1Mby1M Virtual Accelerator Investor Forum: With Jake Seid of Stone Bridge Ventures (Part 3)

Sramana Mitra: Your point about the fund sizes being larger and mitigating the later stage pro rata opportunity is well taken. I’m going to elaborate on my question. There is a lot of competition to get into some of the deals for Series A and Series B.

If you look at the numbers, there are 50,000 to 70,000 seed stage investments a year versus 1,200 to 1,500 Series A investments. Clearly there’re a lot of companies in that pool that are not getting to Series A. Only a percentage of those are really these hot companies. The hot companies, by definition, are few and far between, which is why there is such a competition. All that is anomalies. There’re a lot of companies in the middle.

Then there’re the stranded ones that don’t deserve Series A. That is irrelevant, because there are a lot of companies that do get seed investments and don’t really pan out. They shouldn’t be raising more money. That is also not of interest to me because that makes sense that they shouldn’t get Series A. Then there is a big middle. They’re not the hottest companies but they are good solid companies. Many of those are falling in the Series A crunch as well.

Jake Seid: If I was coaching a founder in that category, I would say that, now more than ever, there are a lot of creative opportunities if venture capital isn’t readily available. Some of the most innovative new phenomena are initial coin offerings and token sales. These are companies that are Series A companies raising tens of millions. In some cases, hundreds of millions. There have been over several billions raised in initial coin offerings by early stage companies. It’s 100% non-dilutive.

Sramana Mitra: It’s worth discussing this a little bit. There’s only a specific class of company that qualifies for those. It’s not like you’re going to do an ICO for a SaaS company for example.

Jake Seid: I disagree. You actually are seeing that. It’s not just somebody saying, “I’m going to come up with the next version of cash.” These are companies that are building applications. Cryptocurrency is becoming a way to have a business model around open source software that allows contributors to participate economically in a way that they could never have participated before. I think that’s what’s actually quite interesting. There is a broad swathe of companies that will be using that as a mechanism to fund their businesses.

Sramana Mitra: Your thesis is that some of these ICOs will become a form of crowdfunding.

Jake Seid: It’s a form of crowdfunding, but it’s also a form of allowing contributors to do projects to instead of doing it for free, to get economic incentives and participation in the project success. I think that’s also a unique part of the business model. It’s not just the funding mechanism. It’s a way to build a community that’s all economically aligned.

Sramana Mitra: Interesting early trends. I just talked to Vinny Lingham who has done an ICO offering.

Jake Seid: I’m on Vinny’s advisory board. That’s a great example of B2B technology product where you’re using Blockchain for identity that benefitted tremendously from the idea of token sale. Again not just thinking about cryptocurrency as a form of cash, but an integral part of how distributed applications are being built.

Sramana Mitra: Switching gears, the large funds are also fueling what we call unicorn mania. A lot of these later stage fundings have a lot of liquidation preferences and all kinds of terms that can be very detrimental for a seed investor. As a seed investor, you could get buried under later stage liquidation preferences. How do you protect yourself?

Jake Seid: The way you protect yourself is by being early. Ultimately, if a company is not doing well and is forced to take on draconian terms, the first thing that a CEO has to do is do the right thing for the company. Seed and Series A investors are stakeholders, but ultimately you have to do what’s in the best interest of the company.

Because you’re buying ownership, each dollar you invest at seed and Series A buys a significant amount of ownership role to what people at the later stage have bought. They get protected through preferences. Your risk return that’s created by the fact that your dollar has bought, in some cases, one or two orders of magnitude more ownership than their dollar. That’s how you get compensated for risk.

If you’re focused on companies that have large market opportunities and have a chance to be standalone public companies, when the company goes public, people convert to common. In some cases, there are ratchets in IPOs that don’t go as well. Of course, people who are experienced investors in seed and Series A understand these risks and always have the opportunity to save some money in reserve and put some money into those later stage rounds that might have preferences or special terms.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Jake Seid of Stone Bridge Ventures
1 2 3 4