Seed is the new Series A, but who’s supporting founders pre-launch?

Jason Calacanis just published a good post on the changing definitions of Seed, Series A, and Series B investment. I’m going to quote his definitions in full:

2004 definition
— Pre-funding: You talk about your idea & write a business plan.
— Seed Round: You build a prototype of your product.
— A Round: The funding necessary to launch your product.
— B Round: The funding necessary to get product traction.
— C Round: The funding necessary to scale your product.

2014 definition
— Pre-funding: You build a prototype of your product.
— Seed Round: The funding necessary to launch your product.
— A Round: The funding necessary to get product traction.
— B Round: The funding necessary to scale your product.

2015 definition
— Pre-funding: You talk about your idea, you build a prototype & launch an MVP.
— Seed Round: The funding necessary to get product traction.
— A Round: The funding necessary to scale your product.
— B Round: The funding necessary to get founder liquidity, build groovy headquarters, and make competitors give up (or not start in the first place).

You’ve seen the pattern here, what used to be Series C is now Series A, what used to be Series B is now seed, and what used to be Series A is now ‘Pre-funding’. All this is being driven by increased capital efficiency. In 2004 it took until Series C to scale your product because it took a lot of money. Now you can do that with Series A. (There has been some inflation in round sizes, but the main story is definitely capital efficiency).

In his post Jason goes on to give advice to founders and angel investors and talk about his incubator The Launch Incubator and the consistent theme is that there is no support for pre-launch companies anymore. Founders who can’t launch an MVP will struggle to get funded, angels shouldn’t invest in pre-prototype companies, and The Launch Incubator is looking for companies with an MVP to take into their 12 week programme.

I think this leaves a massive opportunity to support founders who are pre-launch. There are lots of great entrepreneurs with big ideas that don’t have the technical talent to build a prototype or MVP. Investing at that stage is tricky because the company needs to quickly and cheaply build product and get traction, but the key is having the people in-house who can help the founder make that happen. That’s what we do at Forward Partners.

Presentation on the future of funding

I was scheduled to give the embedded presentation in one minutes time to the London School of Economics SU Alternative Invesments Conference but they are running late, which gives me a chance to put it online. You saw it here first :)

This will be the second time in a week that I’ve presented to an audience of students. It’s good to see such a high level of interest in startups and venture.

Great investing comes down to betting on new markets

Over the last couple of days a lot of people have been linking to Jerry Neuman’s great essay on the history of venture capital. It’s US focused, starting when the venture industry started in the 1970s and analysing all the up and down cycles of investment and returns since then. It’s a long read, but highly recommended if you are a student of the industry.

What follows from here leads on from what I see as Neuman’s two main conclusions:

  • when investors stop taking risks returns plummet
  • the best returns have come from taking market risk rather than technology risk

That chimes with my experience. When I’ve seen VCs go after ‘safe’ 3x deals rather than chase 10x deals it hasn’t worked because the success rate doesn’t go up enough to compensate for the reduced returns, and investing in technology is difficult because it’s hard to ascertain whether progress is being made and it’s too easy to invest good money after bad.

You may now be thinking that venture should be about taking technology risk, but when you look at history that’s not been the case. Neuman discusses this in a bit of detail, but the headline is that the majority of great venture winners took market risk not technology risk. When VCs invested in Apple the technology already worked they just didn’t know if anyone wanted computers. Similarly with Google and another search engine, or Facebook and another social network, and so on. If this feels counter-intuitive it’s because as an industry we are guilty of romanticising the idea of big technology bets, I think because they sound more exciting than bets on new markets.

Neuman doesn’t go into this, but perhaps the defining feature of startup financing over the last decade is that it’s become much cheaper to assess market risk. That’s partly because of declining costs and partly because we’ve developed new and better techniques. I’ve written about both these developments at length on this blog before so won’t go into them now but the end result is that companies can now eliminate a lot of risk from their business plans and hence generate a lot of value for shareholders with their first £250-500k investment. That’s why we choose to play at these very early stages.

Breadth and depth of UK VC market improving


Here in the UK we’ve been working away building our startup ecosystem for 15-20 years (just 15 years for me) and it’s only recently that I’ve felt we are finally reaching critical mass. That’s a subjective assessment combining strength and depth of the angel and VC markets, number of quality investment opportunities, number of exits (including £1bn+ exits), strength of our startup hubs, and quality of support from advisors, lawyers, real estate agents and so on. I haven’t put a number on all these things but we’ve seen great progress on all fronts over the last couple of years.

This chart from CBInsights is another piece of encouraging data. There has been a lot of talk about new UK funds coming online in 2014, but we can see that the trend has been going for a couple of years already. The YTD 2014 data goes up to the end of Q3, and if we assume the same rate for Q4 which is traditionally a big quarter for venture, then we will end up with 170 unique investors this year.

Looking at where the investors come from is interesting too. The percentage from the UK has increased from 30% to 47% since 2010 – that’s an increasing percentage of an increasing number – which is a sign that our local VC industry is building some strength now. That’s great because strong local investors are a critical ingredient of a sustainable ecosystem.

This data shows that the breadth of the UK venture market has increased. Couple that with the fact that the volume and value of investment is also increasing and it’s fair to say that we are making great progress on both breadth and depth. Exciting times.

Your seed round should last 12-18 months – data


The ever excellent CBInsights just released new data on the time between rounds. As you can see from the chart above year to date in 2014 the median time between seed and Series A has been 349 days and that’s been reasonably consistent over the last couple of years. If the median time is just under a year then in the spirit of planning for the worst and hoping for the best this data suggests that reckoning on making your seed round last 12-18 months is the way to go.

Thinking about our portfolio and other companies I have seen recently in the UK I would estimate that over here the median time from Seed to Series A is slightly longer than this, maybe just over a year. That would make sense given that the volume of capital in the market is lower and the competition between investors is less intense. (The good news is that the a number of new funds have come to market recently, including Google Ventures and Mosaic Ventures.)

For UK companies then, I would advise reckoning on 12 months as a minimum. Some companies do better than that, but that takes luck and it isn’t wise to plan on being lucky.

All that said, within reason more runway is better and if you can get extra cash at an acceptable dilution it’s usually worth doing. Important caveat: if you do raise a large seed round don’t ramp the burn too much before you’ve found a repeatable business model.

On a side note, in a bubble times between rounds usually drops, but we’re not seeing that in the chart above, or in times between later rounds.

Cultivate the calmness that comes from knowing you will succeed

Reading this tweet from Paul Graham I immediately thought that this is great advice for multiple situations, not just YC interviews. Job interviews are one such other situation. Negotiations are another – knowing you will succeed whatever the outcome gives you the power to walk away.

Knowing you will succeed takes a special kind of confidence. That starts with self belief, which an entrepreneur needs in spades. I wrote a while back about the cognitive biases that an entrepreneur need, and personal exceptionalism is top of the list, you should believe that you are the top of your cohort and that your work is snowflake special. You know you will succeed because you know you are good enough to find a way. I’m not sure if you can cultivate this kind of confidence.

But self-confidence isn’t enough on its own. You also need a good plan. It might not be possible to do anything about your levels of self confidence, but you can make sure you have a good plan. The first thing you need is a good idea. That isn’t the same as the best idea you’ve had so far. It should be something that you have a great feeling about. Then you need to test it thoroughly. Look at it from every angle. One way we help entrepreneurs do that is to list out all the assumptions that are made and then examine each for reasonableness. Another good way is to talk to as many people as possible and listen carefully to any criticisms they have. Listen, process, and then figure out whether they are right. Don’t fall into the habit of dismissing a commonly heard objection. If you hear it a lot, think about it a lot.

By way of an example, here at Forward Partners the most common criticism of our business is that our returns won’t be good (enough) because we spend much more money than conventional VCs supporting our partner companies. The argument runs that we would be better off using that money to invest in a larger number of companies. Our belief is that the tools and services we offer make it a little easier for companies to achieve success which brings two important advantages. Firstly it gives us an edge in winning deals and secondly that our partner companies will do better as a result. We take the critique seriously and have modelled out how much that edge in winning deals needs to be worth and how much more success our companies need to achieve. The assumptions look reasonable and we continue to test them against reality as we do more deals and gather more data points.

Combining a good plan which has been thoroughly stress tested with a high level of self confidence puts you in a good place, but there’s one final ingredient you need before you know you will succeed, and that’s a back up plan. If you are founding a company there will be huge unknowns and associated risks. If you’ve done your planning well you will have confidence that they are all manageable, but you need to know that you will prevail even if you get unlucky. In our case we ran the analysis to see what happens if the extra money we spend supporting our partner companies makes no difference, and the conclusion is that the returns to investors will still be ok. Not where we hope to end up, but still ok.

High growth startups are a big deal for the UK economy – new research

There’s a new report out on the impact of high growth small businesses on the UK economy. Last week I wrote about some new research showing that nearly all job creation in the US comes from young companies and concluded by saying it would be great to see some similar research in the UK. And now we have some already. With this publication and the upcoming Scale Up report I hope it will be very clear that high growth startups are the engine of growth for employment and the UK economy more generally.

That’s important for two reasons. Firstly we should all feel good about the work we are doing within the startup ecosystem – the work we do is the difference between growth and stagnation, and secondly it will encourage government to continue and extend their support for our work, particularly with policies to improve access to finance and the depth of the talent pool. The Startup Manifesto is a good read if you want to bone up on what government should do for startups here in the UK.

The research was conducted by Centre for Economics and Business Research and commissioned by Octopus Investments (thank you) and took the form of a survey of 400 high growth small businesses (defined as companies with £1-20m turnover and 20% growth per year over three years). There are 30,000 businesses like this in total in the UK. The key findings are that high growth small businesses:

  • generated 256,000 new jobs 2012-13, which was 68% of the total. That’s huge, particularly given that theses companies only accounted for 3.4% of the economy, and
  • accounted for 36% of the increase in GVA in 2013. GVA, or Gross Value Add, is a measure of economic output similar to GDP.

As with the American study, note that the growth comes from small high growth companies, not all small companies.

What would be interesting to see now is a breakdown of which companies within the 30,000 high growth small businesses in the UK are responsible for most of the employment growth. Just as we have learned that if growth is our objective we should focus our support on the portion of small businesses which are growing fast, it may be that we can make a further refinement to a particular industry or sector.

How to handle existing investors when negotiating a new round of investment

In the last year we have had new investors lead rounds at about ten of companies  (including two that are about to complete). In every case we are happy our new partners have come on board,  but there were some processes that went better than others.Here’s what I think makes a process a good one from the perspective of the existing shareholders in a startup. I’m focusing on the factors that are only important for existing investors, not the factors that make a process good for everyone (quick, transparent, competitive tension, etc).

  1. Over communicate. If you have a small number of shareholders keep them abreast of the process and share key terms early, including before there is a formal termsheet. You don’t need to go overboard and report every investor meeting, but do keep the updates regular. If you have lots of shareholders try to find one or two who will represent the rest and treat them as above. Explain to the others how the process is working and send them updates at key moments, including when you decide how much you will raise, when you accept a termsheet and when you will need them to review documents.
  2. Understand the appetite to follow on and make sure there is sufficient space in the round to accommodate everyone who wants to take up their pre-emption rights. This isn’t always easy. Existing investors may have a hard time deciding how much they will follow on until the round has taken shape and your new investor may want to take most of the round for themselves. Persevere. Remember it was your existing investors who supported you first.
  3. Make sure that at least your key shareholders are aware of anything that is likely to be controversial and don’t take silence as assent.
In practice it’s often difficult to find the time to keep existing investors in the loop. Events move fast, deals are a complex balance of multiple factors that are difficult to explain, due diligence is very time consuming, AND there is a business to run.On top of that it’s not always easy to know how much detail to share and how to communicate bad news. My advice is just to get on with it. Don’t wait until you want some help or advice before you get in touch. A good advisor or board member can be an enormous help, both in shaping the communication and in taking on some of the work.

Finally, it’s not all on the founder. Existing shareholders have a responsibility too. CEOs run companies and interfering, being too needy for information, or offering unwanted advice is definitely not best practice and makes management less likely to give regular updates.

UPDATE: I just updated point 2 to say that existing investors should be accommodated up their pre-emption rights – i.e. to take a percentage of the round equivalent to their current stake in the business. That’s a fair principle recognised in company law. I don’t think there is any general obligation on founders to make space in the round for existing investors to invest more than this and increase their stake in the company – no matter how helpful they’ve been.

What investors look for in a startup

The post below first appeared as a guest post by me on the Web Summit Blog


If you ask most VCs what they look for in a startup they will say great team, great product and great market. Then, if you press them for more detail most will say that for them the team is the most important (although I think they say that at least partly because it’s what entrepreneurs want to hear). Marc Andreessen wrote about this once. He was on the money when he said that for early stage investments having a great team is most important but for later stage investments the market matters more. That’s because when a company is young there is little in the company except the team whilst more mature companies have customers and a brand that tie them to a market.

Early stage investors like Forward Partners look for a minimum of a great entrepreneur and a great idea. Like many others we believe that at the heart of every great business there’s a great entrepreneur so that’s the first and most important thing to check off the list. A mistake that I’ve made in the past is to think that with my help an average entrepreneur with a great idea can be successful, but I’ve come to understand that that’s a conceit. All that said, it’s crucial that the great entrepreneur comes with a great idea otherwise the investment is likely to be wasted. There have, of course, been many instances where great entrepreneurs have pivoted away from their first idea and still been successful, with Kevin Systrom at Instagram being perhaps the most famous recent example, but that doesn’t happen often enough to bet on and it remains a mistake to invest in an entrepreneur, however good, if you don’t believe in their idea.

Much has been written about the character traits of great entrepreneurs so I won’t repeat that here (this post from Mark Suster has a good list) but I will say that in addition to those traits we want to see they have something special which gives them an unfair advantage for their chosen opportunity. Most often that’s deep domain experience. A great idea is for a company that can be a leader in a sizeable market, has enough upside potential to return the investor’s fund and can get far enough with the money to raise the next round.

As businesses develop investors start to think about execution as well as the idea and the team. The first evidence of good execution in my book is the work done to understand the customer and the problem, then slightly more mature companies should have prototypes and first releases of the product to show, and after that they should demonstrate traction and growth. Across all these areas the execution should evidence rigour, discipline and clear thinking.

Now you know what investors are looking for you might be wondering how to approach them. It’s been said many times before but the key is to build a relationship over time so that when you get to the point of asking for money you are asking somebody who already knows you, and hopefully likes you and your idea. The effort the investor puts into building a relationship with you is a good indicator of how likely they are to say yes when you finally come asking. The best way to to get a relationship started is with an introduction, but interacting on social media, networking at cocktail parties and attending office hours or other drop in sessions also works.

My final piece of advice is to understand that most good investors are incredibly time-poor – they are inundated with requests for calls and meetings and only have enough time to say yes to a very small percentage. Moreover, those ‘yesses’ will naturally skew to the people they already know and know well, making it tough to break in. It’s fine to ask for a meeting, but be prepared to begin the relationship with an email conversation. If you are approaching an institutional investor then people who are new to the firm and/or more junior often have more time, although maybe less influence.

Good luck!