How to choose your seed investor?
Updated: Mar 29
A couple of weeks ago, after a stellar Q4 2020, our company Wix has become Israel's most valuable company. Let that sink for a moment. This means that Israel's most valuable company has been founded just a bit more than a decade ago.
'Wix's revenue jumped 38% year over year to $283M. The website-creation platform added 185k net premium subscriptions in Q4, bringing its total subscriber count to 5.5M as of the end of 2020. Wix's total registered user base, meanwhile, climbed 19% to 196.7 million. The demand for a web presence is higher than ever before,' Wix CFO explained. For more, check out this link.
If you listen to the CEO of Wix, this is only the beginning. While most see in Wix (only) a website builder, what the company really does, is powering the Internet...
Driving Alpha: From idea to IPO and beyond...
More importantly, though, I think Wix illustrates so well how my firm works with founders. While we let one of the company's first financing round, we were also the last VC that sold his shares in the company, and kept on investing in the company across funding rounds. And yes, we are still on the company's board, 7 years after its IPO on the Nasdaq.
Picking a VC is hard. Make sure you like their 'style'.
One area that entrepreneurs, and co-investors to a certain extent, should take some time to understand is how VCs and their teams 'tick'. As Rob puts it well, 'Choosing a VC Is like a Marriage. But meeting and pitching VC’s is not like Dating... In dating, you hope that your first experiences with another person are a decent indicator of what the future holds. But in VC, that is only sometimes true and often is a false indicator. I know many VCs that are amazing partners to founders in thick and thin. But their reputation with founders that pitch them is mixed. Conversely, it’s very common that investors seem wonderful to work with when trying to get access to a deal, but then act totally different once they are on board'.
So, if pitching a VC isn’t really like dating, how is a founder supposed to figure out who the right person is to work with?' You don’t really have much to go on to decide who would make a good fit. Reputation of firm? Of partner? Network? Yes, of course, but it is much more than that. And it is so important, especially at the seed stage. This is one of the reasons I am writing this blog. To help entrepreneurs quickly assess if they like my 'style', and if my firm might be a great 'fit' for them. So, read on...
(1) A Patient and Passionate Partner: 'Our DNA'
The journey of Wix has not always been up and to the right. Fundraising wasn't always obvious, and a bunch of VCs even sold their shares along the way... But the journey of those rocketships rarely is, even if the tech news headlines can make you believe so sometimes, especially in the recent months.
Let's look at the data of one example: Follow-on Fundraising (based on a sample of 35k startups). As the graph below shows, the startup journey is a rocky one, until the end. Not surprisingly, the success rate to exit a business increases as a startup progresses through financing stages. But, there will be many instances where follow-on funding isn't that easy.
Raising a Series A is usually the most challenging moment (20% avg success rate), especially for the 'non-obvious' plays. Notice the considerable increase in the success to raise a next round from 'Seed to Series A' (20%) to 'Series A to Series B' (50%), and directional reversal to Series B (44%) - resulting in a kink in the line plot above. The intersecting lines tell us that a Series F startup is as likely to exit as it is to raise a Series G. One step further, the story changes. This makes sense. After a certain point, a successful company can sustain itself, not needing further capital injections.
This is one key reason why it is so important to choose the right seed investor, one that is an active (also financial) supporter from seed to A, but also beyond. Make sure your seed investors are 'real believers', regardless of the current 'mood' of the market, and truly understand the value you are creating. Most, and that's ok for later-stage investors, are different. They are purely financial investors: They assess traction based on the usual clear KPIs and results, to see if you can drive financial performance now, first and foremost. Unfortunately, things don't work that way, definitely not at the early stage, and sometimes not later on. Make sure you have a partner for the entire journey, one that has your back...
(2) A Committed Partner: 'All in, or nothing'
A great VC should want to lead your round. Leading a round means taking on responsibility. While I am (from time to time) cool to share a round with a great firm and partner I like to work with, I don't like 'party rounds' where there are, for example, more than 3 investors participating equally. It is just unclear who is in charge, resulting inevitably in a lack of commitment. I have seen this, and I don't want to invest like that. It is just not my style, and it does not drive great financial performance in the long run. If you allow me to put my name on your cap table, I will be all in.
Let's have a look at the data of another example: Time Between Rounds (based on 14k materialized financing sequence events). The median indicates a time range between rounds of 15 to 19 months, while the averages even suggest a range from 18 to 22 months.
Having great seed investors means having passionate, but also honest, partners who know when to push you, and when to hold you back... Building a product takes time. Finding the right talent takes time. And, as it turns out, fundraising often takes time, too. A great investor will be able to 'read' your company's journey and help you spot the right timing for key events. Very often, founders don't think that they are ready for the next step. It is an investor's job to convince them otherwise, and actively help them reach it faster.
The level of involvement you get from great seed funds is unprecedented compared to VCs that don't like to take on ownership. And this simply because their interests are so much more aligned. When a good seed investor, that partners only with a few companies, wants to lead a round, it means you’ve got the whole fund behind you. They will be 100% on board in helping you drive the future of your company. Their fund economics are such as they are incentivized to help you become their next big success story. Raising your next funding round is only one out of many steps along your joint journey. As my friend Gil put it well:
(3) A Smart Partner: 'The true value of what you are building needs to be understood'
Great seed investors are the guys that will be on your side, ideally be your first call, from the very early days, until you make history. They need to understand your business so well, that they are able to stick with your company when the chips are down, but also see clear when things are going 'so well'. Many people can’t do it. It is hard. They are impatient. They want the easy and quick money.
Let's get back to the Wix example. 'We had opportunities to sell Wix. In 2011, we received a very serious offer to sell, at a value of $400M, and we came to the founders and told them we did not believe it was right to sell. At the time - before the IPO - the founders and we had much bigger stakes in the company, and we were looking at a lot of money for each one of us. We had an interesting conversation, which turned into a question of confidence between us and them. We told them, ‘You can be worth much more.' So, they decided not to sell, and the rest is history. Giving such a strong recommendation is only possible if an investor truly understands the value of a business.
So, picking a highly committed and dedicated early-stage investor ensures you, the founder, will have a partner who thinks about how to handle critical topics, and not only early on.
(4) A Humble Partner: 'Cheerleaders', and just good people...
We are not passive investors. On the contrary. We partner with very few companies only, and aspire to be 'their first call'. Building companies is hard, and you can't be a great, active partner if you are spread thin across too many.
A great seed investor also knows who the true stars are. And it is not them, but the entrepreneurs. It is about your company, and your employees. Make sure the people you let onto your cap table live by that.
Finally, I always ask my founders when they talk to investors if they think they would get along well, and feel if they are 'just good people'. There will be many tense moments in a startup's journey, and going through them with nice people makes it a hell of a lot easier. Being a CEO can be a lonely job. You always feel the need to be self-confident and make sure others don’t sense any self-doubt. You’d love to tell your employees that you’re going through tough times but you don’t want it to affect them, of course. But you want to be able to tell your VCs that you’re nervous or that you’re worried that something might affect your next funding round, for example. So, when you partner with a firm, it is also crucial to assess the individual partner(s) involved with your company directly. It is this person, first and foremost, that you will be working with on a daily basis.
Last week I was in Madrid. I can't tell you how relieving it is for me to meet again the people I work with. I had my first indoor restaurant dinner in months! How crazy is that 🙃? Yes, remote can be great, but nothing beats in person. It is all about going where the great entrepreneurs are, and support them. Below a pic from a walk in Madrid's sunny El Retiro Park.
Life is awesome,
Other content I found useful
- Dealroom has pulled together a list of EMEA's top VCs. Check it out. We are in great company here, alongside many great firms that shaped the European landscape in the past decade.
- Congrats to my friends to Singular for closing their first fund. This is a great team, and I am looking forward to working together. Onwards!
- Here a great Twitter Thread by Frank on how institutional LPs that invest in VC funds think about the recent rise in exit valuations, and how this might impact their view of managers and allocations: 'All VCs should assume their LPs have great BS detectors. They want to back managers with repeatable strategies over lucky managers. They love the returns but care about how they were generated as much as the actual outcome. One LP said they’re studying the top 20-30 IPOs and SPACs of the past 12 months to see who owns what with an eye forwards determining which managers got lucky and which ones repeatably have been able to find winners. Consistency trumps incremental returns. Some vintages will be kind to all managers, but very few can perform when the tide is out...'.
- Great read by Sofia on the potential of online grocery shopping in Europe. Many startups across Europe, often very early ones, are raising big rounds in the space. Here is the rationale: 'The European grocery market alone is a $2.2T industry, and top chains such as Tesco, Aldi, and Carrefour are some of the largest private-sector employers. The Western grocery market has historically lagged behind other industries in terms of online adoption. While e-commerce in Europe and the US averages 15-20% of total retail sales, for groceries, the share of online is 0.5-5% across EU markets and 3.5% in the US. The only exception is the UK at 10%. While the secular trend towards an increased share of online was noticeable pre-Covid, the pandemic has accelerated this transition on both sides of the Atlantic. 10% online adoption in Europe alone would represent $220B of total addressable market'. This will be a tough fight in the tech world over the next months and years, with huge amounts of venture money being deployed in companies around Europe going after this opportunity. To be continued...
- How Long Does It Take To Get to A Billion+ Acquisition in SaaS? About 10 Years. Here a great data-driven analysis by Jason.
- Another great Twitter thread, this time by Roger on why VC equity ownership and disciplined follow-on investing in their portfolio companies is crucial for seed investors: 'If I lead the seed round in a company I believe to be truly generational, and I have capacity to invest in the Series A, then I'd likely value this more than investing in 2-3 new companies.' In other words, a great seed investor is committed to your company. Ownership means responsibility, and commitment, to your startup. Make sure you choose the investor that fits your ambition.
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