Paul Graham’s Prescription For VCs: Move Fast, Take Less Equity
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We've crowd-funded our seed in the UK, using an equity based crowd-funding site called Seedrs. We're currently the fastest equity crowd-funded company in the world, we got our seed in 15 hours thanks to the belief and need that the users have.
Our impression was that this was massive social proof, but what we're hearing from angels and VCs is that there is a great amount of uncertainty about crowd-funding.
Questions like:
* What happens with drag-along?
* Did you crowd-fund because no-one else would invest?
* Are we now dealing with 100 naive investors?
So much FUD.
We did it in place of the friends and family round, and chose Seedrs for their nominee structure that gives us a single shareholder with terms that are not a disincentive to any future investor. We had a third party (Orrick) check the papers to make sure nothing was in there that would cause complications, that things like drag-along and preemption rights were all standard, that the seed investors couldn't complicate things later.
We also had numerous options on money and went with the one that helped mitigate a risk we had. By securing a financial as well as emotional investment, our biggest risk of substantially changing the product and losing a core of our key early users as we imported sites with UIs that they knew intimately, is mitigated somewhat as their investment helps to overcome some of that.
Our experience has been positive, but the amount of inexperience within angel circles and VCs of crowd-funded companies that have later raised and exited is so great that there is a great deal of uncertainty, and from that the fear and doubts emerge.
We http://microco.sm/ have only good things to say about the process and engagement of users, and some of our "user as investors" have contributed phenomenal feedback and helped win us key customers at an early stage.
What happens next, for us, and for other companies in our position in the next few years, will help influence how crowd-funding is perceived by angels and VCs.
We are at an interesting stage now where we need to raise a further round as demand for the product is out-shipping our revenue and we need to go faster. Users still want to invest, but users can't always be the source of investment and we now need to start transitioning towards angels and VCs.
An issue for us is that the crowd-funding allowed us to get the MVP done and gain initial traction, and it has raised our valuation such that small angels may now be deterred as they won't receive as much ownership for their investment. And VCs like to have social proof of key angels to help filter and vet companies. So we find ourselves considering down-valuing to get the angels to help us go beyond this round, or tightening belts further and shooting for more traction and growth so that we can jump to Series A and skip the follow-on seed rounds.
If any angels are interested in hearing more, get in touch, contact details on my profile.
Ultimately what you learn is that more important than the money, is who backs you. We'd love to have one or two key angels who can be mentors and guides, whose experience we can learn from, and crowd-funding did not give us that.
For those missing the numbers, they sold 10% of the company for ~80K (US). https://www.seedrs.com/startups/microcosm
With some caveats:
I cannot make my business decisions public. You have to trust me as a founder. This is a company is still at a stage of going under water and moving fast with competitive technology/business tactics etc.
I should be able to choose the reserve investment amount at 1000$ or 2000. Maybe that’s personal call
I am not clear about this one but I’ll set the valuation for my company. If there is a mechanic for feedback I’ll be able to move the scale based on tempo of the current market. This I believe will help set the right valuation for the convertible round I raised earlier.
Pros I can think of:
I can set an independent board
They're not in the business of building long-lived healthy companies, even though that's something the world sorely needs.
That's the thing, though; being a long-lived, healthy company is much easier if you have one person who unambiguously owns it (and that person is also the top operational manager.)
That's the thing, what kills a web startup? the owner deciding to get a real job.
If you have two owners? now rather than having one person who will kill the company if they get a real job, you have two.
I'm not saying absolutely that it's an unsolvable problem; if the person who loses interest early gives most of the ownership to the remaining partner, I suppose it could work out? but I'm not sure how that would or even should work.
This could also potentially shorten length of runway needed. If you knew you could raise in 30 days... you wouldn't need 12 months of runway. Much more efficient for the entire ecosystem.
The slow decision-making is about three things:
(1) It reaffirms the rank of the VCs. (Status waiting.)
(2) It's a test of the petitioner's social status. (If desperate or low-status, the petitioner will continually seek feedback.) The whole point of the time-wasting deliberation is to weed out the desperate, and more importantly to see if you come from the right social class (and can therefore summon enough resources to make their slow response tolerable) to be funded.
(3) It gives risk-averse VCs, who are driven more by their individual career goals (of being "in on" career-making deals that occur once every few years and require social access) than portfolio optimization, plenty of time to collude, trade favors, and peddle influence.
It will never change or go away. Nor do I think we will see an end to this insane bipolarism in which a company is either overfunded or forced to operate on a shoestring.
VC is just unhealthy for software; it works (because it's the only option) for biotechnology startups that require $50m+ just to get started, but for software it's just kingmaking (work with us, or we fund your competition) that doesn't really add anything.
VCs are not out to "stick-it" to anyone. They want to be a part of a great deal just as much as the next person.
Key bottleneck is that the process is too slow. Not designed for today's 15-minute world.
Are you amenable to being convinced that this belief is false if I can point to people who had no connections at birth but are funded or clearly fundable?
If you're from a rich and well-connected background, VCs who turn you down mentor you until you're fundable, and set you up with EIR sinecures so money's not an issue. If not, you're trying to hit the head of a pin from a mile.
The game is clearly rigged, but very few people have the courage to talk about it.
Some of these teams blow me away with their technical expertise, plenty of these guys & girls have had a life full of headwind and yet they push on. The one common factor: they don't complain about their misfortunes (perceived or real) they just keep pushing forward. I'm seriously impressed with that, being born into anything has nothing to do with it whatsoever.
Finally, yes, being born into connections can help. But I've seen lots of people that were born into connections/wealth end up losing it all in a very short time.
VCs for software make good sense in many situations, companies that are still on the losing side of the equation that want to sew up the market before a competitor comes along (not all software is throwaway apps), international expansion, horizontal expansion across several niches. All of these cost money, and sometimes bootstrapping just isn't enough (especially with older founders).