I had a fascinating conversation with an early/seed stage investor yesterday who basically described the market as follows...
He said that, over the course of all of their deals (over 50), they've done a very good job figuring out what a team will need to do to raise venture capital. Their investments are basically meant to supply a team with about 9 months of capital to go out and build something and "jump 9 feet", because that's the milestone they see for VC--whatever 9 feet is for that particular comapny.
That had been going pretty well up until deals that were done in the first half of last year--right around the time that Path101.com got it's first angel financing. Now their companies are coming back into the market, as planned, for financing. They're reporting that instead of the 9 feet they were training for, they're now being asked to jump 15 feet by the VCs. Somehow, companies are supposed to get straight from product to revenue--without iteration or even traction in between.
If you're an investor and you can get a Series B company--one with revenue traction--for Series A prices, why would you ever do a Series A? It's not unfair--it's just good business.
Welcome to raising capital in 2009. Go straight to Series B or do not pass go.
This investor was basically doubling the size of the rounds he was doing--splitting them with a partner fund--in order to give companies longer runways to actually make it to sustainability. He described your angel/seed funding like a rocket ship. You need to decide how big of a fuel tank you need to take you into orbit, because, these days, if you run out before you get there, there's no refueling mid-flight.
We'll be talking to our board tomorrow and the theme of the conversation is more or less "If financing happens, great, but we're not going to wait around for it." We're still in conversations with investors, but our product plan has prioritized immediately monetizable features. We're shooting for 45 days, give or take a few bug fixes here and there, to launch both recruiter and candidate services we can sell. We've cut our burn pretty low and we're working on some in person job search seminars to help extend the runway. We're not going to disappear tomorrow, that's for sure--but we want to still be here six months from now and beyond. That takes a solid plan and some rolled up sleeves.
What am I telling startups now? Forget raising 250-500k. If you can raise a million, do it--because the chances of you creating a break-even business on 250k-500k is pretty low. If you can't raise a million, then only focus on building something that a customer is willing to pay for TODAY. (That should focus your product roadmap just a bit.) Anything in between will be a bridge to nowhere.
UPDATE: Fred wrote this post yesterday about becoming the default behavior for your market--ahead of figuring out how to monetize it. I think the problem with that thinking is that it basically only gives you one shot. You're playing startup Russion Roulette when your goal is to become the default activity and you have no Plan B. At least of you monetize in some way, if it takes you two or three tries to become the default, you have the runway to iterate. We're all aiming to become the default activity for our consumer base and the service we provide--but it's not always clear how to do that. Lots of people wanted to be the Google of events--it never happened, but not for lack of trying. In new markets, it's not always clear what model wins out, and often times the last one standing wins. It's hard to be the last one standing if you're not making money. The key is to make money in a way that doesn't hinder your growth.
In hindsight, I wonder if perhaps we at Union Square Ventures did the world a disservice back in 2005 when we started blogging as a fund--opening the kimono on the world of venture capital and making it seem like it was within arms reach. Maybe the world was better off when firstname.lastname@example.org was the black hole where your ideas went.
We have a new black hole where all the ideas go today--but this time we call it the economy.
Before all the transparancy, those who really wanted to pursue their ideas, out of necessity, went and got paying customers for their business day one. If you built a great business, the VCs would find you, but short of that, you didn't have all of these conferences, bootcamps, etc. making you feel like you're just an investor away from the next big thing.
People would tell me, "Oh, you're lucky that you used to work for a venture fund, because you understand what they want." In hindsight, I don't know about that. I might have been better off not knowing that venture capital existed, aiming for profits from the beginning--and then just being nicely surprised if some dude shows up at my door with a few million in cash asking to buy a minority stake in my business.
Venture capital is like winning the lottery. Somebody wins, but statistically, it's not you. Don't wait for an investor to go build the business. We're not--not anymore, anyway.