What should you price your seed round at?
Well, it depends...
I could probably write a book on venture round pricing dynamics. It would have lots of philosophy, religion, theory, fiction, and pontification.
However, since I only have time for a blog post, I'll settle for actual data.
Since January of 2010, when I led my first seed investment in Backupify, I have led or committed to 27 investments. That includes all the deals I did at First Round, with the exception of Refinery29, which was a Series A. That also includes 16 Brooklyn Bridge Ventures deals done and five agreed to term sheets. Yes, it's going to be a busy fourth quarter.
The criteria for what is a Seed and what is a Series A for these purposes is whether or not the first round of the company was within the same year that I did the investment, and it had to be less than $750k of prior money. Refinery29 fell out based on timing.
So what does the data say.
Well, if you group them all up, here's what you get:
|Pre-Money Valuations (M)|
You wind up with about a four-ish valuation, mostly right around four, but with some outliers that bring up the average.
But price doesn't tell the whole story. What about the round size?
|Round Size (M)|
So the average round that I'm participating in is about a million bucks. For those of you that have trouble doing division, not surprisingly, that puts the average dilution right around 20%, which isn't surprising.
So, if you're looking at pre-money valuations saying "But hey, my deal wasn't valued at X, WTF??" then you need to take a look at the dilution numbers.
That's the dirty little secret of pricing:
Pre-money isn't the price. Dilution is the price and you're all pretty much getting the same deal.
On the other hand, stage matters, too... and stage generally impacts the resulting pre-money. How much money you get from investors reflects your stage. You start out at an accelerator or just raising some friends and family and that tends to be small potatoes. Maybe you raise a pre-seed after and that's like $750k to a million. Next round might be $2M, next after that $5M or more, etc etc. The further you progress, the more money, typically, that you get.
There's less money available for riskier and earlier deals, which makes sense.
So, if you're raising $750k and someone else is, you're probably at about the same stage, but if you had to give up half your company to get it and someone else only had to give up 10%, that's really where pricing matters--not so much the pre-money.
It's quirky, but that's the way that VCs think.
That also means that the best way you can move your price up is to create demand for your round. If you're oversubscribed, but don't want to take additional dilution, you can usually move the price up.
So what effects pricing and how much people raise. Across these 27 deals, here's what I saw...
Does it matter if you're launched? What about if you have some revenues?
|Pre-Money Valuations (M)|
Some interesting things happen here. There's very little difference in whether or not you've officially launched. However, having revenues does seem to make a big difference in the Pre-Money price. 12-20% depending on how you look at it.
But what really counts is the dilution. Did you have to give up more of the company?
Yes, for sure, especially with revenues. Launching may or may not give you less dilution based on whether you're looking at the median or the average, but across the board, having revenue changed how much dilution an entrepreneur had to take. When you're making your own money, your need for other people's money goes down and so does how much of the company you have to give up.
Can you raise a bigger round based on launching or having revenues?
Here's where the data gets really screwy, but I have a theory.
According to this, launching and having revenues caused the round sizes to go down. What??
Well, it's simple. If you haven't launched and you don't have revs, you're simply going to need more money, because you have more things to do.
One thing I thought of is that if you're able to raise money pre-launch at all, especially with a larger round, well then you must be the world's greatest team, right? That would mean you get a better price, right?
Well, that didn't hold above, right? The rounds are bigger, sure... but you're still taking the same if not more dilution than everyone else. So, yeah, you and your great team may get more money, but don't expect less dilution as well.
Can't have your cake and eat it, too.
How I learned to change the oil in my car and found a new office because of Shake Shack and a hackathon
Random story that I recounted recently to someone the other day. It's super interesting to go back and trace connections and relationships that led to new opportunities. If nothing else, it serves as a good reminder that every thing you do now is an investment in the future.
In 2009, I was introduced to Havi Hoffman. She was working as a developer evangelist at Yahoo! and got me on a panel at a hackathon she was working on. In turn, I wound up inviting her to a 300 person event that I threw at the Shake Shack in Madison Square Park. After seeing my ability to bring a big community together, she wound up introducing me to TK because he was running a hackathon of his own around the first Techcrunch Disrupt in NYC in 2010.
My friends Daniel Raffel (colleague, yahoo) and Tarikh Korula (Uncommon Projects, Brooklyn) + Etsy’s Chad Dickerson are organizing a weekend Hack day on 5/22-5/23 in association with TechCrunch Disrupt. More detail from Tarikh below. They’d love your help getting the word out and can answer any questions. It’d be great to get a mention in NYC Innovation. Thanks in advance for help getting the word out.
I wound up not only helping to promote that event, but actually attending, because if a bunch of hackers were going to be in a place in NYC, as an early stage investor I figured I should be there. So I went--the only investor at the time to actually hangout during the pizza and hacking part of the hackathon, not just the demos.
Techcrunch Disrupt is where I met Steve and Jared from GroupMe and what led to me backing the company when I was with First Round Capital.
Later in 2010, I was introduced by Fabian to Andres Wuerfel, who was leading Deustche Telekom's Innovation Group. It seemed like a good intro for GroupMe, so then I put Andres together with the GroupMe team.
Andres stayed in touch. When I launched my fund, he reached out and asked if I'd be willing to speak on a panel in Berlin. Why? Because someone who launches a fund in Brooklyn would have an idea of how ecosystems outside the Valley can survive and thrive--so that's what I spoke about. It was a great trip, but it also reconnected me with some New Yorkers that I hadn't seen in a while--namely Chris Muscarella, the co-founder of Kitchensurfing.
When I checked in on the app formally known as Foursquare, Chris reached out and invited me to a dinner in Berlin--which is where his co-founder Bo was from.
That's partly when my obsession with building communities around food began. I got to know Chris and Bo and wound up at a Kitchensurfing chef test meal, as they were vetting the chefs that wanted to join the platform. I met Chris' brother Stephen at that lunch. Stephen is an interesting dude who builds things and wants to enable other people to learn to build things, too. He bikes a lot and isn't too shabby at softball, so he wound up joining my softball team.
He also wound up teaching me how to change the oil in my car.
Getting to know the Muscarella brothers is also what led to a change of scenery for Brooklyn Bridge Ventures. About a year ago, I started talking to some of the crew from Studiomates about joining them in a new location. Their old home at 10 Jay was being renovated and that community was trying to figure out where it would go next.
As it happens, Kitchensurfing wound up growing out of their space in Gowanus and recently moved out. Chris reached out to me to ask if I knew anyone that wanted to take over. Our group was still on the hunt for space and so it wound up being a great fit.
So by the end of the month, I'll be moving Brooklyn Bridge Ventures from Dumbo over to Gowanus and bunking up with a great group of folks that are tied into the same community that produced Brooklyn Beta and led me to my investments in Tinybop and Editorially. Gowanus is an up and coming Brooklyn neighborhood that is now home to a Dino BBQ, the best pie place in NYC, a shuffleboard club, an Ample Hills and soon, a new boutique hotel.
I'll still be in Manhattan regularly and making the regular ride up and down Brooklyn's western shore to my investments in Williamsburg and Greenpoint, but I'm excited about the new surroundings, my new housemates, and the even shorter commute to work.
Let's get one thing straight. The world and every individual in it is a biased place. We all have our inherent biases and what I am not arguing here is that the venture capital world is a fair playing field for anyone.
I repeat: I AM NOT ARGUING THAT VENTURE CAPITAL IS FAIR TO ANYONE.
It weakens your argument, whatever it is, when you use faulty logic. So, if you're going to argue that the process of venture capital is inherently unfair to women, here's the logic that you *should not* use:
"Less than 3 percent of the 6,793 companies that received venture capital from 2011-2013 were headed by a woman, according to a study from Babson College released Tuesday. That means that out of nearly $51 billion in funding that startups received over those two years, a comparatively teeny $1.5 billion went to women-led ventures."
Sounds awful, right?
It may be. It may not be. We really don't know, because we're missing some critical information:
HOW MANY WOMEN ARE SEEKING VENTURE CAPITAL?
Unless you're tracking that statistic, there's no way to use *actual data* to prove how bad the bias is, or if there is any. You can broadcast all the anecdotes you want about how badly women were patronized or not respected in other ways, but until you track that statistic, that's all they are--just anecdotes.
I AM NOT ARGUING THAT WOMEN AREN'T SEEKING VENTURE CAPITAL.
They are, and perhaps not often enough. There are studies that suggest that there are lots of perfectly fantastic female owned business that are undercapitalized because the founders aren't seeking it--perhaps they believe the system won't support it, perhaps it relates to perceptions of risk. This is where I think there's a great opportunity for investment. Right this very moment, I'm in the process of leading investments in two companies where I had to convince a team with a female founder to take capital.
Whatever the case, the stat that just says that venture capital doesn't wind up in the hands of women is a very weak, incomplete story.
I repeat: I AM NOT ARGUING THAT VENTURE CAPITAL IS FAIR.
What you really want to know is, at the moment a founder pitches, can she get a fair shake? Right now, half the companies I've backed at Brooklyn Bridge Ventures have female founders. Does that mean I'm being fair and that I'm bias-free?
Nope. It doesn't prove squat. You don't understand basic logic and statistics if you think it does.
For all anyone knows, all things being equal, 80% of the BBV portfolio should have female founders in it because of the best deals I've seen, 80% of them were run by women. Maybe I've missed out on some amazing opportunities because I'm being unfair and biased.
You just don't know until you measure every part of the funnel.
It just frustrates me when super passionate people keep making a logically poor argument and get ignored because of that. I want to see the playing field get more level, but it's not going to happen by just stating where venture capital winds up.
It's a bit like saying that because 99% of donated food winds up in the hands of the 1% poorest people, we've solved the hunger problem. If you're not measuring how many people are hungry, and how much extra food there is, you're failing to tell the whole story.
I mean, we don't even know what the right number is. Is it 50/50? At 50/50, it still could be unfair. We'd all be patting each other on the back on how level the playing field is, not realizing that its actually still way harder for a company with the same qualifications to raise money.
Should it be the number that is reflective of how many women-owned businesses there are? Would that make more sense? I'm not totally sure of that either--because if all the guys own software companies and all the women own retail brands, and venture capital generally doesn't work for retail brands, then you wouldn't really expect venture capital to invest in women, would you?
And maybe all those steady growth retail brands are much better businesses from a cashflow perspective, but just not appropriate for venture capital where it's about the exit multiple.
That would perhaps be a great argument for VC being a crappy asset class, but not necessarily an unfair one.
Of course, that's a stereotype and a gross generalization--but the point is, we're living in a soundbyte culture around a very complex issue and it's really degrading the conversation.
I repeat: I AM NOT ARGUING THAT VENTURE CAPITAL IS FAIR.
Sometimes, an investor gets lucky. They invest in a company with an idea that doesn't go anywhere, the company pivots, and you wind up in the next big thing.
In hindsight, an investor will tell you that they knew they had backed a great team and that was the key to the investment. It's never luck.
I have a lot of trouble with the "great team" scenario, because it just doesn't seem to play out in real life. What about when a company clearly makes a stupid acquisition? When they spend hundreds of millions to buy you only to turn off your product and shut it off later, were you a great team, but you wouldn't have been a great team if you ran out of money two weeks earlier?
Is greatness innate? Are you born to be an entrepreneur?
Why don't all the people who have "great" entrepreneurial qualities succeed? Wouldn't there be some test you could give all first time entrepreneurs to gage their entrepreneurial prowess to understand how good they'll be at running a company?
It feels like a lot of hocus pocus half the time--where we mistake agressiveness and ambition for qualities of good management in startups. Maybe that's why half the time it seems that entrepreneurs are getting in trouble these days--because investors aren't as good as we think they are at funding the kind of people you want to back.
Adam D'Augelli, a very smart investor over at True Ventures, mentioned to me the other day something that rang true--that the best entrepreneurs update their investors with metrics, not stories. That made a lot of sense to me, but what also led from that was the idea that watching metrics was a habit, not something you're born with. It's something that anyone can get into the habit of doing. Knowing your metrics and following them is a discipline and being disciplined is really what being a manager is all about. Do you create processes that bring the right people to your company? Do you create processes that allow them to communicate well with each other and execute? The thing that makes a team more than just a collection of individuals is a system.
The best entrepreneurs I've worked with have great habits and they create great habits in their companies. They have a way to do just about everything--including how they go about learning what they don't know. Good learning habits are key to success, because no one is born knowing everything.
I like this habit model of great entrepreneurs because it means anyone can get their given determination and discipline. It makes greatness accessable.
It's the same with culture. Culture isn't innate to a company--it's a series of habits and practices. It derives from conscious language choices when you hear from management both in public and private--from where incentives are placed, and related to how much emphasize is put on values, communication, and mutual respect. It doesn't just happen. It's a habitual practice.
It's very similar to my own experience with running.
When you're younger, so much of your physical ability derives from the randomness of who sprouts up earlier, who was born just before the cutoff and happens to be almost a year older than everyone, etc. Over time, those advantages disappear as the playing field evens out. Your ability to be a good runner at the recreational level, as you get older, has more to do with your diet and exercise routine than it has anything to do with genetics. In the top 1%, that might not hold, but I'm routinely finishing around the top 5% of my races these days without ever having been anything in the realm of being a top athlete when I was younger. I'm just a lot more disciplined than a lot of my 30-something peers these days, and that's a big advantage.
Greatness is a practice that anyone can achieve. I like it better that way.
The Cost of a College Education
I just looked up how much my alma mater costs in tuition. Fordham University, the 56th best college in the country, is now $44,000 a year. That's a 6% annual increase since 1997 when I started and it was $16,000 a year. Take that forward to when my future kid might be going to school and you're talking $141,000 a year tuition.
What in the world could college possibly do for you to justify over half a million dollars in cost. There's no way anyone will be able to economically justify that cost. Hell, it would be cheaper just to hire private tutors in every subject and pay for the kid to live in a cheap apartment somewhere. There's no way the college cost bubble won't implode.
Diabetes rates, especially among kids, are off the charts and at some point, we're going to have to get serious about eating real food and exercising. You'll see more and more companies like Tinkergarten that motivate kids and parents to get out of the house and out from behind the screen. Maybe we'll figure out the ice bucket challege for heart disease, but if we don't turn our attention from long tail diseases that affect 30,000 people annually, a dozen potential ISIS trained Americans living somewhere in the US and the infintissimally small threat of child kidnapping, we'll figure out how to address the #1 cost burden on our healthcare system and actual killer of humans.
Look around the next time you go into a restaurant. Both adults and kids are face down in their phones--swiping, liking, texting, etc. Up to a quarter of auto crashes involve cell phones these days. It's even causing marital difficulties as partners are complaining that their spouses just aren't present in the small amount of personal time they have together. We're soon going to realize that we don't need every single notification at every single moment and the phones will get put away in favor of devices like Ringly that screen the world and filter notifications to right time/right place.
The idea of a channel that you pay for over and above just a data pipe is definitely going to go the way of the printed local newspaper. When I can download any show, why am I paying for the channel that carries the show?
The Release Cycle of Content
It's already happening. Look at House of Cards--the full season gets released all in one day. Soon, someone is going to enable me to pay $50 to watch Guardians of the Galaxy in my house the day it gets released. Companies like Drip create a direct relationship between creators and content where you could send something to your fans every week instead of going through traditional channels to create and launch an album.
One day, we'll mostly be freelancers, floating from project to project--and the idea that you only do one thing, working for a company will be the exception rather than the rule.
One day, no one is going to give a crap what you do on your own time. You'll elect a single, atheist President or someone in an open relationship and it just won't matter to anyone. The idea that we cared that anyone did anything that isn't any worse than stuff we've done will be a moot point.