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First Time Entrepreneurs?

Posted on Tuesday, Mar 25th 2008

[This discussion is getting really interesting … please chime in, folks …]

I am trying to figure out the seriousness of something that I see is going on in Silicon Valley and elsewhere. I need your help to understand the phenomenon, and would appreciate if you engage in this thread and offer your perspective.

VCs are moving up the entrepreneurship value chain, raising larger and larger funds, and moving farther and farther away from true entrepreneurship. In essence, they are moving to late stage ventures, and becoming Bankers, as opposed to Venture Capitalists.

As a result, there is an increasing void in seed / early stage entrepreneurship. Raising money has become very difficult.

No, early stage entrepreneurship has not stopped. The Angel network continues to play in this, but Angels are not easy to find, so first time entrepreneurs have a hard time locating money to get their projects off the ground.

The other mechanism that is supporting early-stage is serial entrepreneurship. Serial Entrepreneurs, predictably, are funding the seed round themselves, with their own money, and then going straight to their network of VCs to do the later rounds.

This leaves first-time entrepreneurs in a lurch.

My thesis is that many of the world’s best entrepreneurs were first-time entrepreneurs once. Steve Jobs. Bill Gates. Larry Ellison.

By making it so difficult for the new generation of first-time entrepreneurs to get funded, are we throttling a realm of creativity, innovation, and entrepreneurial energy that ought to be nurtured, not smothered?

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Sramana,

Your sampling may be too small, or too localized. Well over 50% of my firm’s investments over the past 15 months, i.e. since 1/1/07, have been first institutional rounds. In most cases these days, entrepreneurs have self or family or angel-funded to the point where they’re ready to raise a venture round. The internet makes it cheap to develop something and get it in front of a lot of people, so most entrepreneurs don’t need, say, $5M to get going.

Many (I don’t have the stats in front of me, but it’s also around 50%) are first-time CEOs.

We, and most VCs I think, are reluctant to fund a first-time CEO who hasn’t been in a key position in a startup before. If this is your first CEO job, and the first time in a startup, you’re putting a steep learning curve in your way. But, if you’ve been, say, a technical founder in a startup, or a VP Marketing, then you’ve at least seen how things do and don’t work. How does an entrepreneur solve this problem? By joining a startup or two before being the CEO of one, or by self/family/angel funding to the point where a VC can see that they’re an effective CEO.

A great example is Alex Welch, the CEO of Photobucket. First-time CEO, first-time exec, first-time startup. He built a great company, with a huge outcome. He self-funded, and then raised a small amount of money from angels (who also happened to be VCs).

Alex Osadzinski Saturday, March 22, 2008 at 2:51 PM PT

Alex,

You just validated one of my thesis … and this is what I advise all first time entrepreneurs without much background to do: bootstrap up to a point where there is something concrete to show, before trying to find funding.

But, if you look at entrepreneurs like Jobs, Gates, Ellison, even Larry and Sergei – they really had no background as such. They never held a key position in anything. They were freaking dropouts 🙂

My point is, are some of these “maverick” entrepreneurs worth nurturing, and how do you determine the characteristics of success?

Sramana Mitra Saturday, March 22, 2008 at 3:07 PM PT
  1. It was never easy to raise money for anyone the first time round.

  2. Yes, serial entrepreneurs are bootstrapping (but again, this is not new).

  3. There are a number of funds that have been created to focus on early stage deals, given Web 2.0 and the vacating of this range by bigger funds (e.g. Alsop Louie Partners).

  4. Bottom line, I think the free market is efficient. If you have a world-class idea, and you have the entrepreneurial spirit and some leadership sense, you’ll find your funding. For goodness sakes — there are 80+ funds in the SF Bay Area alone. It’s all too easy to blame it on “market conditions” when one fails to get funding.

P.T. Ong Saturday, March 22, 2008 at 5:56 PM PT

When I went out to start my first business and raise some money – it sure was a struggle. The challenge is that if you have never done this before–it is the most unsual process to go through. At the core–you end up learning while doing – which makes the process take a lot longer than the second time around. The real key is that you end up with so many people telling you how to raise money and the best way to “pitch” your idea, etc – that you don’t really know what is the best direction to go.

if you do go down the VC route–that introduces a whole bag of tricks.

I now help “incubate” start-ups and have developed a methodology around a “funding” plan – much like someone would built a business plan. it is key to identify who and how you should fund your company. Then stick to the plan and execute.

Funding is a form of sales that most of us are not used to – so you really have to go through it once to figure it out and gain valuable insight.

Mark

Mark Kapczynski Saturday, March 22, 2008 at 6:04 PM PT

Peng,

Those 80+ funds in the Bay Area (and elsewhere), mostly want to do Series B and beyond. A small group is okay with Series A. Almost no one wants to do Seed these days.

I am raising 2 issues:

(a) Seed funding is a problem.
(b) First time entrepreneurs is a problem.

For all those VC firms who are looking for good Series B and Series C deals, the Seed / Series A pipeline needs to be in place.

My question is, why is the Seed / Series A market so inefficient? Why is it such a cottage industry, dependent on Angels, Friends and Family, and a generally disorganized set of sources?

Wouldn’t the whole industry stand to gain if the Seed market became more efficient?

Sramana

Sramana Mitra Saturday, March 22, 2008 at 7:00 PM PT

Definitely makes it easier to raise money if you’re a serial entrepreneur. That said, the prevailing VC wisdom is: serial entrepreneurs can get you great returns, but the franchise companies are created by first-timers. As with most such thumb-rules, they are correct till they are spectacularly wrong 🙂 (Remember Brand trumps Technology? then Google came along.)

Re: Seed market being so inefficient. Simple: Economics. If you’re truly focused on Seed, you’re managing a small fund. You’ll have higher returns than a real VC fund, but on an absolute basis, the GPs are not taking home anywhere as much. It’s a lot of fun, but it’s not about the money. If you’re that smart, you’re better off managing a real VC fund. That’s why it’s mostly angels who do the Seed Investments. They have a day job 🙂 If you want to do a seed fund, you have to change the VC fund economics model, or it doesn’t make sense.

Venky Saturday, March 22, 2008 at 10:53 PM PT

Venky,

How would you change the VC fund economics model to support seed investments?

Sramana

Sramana Mitra Saturday, March 22, 2008 at 11:22 PM PT

sramana;
many valid points have been made above and since i am not really aware of the eco system in the valley;i cannot comment on that
in the end it is the economics for the career investors especially when there are other opportuninites of money making is available such as e.g later stage investing especially today in india
it takes a lot of passion and hard work to start a seed fund just like an entrepreneur who gives up a cushy job to start a venture.
clearly the economics of aseedfund are challanging and will not make enough absolute returns not will it allow for a huge manangement fee..
the only way it can work is when angels are willing to institutionlise what they othewrwise do
and for this you need folks who will work for peanuts and have a deep insight in to building companies

Pravin Saturday, March 22, 2008 at 11:34 PM PT

Hi,

Over the years, as technology and concepts have evolved, so have entrepreneur’s and investors.

In a way it is a boon for entrepreneur’s to be self funded early on with a smaller team to manage those cash burns. We have taken that path here in India (rather forced to).

We have got a lot more realistic and practical in our approach and a exit plan is not necessarily on the top of our minds. We get to the market early and refine our products / solutions offerings and our business models based on the customer feedback.

This gives us better insights and claritty into the direction that we would like to take with the original plan we had.

With clarity we are in a much better situation to decide the kind of investments / investors we will need to take our businesses forward. This, to me, sounds more practical.

There are many successful entrepreneur’s who have gone that way,
Gyani

BTW, some of the concepts that you have mentioned in your blog like Ent 3.0 is what we are building, not based on theories and assumptions, but based on customer’s needs and feedbacks. Often they invest in these implementations.

gyani Saturday, March 22, 2008 at 11:52 PM PT

[…] seems like this is changing. Sramana Mitra writes that VC’s are collecting bigger and bigger funds which they use to enter …. The result is that if you’re a new-comer to the world of funding, getting money on board is […]

The evasive funding — Battling It Solo Sunday, March 23, 2008 at 2:26 AM PT

First time entrepreneur – raising capital or NOT!…

The topic of first time entrepreneurs and specifically the experience of raising (or not) of venture capital is a recurring theme on a number of blogs, including Sujai in his Wireless India blog, Sram……

Design of Business Sunday, March 23, 2008 at 3:32 AM PT

Hi if u look case of Matishuta of Japan and how he evolved a company like panasonic, we will get many answers for seed entrepreneurship.Entrepreneurship is really not a name who has urged to stand on his own but summation of inner locus qualities of finding an opportunities and exploring his inner strengths .He will have to dig all resoures around him and take along other poeple to a path which is not visible to common man.The power of skills , creativity has no substitute in real market and he will definitely able to generate cash,We are living today in era of knowledge economy and technologival boom which creata an envoirnment feasible for envoirnmegrowth of seed entrepreneurship.What is more important then set of cash in your pocket at the time of start up is the level of commitemnt , perseverence and dedication to achieve rightly set goals.

If we do the critical analysis of BODY SHOP created by Anita Roddick we will learn that how lady has built her company by putting all the valauable ingredients of raw detemination, unique idea and commitment to change the way we use to look at beauty products.Similary Michell dell has chaged the way we perceived computer.So the inner vision of looking at some model in a way other cant is really matters not a printed cash.

This is my view your views are welcome.For more info on my view you can visit https://www.facebook.com/pages/ENTREPRENEUR-DADDY/9126717803 and provide feedback.

Syed mahmood Sunday, March 23, 2008 at 3:52 AM PT

Isn’t this phenomenon of VCs moving up “the entrepreneurship value chain” a result of demand-vs-supply? As it’s become a lot cheaper to begin a venture with open source/free softwares and web 2.0 technologies, lots of first-time entrepreneurs don’t demand much financial support as such. On another note, launching such venture has got a lot easier than before so there is certainly a lack of ingenuity that would attract outside support.

ptc Sunday, March 23, 2008 at 12:19 PM PT

I suspect it is more a function of what Venky points out … larger funds are where the management fees are larger. Seed takes longer to pay back.

Yes, a lot of so-called web 2.0 companies can be started with small or no money. But real technology development still requires funding. My question is more about that, than the shoe-string web 2.0 projects, many of which won’t monetize. Those that are monetizing, are already into Series B/C/D.

But the pipeline needs to carry on for the industry to carry on.

Sramana Mitra Sunday, March 23, 2008 at 12:59 PM PT

Sramana,
The vacuum at the seed stage is being filled by Y Combinator and other similar funding sources, in the web/software space. Y Combinator alone has launched 80 start-ups in the past 2-3 years.

It has probably become harder to raise money in networking/semiconductors (or enterprise software for that matter), but that may have more to do with the relative maturity (or perceived maturity) of those markets rather than drying up of early round funding sources.

Sridhar Vembu Sunday, March 23, 2008 at 3:38 PM PT

Sridhar,

Y Combinator claims to invest $20k odd in each of its companies. With that, you can launch a little web site, but I don’t believe you can build any defensible technology. Don’t you agree?

Even if you go from web 2.0 to web 3.0, as you delve into the realms of serious search / personalization technologies, 20k won’t get you far.

Sramana

Sramana Mitra Sunday, March 23, 2008 at 5:30 PM PT

“Y Combinator claims to invest $20k odd in each of its companies. With that, you can launch a little web site, but I don’t believe you can build any defensible technology. Don’t you agree?”

In the Web 1.0 world you would be right. However, now it’s quite easy to start a web startup with not much more than living expenses. The Y-Combinator approach is to supply living expenses to young entrepreneurs in order to give them the time needed for them to develop their software. I think the key is that most of these folks are young – and therefore they have low expenses (no houses, no wives, no kids, etc.). And having few attachments means they can take risks. Will all of them succeed? Nope. Few of them will – but that’s pretty normal for startups. But most all of them will learn a lot and the experience they gain will be quite valuable.

I think Paul Graham is kind of positioning the Y-Combinator approach as an alternative to going to grad school for ambitious young people who have just finished up a Bachelors degree. His point is that they will learn a whole lot more by doing their own startup than they would learn by pursuing a Masters or PhD – I suspect that in most cases he’s right.

This model only can work in a software setting, however. If your startup needs to develop hardware it’s not going to work.

skeptictank Sunday, March 23, 2008 at 10:51 PM PT

Y-Combinator and TechStars are two programs that provide seed funding (Y-Combinator: $5K + $5K*N founder; TS: Up to $15K) and a three month program to get ideas to prototypes. The money and the resources provided gets you to a stage where the teams get to present to Angels and VCs at the end of the program. If more funding is needed for the project that needs more funding, Y!C and TS gives you a direct path to seek funding but a great community that will help in various ways to grow your project.

Steven Loi Sunday, March 23, 2008 at 11:56 PM PT

I am not too sure if the size of the investment is directly proportional to the probability of its success.

There are stories of “good” “high end” products / concepts being funded well that have not met the expectations either.

There are stories of self funded organizations who have crossed expectations.

gyani Monday, March 24, 2008 at 9:09 AM PT

I am not so sure it is a bad things to put hurdles in the way of entrepreneurs, more experience is never bad, more connections are never bad and bootstrapping is good for the soul. I’m sure there are always ideas that would have been great and don’t get funded, but there has to be SOME economic model to fund these things. I would argue that first time entrepreneurs who cannot get funding should get a job at another startup. Someone made a great point above in another comment, working at startups is a great way to make connections for future startups. This not only helps entrepreneurs with experience, it helps make the connections to round out the team.

There will always be unique situations where companies that could have been funded and would have succeeded didn’t but who can tell. Honestly, I’m not sure your example of Bill Gates, the Google guys, etc… really proves your point, I believe quite the opposite. They are successful, they do exist and they succeeded despite how hard it is to raise money.

I believe we will run into problems if there is a prolonged resession. As you point out, the angel networks and rich entrepreneurs are filling the void today seeding early stage deals. If big exits stop for a while you will have fewer wealthy successful entrepreneurs looking to do angel investing – that could really slow things down.

Russ Fradin Monday, March 24, 2008 at 9:48 AM PT

We are just part of the solution to the capital gap problem. But, whereas in 1994 the Band of Angels was an anomaly, today there are more than 200 professionally organized angel groups and even a trade association of groups. These groups help “professionalize” angel behavior, insisting on priced rounds instead of bridge notes, providing mentorship and organized access to help thru their networks, and governance through board participation. But the more interesting trend perhaps is the advent of “side-funds” along side the Angel groups. The Band pioneered this with a $50M fund from institutional investors (no angels!) making investments alongside the individual angels. This marriage of the VC business model with the angel group has worked and provided the substantial basis for a great brand and institution (53% IRR since inception!). From a capital flow perspective it is demonstrating a new kind of sub-model in the VC space. Think about this claim; what we are witnessing in the emergence of professional angel groups is an evolution of the financial food chain with a somewhat new model, much like VC was new in 1970s. A new way for capital to flow to seed stage entrepreneurs…

Ian Patrick Sobieski Monday, March 24, 2008 at 12:56 PM PT

Ian,

How do you mitigate the issue of Angels getting diluted as more capital gets infused into the companies? Angels, by definition, and with some exception, do not invest $3-$7 Million per company. But that’s what it takes to preserve your pro-rata in these companies as they go through later rounds.

In effect, pure Angel financing, IMHO, is fraught with risks of getting washed out. No?

Sramana

Sramana Mitra Monday, March 24, 2008 at 5:53 PM PT

Being careful on terms I think is clarifying. “WashedOut” refers, in my thinking, to the “pay-to-play” financings that are sometimes orchestrated when a company is out of money and a VC is the only funder. In such situations, those without allocation, get “wiped out” via a special reverse split that reduces their ownership to nearly zero. However, in a company doing well, where new financings are done at “up-rounds” with new VCs, a pay-to-play can not really be imposed. Non-participants simply have their ownership proportionally reduced by the new money into the deal. In this way, non-participating angels are reduced in the SAME PROPORTION as founders. After all, the angel investors in Google, or YouTube, or Apple, all did very well even though they never did their pro ratas. In fact, the money data I look at the more is appears to me that it is a better macro strategy to NOT save money for pro-ratas, let those few pay-to-plays go, and use the extra dollars to do and extra couple of seed investments. This all said, we at the Band, by virtue of the level of wealth of our members, almost always have enough capital to do our pro ratas in Pay-to-plays.

Ian Patrick Sobieski Monday, March 24, 2008 at 6:26 PM PT

Ian,

Founders / Management team often get re-issued additional options when a company takes longer and more money. Not doing pro-rata means Angels don’t have this luxury. Hence, they get diluted.

Don’t you agree, that focusing on a portfolio of deals that are performing well and doing pro-ratas in them is a much better strategy for Angel / Seed investors than a spray and pray effort in spreading capital around?

After all, it is incredibly difficult to find ONE really good investment, let alone TWENTY.

Sramana Mitra Monday, March 24, 2008 at 6:38 PM PT

Sramana

The “Seed” stage is actually quite efficient. There are lots of sources of capital for “2 guys in a garage with a powerpoint” and that consists of the Angels, Seed Funds, and traditional technology VC’s like Sierra Ventures, that support these early stage companies

I would offer that you think about your question using a simple grid, where the X axis is the “Largeness of the Idea” and the Y axis is the “Teams ability of Execute”

If the idea is a world beating one, and the team is a “serial” team OR not, the company will get funded by a classic top tier Valley VC or “domain” strong Angel. Idea trumps everything, as a good VC will be able to bring a team around a great idea.

If the idea is not world beating, but the team is very strong and pitch is “that these guys will figure it out” as they have strong domain, that is also a configuration where a top tier Valley VC or “domain” strong Angel may play.

The bottom left quadrant….well, those are the ones that make the most waves. IMHO, that is the market’s way of weeding out the weak idea’s / teams

Tim Guleri

Tim Guleri Monday, March 24, 2008 at 6:50 PM PT

Tim,

From what I can see, not that many firms fund “powerpoint”, even with a world-beating idea. You said yourself the other day that you don’t. It’s not a good use of your time given your fund-size.

Sequoia doesn’t. Benchmark doesn’t. (I know this because Mark Kvamme and Bruce Dunlevie told me.)

I am still trying to gauge who does powerpoint financing … other than Angels.

Every business begins with a powerpoint.

And btw, I absolutely do not believe in friends and family financing rounds. They mostly ruin relationships. Often, that’s the only avenue open to first-time entrepreneurs without “background.” But it comes at a price.

It’s not the job of friends and family to fund startups. It is the job of VCs.

Sramana

Sramana Mitra Monday, March 24, 2008 at 7:09 PM PT

Sramana

I agree with your point that Friends and Family rounds from a standpoint of “after work” pressure to make sure that the venture works

Just to be clear, what I said when we met is that a “powerpoint” stage needs a different financing strategy from a venture firm. Sierra, for instance, has a SEED program, where we do invest in companies that are that early and put in a very modest amount of capital (usually < 2M), with the expectation that the idea would evolve to deserve a “classic” Series A…BUT, the idea has to be world beating. You can’t do too many of these in a single fund, as they take a lot of time, but we at Sierra do welcome and do these kind of investments, but our bar is very high.

Tim Guleri

Tim Guleri Monday, March 24, 2008 at 7:52 PM PT

Many younger/new entrepreneurs do not want to take money from vcs or other institutions at the early stages. As was pointed out by many; depending on age/networks/resources 1st time entrepreneurs will do anything from bootstrap/enter business plan contests to self fund/friends-family/second mortgage.

I am currently launching a web startup in the consumer space and am self-funded (with partner) and hoping to be cash flow positive within 3 months of launch. I have worked/help launch/advised 6 startups in a variety of industries over the past 8 years and now feel ready to run the show.

I am fortunate in regards to age/experience/resources b/c i am not located in a hotbed of web or consumer oriented products/services — DC Metro.

Campus Entrepreneurship Monday, March 24, 2008 at 10:51 PM PT

I actually think that there are many VCs that fund first timers. In fact, I have seen a recent desire in the Valley to search for the next zuckerburg…

In general, I tell first timers that every venture needs to have an unfair start in something. If you are a young, unproven first timer – you should do the old fashioned bootstrap way, and create early assets. Then venture funding is quite easy. Otherwise, get a second timer into the team…

A few months ago, someone from Opus published a great article about seed investing as the new way to do venture. I agree with that. The best way to start with first-timers: early money, kind of “try before you buy”. So in other words, finding seed money for first timers is possible. Finding a straight A round is hard.

Daniel Cohen Monday, March 24, 2008 at 10:52 PM PT

Danny,

I have a contrarion belief on this. A good first-timer (good = passionate, smart, intellectually agile, creative, courageous …) if aided by good mentoring can produce great results. The actual “money” amount is immaterial. It could be anywhere between 100k-$3 Million as seed, but the key is, who/what’s around the entrepreneur?

You should read up on Don Lucas, who mentored Larry Ellison (Oracle).
https://sramanamitra.com2006/03/18/don-lucas-god-father/

I agree that Zuckerberg has done a great thing by making these VCs sit up and start paying attention to first-timers again. How to find them. How to make them successful. That’s precisely the question I am digging into.

By the way, one of the reasons the Stanford-incubation principle works so well is because VCs DO fund first-timers from there, and there is a good mentoring dynamic going on.

The same isn’t true outside of Stanford, though.

Zuckerberg came from left field.

So, what else are we missing that could come from left field?

Sramana

Sramana Mitra Tuesday, March 25, 2008 at 10:37 AM PT

I think you are placing too much emphasis on Seed Funding (on Funding for that matter) to make a success.

Sure, funding CAN help an entrepreneur, regardless if they are are a first time or serial entrepreneur; but if the entrepreneur is unable to get anything off of the ground without funding – then perhaps their priorities are misplaced.

Strong entrepreneurs beat the odds – with or without funding (seed, angel or VC….it doesn’t matter).

If an entrepreneur is faced with “i can’t get my idea off of the ground without funding” then they aren’t a very good entrepreneur.

Isaac Garcia Tuesday, March 25, 2008 at 10:28 PM PT

Sramana,
Good thread.

I tend to agree with Peng’s comments. Raising seed round was always difficult for the first time entrepreneur. If anything, one can say that the markets become somewhat inefficient during the Internet bubble due to the expectations/hype of what it could do. It resulted in a lot of seed investments for teams that could, in some cases, tell a good story and fog a mirror.

We are back to the “norm” now where the exceptional first time entrepreneurs need to show potential around the two dimensions of the largeness of the idea and ability to execute that Tim points out.

Manoj

Manoj Saxena Thursday, March 27, 2008 at 2:05 PM PT

Hi Manoj,

So, are we saying that with first-time entrepreneurs, they have to already show execution ability, powerpoint (largeness of idea) is not enough?

It’s kind of double-barrier, no?

The first-time entrepreneur is the least likely to find capital anyway …

Second-time round, it’s easier. So, are we saying that powerpoint financing is ONLY for repeat entrepreneurs?

And the related question: where should first-time entrepreneurs go for money? Even that “little” bit of money that is needed to execute anything …

Sramana

Sramana Mitra Thursday, March 27, 2008 at 2:46 PM PT

Sramana,

Your thesis is solid (and one near and dear to my heart) – there is indeed a need for alternative investment vehicles and access for early stage, first time entrepreneurs. Assuming capitalism prevails, the evolution of VC firm behavior will cause both the problem and the solution. Deal flow will eventually slow and more forward-thinking firms will return to the outreach to younger and fresher ideas. This may take quite a while, so in the interim, growth and collaboration of angel networks have begun to fill the gap – yet this not quite enough.

VCs owe it to their limited partners to invest in deals with the highest likelihood of success – which criteria is most often limited to rather objective judgment, hands off and simple matrices as “world shaking” v. “team experience” or “from my alma mater” v. “previously funded.” For these first time entrepreneurs, mentorship and networking are just as needed and perhaps as valuable as money. The larger firms have neither the time nor interest to invest significant guidance, coaching and introductions. So a new vehicle might be really small funds ($25M) led by someone with some experience and a good eye for deals accompanied by a sizable group (50) of high profile mentors who meet weekly with the company. Incubator firms tried to do this for a while, but for reasons I have not yet grasped, did not really succeed.

Do you have any thoughts on what might fill this gap?

BC

Bob Cagle Monday, March 31, 2008 at 10:11 AM PT

I think smaller funds with a Seed / series A focus is certainly one way to address the issue. The exact fund size will vary based on the fund’s strategy. Jeff Clavier’s fund is $12 Million, focused solely on seed. Dave Whorton has a $50 Million fund. Stewart Alsop has a $75 Million fund.

If the fund managers want to do pro-rata into the later stages of a good deal, then they need larger funds than the $10-$25 Million funds.

But under no circumstance should the fund-size be larger than $125 Million.

Sramana Mitra Monday, March 31, 2008 at 12:27 PM PT

Sramana,

Style drift amongst investors is not a new phenomenon – it has been there for a long time, and while it has been criticized in most part, it has also allowed the investing community to evolve.

I would indeed like to see some data around the thesis that there is systemic shift away from early stage investing. At Canaan, we measure this fund by fund, and we continue to drive an overwhelming majority of our business from first institutional rounds. We also have a separate seed program to fund teams with powerpoints. In India and Israel, which are new locations for us, we are replicating the same strategy. Our LPs feel great about the fact that we are sticking to what we understand best, and where our networks are powerful.

There will always be entrepreneurs who look like they should’ve got funded and dont – there is an inherent tradeoff between balancing type A and type B errors. However, I am not sure if a move away from early stage investing is a systemic one.

Alok

Alok Wednesday, April 2, 2008 at 8:28 PM PT

Alok,

If widely available data were available, then one doesn’t need to ask these questions. The questions typically get asked first, before the research gets done to gather data. Why don’t I turn this back to you so that you show us with data that this is/isn’t happening?

“First Institutional Round” is not Seed, by the way.

And LPs would feel the best if GPs invested in Series B and later, because that’s where the risk level is the lowest.

We are not talking about LP’s needs. We are talking about very early stage entrepreneurs’ needs.

And that need, mostly, is being met by friends and family and Angels.

Not VCs.

Sramana Mitra Thursday, April 3, 2008 at 12:10 PM PT

[…] seed funding as the financing eco-system is going through its own set of changes. Especially for first time entrepreneurs, as we have been discussing, the battle is […]

Forbes Column: Searching For the Real VCs - Sramana Mitra on Strategy Friday, April 4, 2008 at 9:58 AM PT

Sramana, I think the data you have mentioned (shift away from early stage funding) is different from what I have quoted here https://www.venturewoods.org/index.php/2008/04/07/angels-fund-57000-companies-for-26b/ which essentially says its slightly up on year-on-year basis…

alok Tuesday, April 8, 2008 at 5:36 AM PT

That’s true, Alok. This data only confirms that most of the seed investing is done by Angels, not VCs.

Sramana Mitra Tuesday, April 8, 2008 at 9:52 AM PT