Seed Capital From Angel Investors: Mike Hirshland, General Partner, Polaris Ventures (Part 6)

By guest authors Irina Patterson and Candice Arnold

Mike: For seed deals, typically we get a small amount of the ownership. In many instances, we’re less sensitive than angel investors for whom the seed is . . .  that’s when they buy shares. That’s their investment.

For us, maybe we’ll invest $100,000 or $200,000 in the seed, but in a successionary [stage], we’ll put $5 million or $10 million in, in follow-on rounds. The valuation for the seed is not as critical for us a lot of the time.

Irina: So, do you still have a certain number in mind?

Mike: It varies. It’s hard to generalize. I would say the rule of thumb is $3 million or $4 million pre, in raising $1 million, has been an industry norm. But I’d say the market is changing and companies don’t always need $1 million today.

The seed stage is getting competitive and valuations are going up. The rules of thumb over the past 10 years, I think, are less constant than they used to be.

Irina: Do you think in terms of equity when you do seed investing?

Mike: Again, less so. That really is the same question as the valuation question. For us, because ultimately the ownership is going to come through our investing in later rounds, we’re willing to take very small stakes in the seed and see it as an opportunity to get to know the entrepreneur, get to know the company, and be well informed about follow-on rounds.

Irina: At what stage of a company’s development do you usually invest?

Mike: It varies widely. In the past month, we backed an entrepreneur and an idea. It was an entrepreneur who we’d worked with before and who we think the world of. We liked the idea and we were very excited to do that.

Last December, we did a seed investment in a company called Formspring, which even though it was a very young company, had launched a product and had extraordinary growth in the marketplace and had tens of millions of users by the time the seed was closed. And we see everything in between.

Irina: Do you think about the size of the market?

Mike: We do, depending on the nature of the deal. For example, we do a fair amount of seeds that are SaaS businesses, on-demand software, more of B2B companies where you can think about the pricing model, the users, and the addressable market.

You do that analysis. It’s a fairly high-level analysis because it’s very uncertain, but you can do it. In the consumer Internet businesses, it’s less precise. In most instances, the revenue model itself is ambiguous. So, to think that you know what the pricing model is going to be when you don’t even know what the revenue model, it’s hard. The best you can do in any instance is just to try and figure out how real the problem is that they’re addressing and how broad the market is to adopt the product.

Irina: Do you invest in people straight out of school, or do they have to have previous business experience?

Mike: They do not need to have prior experience. One of our most exciting investments is Automattic, the company behind WordPress. When we first met the founder, Matt Mullenweg, he was 19. He’d just dropped out of his sophomore year of college in Texas and moved to Silicon Valley. He was clearly a pretty special kid and was doing special things with WordPress.

That’s way, way more important than a particular degree. We look at the individual much more than the credentials.

Irina: What were his most important character traits?

Mike: He had a vision for what he wanted to do. He had what appeared to be an uncanny sense of the product that needed to be built to enjoy mass adoption. Interestingly, he’s very musical, and we often find that great innovators and great entrepreneurs have strong artistic skills as well.

Also really persuasive to us was that although he hadn’t yet created a business, he had formed or had created an open source software movement that really hit scale. There were a lot of people working on WordPress and a lot of people using it before Automattic was formed. Ultimately, that was the best testament to Matt and what he was doing. He had a lot of people on the WordPress platform.

This segment is part 6 in the series : Seed Capital From Angel Investors: Mike Hirshland, General Partner, Polaris Ventures
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