years of progress, little has changed about the way we consume articles on the web since the internet started.  It's still largely a desktop experience driven and produced by publishers clinging to siloed production and consumption experience.  Discovery sucks, as does the multi-device experience.  The best hope you have for sending me an article that I read is to e-mail it to me or DM me on Twitter—and to hope that wherever I’m reading the web, I’m also checking messaging services.  Even so, there’s no “read” box, or way for me to share back, comment, etc.  Unfortunately, as long as content is produced by people who send nastygrams to people building great consumption experiences, like Pulse, and who want us to download a new app for every site we visit, you can expect little change.

There are, however, glimmers of hope--small examples of features and efforts that paint a clearer picture of what a great product experience needs to be.  The full experience is largely broken, but you're starting to get a sense of what a complete, end to end, net-native content stack should look like—one that works and is sustainable as a business. 

Here are the things that I think a real web content consumption product should have which would enable better monetization—better ads, easy passage through paywalls where applicable, freemium features, etc:

1) Read Everywhere

Amazon is *nailing* this with books.  The one-click Amazon to my Kindle experience is fantastic.  What’s even more fantastic is that it also goes to my Kindle Android app.  Click, I have a book everywhere I read. 

This is one of the frustrations with Instapaper, because it’s very Apple-focused.  Kindle integration is spotty at best, and there are no official Android or Blackberry solutions.  This is going to get even more magnified with the Android tablets start coming out.

2) Social

This is where Amazon is really missing the boat.  Amazon uses the data of other humans, but not humans that you actually care about—which misses the opportunity created by influence.  I don’t just want to read things that people like me read.  I want to read things I “should” be reading because I want to keep up with certain people.  The notion of followers and influence hierarchies is very powerful in the recommendation space.  It also has social value.  When I read what my friends are reading, I can now interact with them in different ways.

I’m using this to replace discovery, because, honestly, anytime a machine has ever told me what I’m supposed to read, it fails.  More powerful to me is to know what’s trending through the system close to my circles and among people I care about.

3) Remix, Comment, Blog, Tweet

Tumblr really made it clear to the world that consuming content should be seamlessly integrated with sharing.  Adding your two cents and passing something along in a seamless act of curation is a very powerful feature.  It’s the reason I stopped using del.icio.us  I felt like I was throwing stuff into a void.  Now, I’m much more likely to share something on Twitter than I am to tag it in del.icio.us.  Sharing links on my blog is to cumbersome, but I’d do it if I had a better clipping tool that posted.

4) Easy Payments that Ensure Virality

The reason why I’m so much more likely to pay for a Meetup is because it’s integrated with Amazon one-click payment.  If I was sitting in my reader, and I saw a premium post that just required one click to open up, I’d be so much more likely to do it than to sign up for a single publication’s paywall.  If I have to start typing in my credit card numbers the second I read something, I’ll just move on.  However, if you let me read the premium article, but then you make me pay for it the next time I use the site when I have more time to sign up, perhaps that’s a better alternative. 

On top of that, you could create a system whereby the more you share, the less you pay.  Let’s say I was a tastemaker—where not only do I have a big following, but people like to engage on what I point them to.  If you’re a publication, you actually want to give me that article for free, so that I can tell others to view it.  If you make it transparent, and even layer on some gaming aspects that take quality of link sharing into consideration, you could incentivize people in an interesting way.  If I just start randomly sharing, and the clickthroughs are low, I pay full fare.  But if I show real influence, I pay less.  It’s not Pay Per Post b/c you don’t know what the discount was until after you share. 

5) Publisher Friendly

I don’t think you can be in the content consumption, delivery, discovery, etc business without being publisher friendly.  How many cool sites are out there that do interesting stuff with music that have “all the indies signed up” but can’t get any of the majors on board.  The same goes for textual content.  You can’t have the NYT suing you or griping all the time, because, at the end of the day, you need them for distribution. 

6) Consumer Friendly

People like Instapaper because of the simple and elegant design.  To become the content consumption platform of choice, it needs to be so easy and so sleek that Steve Jobs himself would be impressed.  That also means the experience starting from the product onboarding and the web article.  Remember how awful the experience of clicking on an RSS button was?  It can’t be that.  RSS left it up to you which reader you wanted.  Fail!  Most people didn’t have a reader, and in being flexible, it became confusing.  If you build an awesome reader that cuts across platforms, you can build up enough of a base that makes it worth it to publishers to add your add buttons.   Bookmarkets, plugins, extensions, etc. all need to be so easy that you don’t lose someone right off the bat like when someone had to handhold you on how to use del.icio.us.

Ok… that’s all I got. Thoughts?