Piggy Rounds Part II: Why Some Large VC Funds Are Doing More Seed Deals

In May, I speculated several large VCs were changing their strategies after seeing more large seed checks from funds that usually enter at A or B rounds. These “piggy rounds” usually left little room for other institutional investors, in contrast to traditional seed rounds which may include several funds collaborating. My particular POV is that piggy rounds, just like party rounds, are risky choices for most founders (and have my own obvious bias in this statement). Four months later, wanted to update the “piggy round” hypothesis with some additional data around large fund motivations.

1) Large Funds Are Chasing Potential Outliers Earlier

The large funds – and by large I mean $250m+ who usually enter at A or B rounds – that have been most active in piggy rounds are doing so to chase potential outliers earlier. By “outliers” I mean companies they perceive as having the potential to scale very quickly in a success case. Often these funds are attempting to build out a reputation or gain exposure to a new vertical. For example, let’s say that a fund isn’t especially well-known for their consumer investments. Accordingly, if a consumer startup hits escape velocity, this fund likely won’t have a shot at winning the A round. So by necessity they’re willing to write a larger check earlier at seed, even if there’s a reasonable probability the investment goes to zero (the ole’ ‘you can only lose 1x your investment but the upside is unlimited’). Semantically, these funds might say they’re not doing seed rounds, instead taking the company ‘straight to A,’ but the motivation and implications are the same.

If you’re one of these funds, it’s probably the right strategy in the nearterm, although I think greatest risk is that you’re ‘winning’ these deals but end up applying your later-stage POV to these early stage companies. For entrepreneurs, you’re removing a degree of optionality very early in your existence since large funds have outcome goals that might be more restrictive than the full set open to a company backed by angel/seed investors. And for seed funds like ours, it definitely drives valuations up somewhat since large multistage funds tend to be ownership percentage sensitive more so than price sensitive.

2) Larger Funds Buying Up Early to Outbid Other Funds Later

Ok, this is really inside baseball but kind of canny and I’m starting to see more of it. Here the later stage fund writes a substantial ($~500k) check quickly into the seed round, not necessarily being the only/lead funder, but definitely different than the ~$50-100k exploratory seed checks we saw from these guys in 2011-2012.

So what’s the goal? To be in a position to outbid competitors come the A Round by offering a very high valuation. Their earlier ownership stake allows the fund to dollar cost average into a more realistic total valuation. Previously the $50-100k checks were about information/relationship first mover advantage but this strategy is about cost leverage.

How This Impacts Homebrew

We believe our fundamental strategy is strong – being partners of conviction for a startup, focused on leading seed financings and leaning in proactively where we can help. That said, we will likely increase the size of our second fund slightly in anticipation of “lead checks” being more often ~$700-$1m (as part of $1-$2.5m rounds). Also while we often collaborate with multistage funds in seed rounds, we are most focused on helping the founders end up with the best partners for their particular situation. We haven’t – and won’t – chase valuations and round size increases, especially when we believe they’re being set by an investor with motivations that may differ from ours and the founders.

There Be Dragons: Ultima Online’s Lawsuit Connected to Today’s 1099 Workers

Kevin Roose recently covered the “contract-worker problem” – namely, the increasingly number of startups who have focused on keeping labor arm’s length as 1099 Contractors vs W2 Employees. And the IRS looking into whether this status is legitimate.

Because #ImOld, I remembered a similar situation years ago which had large implications for community-oriented online products who were relying upon “volunteers” to onboard new users, manage some traditional support functions, etc. A group of Ultima Online volunteers sued Origin/ElectronicArts, claiming they were really employees and owed back pay. That lawsuit hinged on questions around fixed schedules, training, performance monitoring and work similar to what other paid employees were doing at the company. The lawsuit had a chilling effect on other game companies (I was at Second Life at the time so paid attention as we launched a volunteer greeter role to interact with n00bs).

As Roose’s article notes, startups are also realizing that grinding your contractors down to minimum viable wages doesn’t necessarily attract and retain the best professionals. Homebrew companies such as Shyp have, from Day One, sought to create a great work environment for their contractors and part-timers. After all, in many cases these people are the ones who touch your customers.


“We’re Passing But Please Stay In Touch” -> Building a Relationship with a VC Even if They Don’t Invest in You

It sucks to hear “no” and as an early stage investor, the law of numbers means I have to say it regularly. Sometimes I deliver it quickly, sometimes it’s after deliberation. But I try to always do it honestly with feedback because we can also be on the receiving end of a “no” and want the same courtesy. My “no’s” often include an offer to stay in touch or reach out if I can ever be of help. It’s not a throw-away line meant to make me seem ‘founder friendly’ but really a desire to maintain a relationship.

My assumption is that this offer is may initially be treated with (a) dismissal or (b) skepticism by a few founders and it makes sense why. Partly the need to be ‘on to the next one’ – don’t spend your time chasing after the no’s when you just need to hear yes once or twice from someone else. Or don’t throw good time after bad since many investors will put on a smile but appropriately prioritize any needs you have below the companies in their portfolio. And some of it is just human nature – “No? Eff you, I’m going to show all of you that we’re right.” But just as I’ll stay in touch with founders who may have turned us down, trying to find an opportunity to turn a loss into a delayed win, I’ve seen some entrepreneurs do a great job of converting an initial NO into a relationship. Here are some examples:

Adding Me To Your “Friends of…” Update Emails

Many founders send our periodic “friends of…” emails with updates on the product, business, team. Perfectly acceptable – and IMO not spammy – to add any investor to this list proactively with whom you had a good rapport. If you want to be super-safe, add them and forward last update with a note that just says “hey, enjoyed getting to know you. Would love to stay in touch and so adding you to our email list. If you’d prefer to not receive these, just let me know.” Note – this is different than being signed up for your general public facing mailing list. [Update: here's a nice example of an investor update email]

Connect With Me on LinkedIn or Your Social Network of Choice

If we got pretty far down the mutual evaluation process, I’m happy to have you traverse my graph and occasionally ask me if an intro to XYZ would be ok. The best way to do this is (a) provide context for why you want to meet someone and (b) understand if I decline to make the intro based on any number of factors.

Refer Other Smart Founders/Intros My Way

If we’ve had a good interaction – despite it not resulting in an investment – the best thing you can do is consider me on your short list to introduce other entrepreneurs who are looking for funding. In fact, the first few times this happened – from founders we passed on, or where there was mutual recognition of lack of fit – was f’in amazing. It was one of the best feelings I’ve had in the first 18 months of Homebrew. You go to bat for me and I’ll go to bat for you. Not because I want to create some transactional quid pro quo relationship but because it’s the strongest signal of your character and judgment. Makes me want to reciprocate by keeping you top of mind for additional fundraising, folks who might want to work for you, etc.

Give Me Feedback on the Process

This happened only once but man, it was appreciated and classy -> after a few discussions with a founding team, we decided to pass with some detailed notes for them. The CEO processed the info (including some follow up clarifying questions) and then also gave us some feedback (positive and negative) on our process. What a gift for us. Totally unexpected but thoughtful. Framed helpfully, not spitefully. My immediate thought was, wow, this guy is going to be a great leader.

Founders, investors – any other ways you’ve build relationships after the No?

Homebrew Invests in Chain and True Accord

Happy to share two recent funding announcements we published on the Homebrew blog (Homebrew being the seed stage venture fund my partner Satya and I started last year). In both cases we played supporting roles and were thrilled to help back strong founders, teams and businesses.

Chain is a secure blockchain infrastructure for developers.

True Accord is more effective and kinder debt collection.

Hey Buddy, Can You Spare a Vote? My SXSW Panels.

As many know, SXSW uses a group voting process to help influence what panels are selected for their event. There are four panels that I’m part of for 2015’s event and if you had a moment to click on over and vote for our submissions, it would be great. And also groovy to see everyone in Austin!

1. Building Gender Balanced Startups

Everyone in tech wants more gender balance in the startup ecosystem, but the practical challenges to implementing that goal are complex, and involve many players—from the incubation/hackathon culture, to the VC community, to the startup founders and execs who must hire and manage a (hopefully) gender-balanced team. Join a leading venture capitalist, female tech leader, and reporter as they discuss the problems they’ve encountered—and offer solid advice for building a more inclusive (and therefore successful) startup industry. – See more at: http://panelpicker.sxsw.com/vote/40327#sthash.dktxr411.dpuf

2. How Your Startup Can Win The New VC And M&A Game

The tech startup world has changed dramatically in recent years with the rise of crowdfunding, a changing venture capital industry, and changes in the M&A market. Venture capital has seen the growth of many angels and smaller funds, new corporate venture firms, as well as the concentration of a small number of large funds. We’ll talk about how entrepreneurs can best build their companies, raise funding and prepare (optimize) for a massive exit in this new environment. To build successful companies, entrepreneurs need to think about these larger strategic issues and how they affect each other. We’ll also talk about the mechanics of how to develop relationships with potential acquirers and how to negotiate with acquirers. The panel includes experts in startups, venture capital, corporate development and M&A. They are at the forefront of new ways of investing in startups and conducting M&A transactions. – See more at: http://panelpicker.sxsw.com/vote/40604#sthash.cZ5Egx23.dpuf

3. Product Leads:Dictators, Democracy & the Good King

Who makes the final decision for product? Weak product leaders let consensus rule. There’s a town in Chiapas, Mexico where no law can change without unanimous agreement -anthropologists study it because nothing ever changes. Like the Mahabarata and Plato point out, the best form of government during an intense growth period is under a Good King. This is the only way product can move fast. It requires you to make fast decisions, be inclusive on ideas and brainstorm, but be very decisive to deliver speed of change.

Hear from industry leaders Paul Berry, Hunter Walk, Justin Santamaria & Shiva Rajaraman on what this means for launching and growing a successful product, today.

Amazon pushes new code every 11 seconds. How often do you push live? The speed of change may matter more than anything else. People move from liking to loving products not just because of how the product is right now but because of a because of the belief in where the product is going.

- See more at: http://panelpicker.sxsw.com/vote/41935#sthash.OwlWwKu4.dpuf

4. Unlocking the Promise of Local

For the last decade, local has been considered the next frontier for startups. But for all the promise, the landscape is littered with startups that have tried to crack local and spectacularly failed (Kozmo, Webvan, etc). Hundreds of millions of dollars of venture capital has evaporated in this space.

But finally, after years of struggle, startups across local are starting to get significant traction. And the remarkable success of Uber shows how incredible the opportunity is.

Hear from startups that are breaking out across local: in apartments (CEO, ApartmentList), local services (President, Thumbtack), food (CEO, Sprig), and shipping (Investor, Shyp).

Panelists will discuss:
-Why is local so hard?
-Why are companies starting to break out now?
-What are the keys to unlocking local?
-Will all of local be “Uberized”?
-How are the tech giants — Google, Amazon, eBay, Apple — going to play in local?

- See more at: http://panelpicker.sxsw.com/vote/34835#sthash.ehHBoWdy.dpuf

got your money

Getting Founders Some Early Liquidity Can Benefit VCs

When Google went public in August of 2004 one of the first things I did with my employee grants was sell enough to pay off my student loans. In retrospect I lost a lot of future gains by cashing out too early but what I gained was more important: peace of mind in removing the only debt I’d ever carried. Did I work any less hard the next day because of my liquidity event? Nope. The vast majority of my future savings was (a) not vested yet and (b) tied to hope for future stock grants I’d earn. Being out of debt, having a little cushion, actually allowed me to just put my head down and work, not worrying about my month-to-month bank account balance.

It’s for reasons like these that I support getting startup founders some liquidity during their company’s first few years, perhaps as early as Series A financing when appropriate. At Homebrew we’ve backed many first time founders, many of whom have struck out on their own and are putting lots at risk. They’re hungry – not just for financial success but to build a company they can be proud of for years to come. Pre-seed round they’ve done things like share the same room in a two-bedroom apartment in order to airbnb the other room. Or put startup expenses on their credit cards, far beyond their savings, hoping they can close financing for the company by end of the month.

So what should happen when these founders get past a few important milestones in their company and are able to raise healthy financing rounds at meaningful multiples? They should get a chance to sell small amounts of stock and put some money in the bank ($50k, $100k, $200k). Feel ok about going out to dinner every once in a while – maybe even take their significant other for a weekend to Napa as thanks for putting up with the long hours and uncertainty. Clear our some student debt. Get an apartment of their own in an expensive city like San Francisco.

Is there a formula for this? ie Raise $X million at Y valuation and sell up to Z%? Of course not, it’s situational and a discussion between founders and their investors. It’s a personal decision – to sell stock that you hope will be worth much more later on – but one which should be given to founders. Done properly I don’t believe it will disincentivize or send wrong signals to employees or future investors. As seed venture capitalists, we want founders to ‘go the distance’ and continue building value. It’s not clear to me that “all or nothing” is the right path forward or even that waiting until growth capital rounds makes sense. Yes, at early stages you want to maximize investment going into company operations and not private pockets but that’s why these conversations should happen openly and with structure (for example, series FF which requires Board approval to liquidate in a financing).

I conjecture there’s a secondary benefit to managed liquidity for founders: it may help diversify founder populations. The opportunity cost of a startup in forfeited salary and in-the-money equity at larger tech companies can be considerable. If you don’t have family money or a nest egg from previous wins, let’s balance that risk with some short-term opportunities. It’s not about giving founders a wild lifestyle or encouraging them to increase their personal burn (Sam Altman has a great tweet about this and I’ve written the same).

If you’ve entrusted a young founder with millions of your LP’s money, you can probably trust them to make the right choices if you offer the ability to pull $100k out of a company that was just valued $50 million.

Why Most VCs Won’t Intro You To Other VCs (Unless You Follow These Steps)

The question I get asked most often is “would Homebrew like to invest in my startup” (and we do our fair share of chasing too -> “please let us invest in your startup!”). The question I get asked second most often is “if not Homebrew, will you introduce me to some VCs who would like to invest in my startup.” There’s a reason why I won’t – because it means putting my reputation on the line for a founder I don’t really know. And in this business, reputation is very important. That said, Satya and I have made introductions on deals we looked deeply at but passed — in at least two cases these intros resulted in funding. And in many other cases we’ve pinged investors who I thought might be interested even though I didn’t look closely at the deal (usually because it was outside of our themes). What set these entrepreneurs apart from the ones where I just hit ‘archive?’ A lot. So here’s my guide to getting a VC to introduce you to other VCs:

1. DO some work upfront. DON’T just ask me to identify investors for you

Which of these is more likely to gain a response?

(a) “Hi Hunter. We exchanged some Twitter messages. I know you don’t invest in social gaming startups but do you know any investors who do?”

(b) “Hi Hunter. We exchanged some Twitter messages. I know you don’t invest in social gaming startups but I’m not from the Valley and was hoping you could give me some guidance. I checked AngelList and Crunchbase. Funds 123, 456, and 789 all seem to invest in seed stage social gaming startups. Do you think any of these three would be particularly good for me to approach?”

I receive 20 versions of (a) for every one of (b). It’s never been easier to get a sense of what industries and stages are preferred by various investor segments. Do some work upfront and then ask for confirmation, rather than just open-ended asking a VC who they recommend for your company. (b) also leaves the door open to me actually making those introductions because you’re starting to engage me in specific directed conversation.

2. DON’T tell other investors that “Hunter suggested” you reach out if I didn’t actually say you could use my name

If we’ve ever corresponded public or privately and I’ve said something like “so-and-so angel investor is really good” you can’t use that to approach said person with a “Hunter Walk suggested we get in touch” subject line. When an entrepreneur says they were referred to me by a mutual friend, I always immediately forward that note to said friend and 95% of time get back a response that suggests the founder is exaggerating the relationship. This isn’t hustling, it’s borderline duplicitous. I don’t like to be on either end of these ‘endorsements.’

3. DON’T expect me to write your pitch email for you

When I agree to make the intro, send me a new fresh email for each one you want me to forward. Roy Bahat at Bloomberg Beta gives a nice outline of what an intro email should look like. You can even forward me a sample intro email and ask for any feedback. I’m glad to look that over (but won’t always be able to spend time on your deck or product).

4. DO follow-up with me post-introduction

Close the loop. After I make an introduction you don’t have to give me a play-by-play but I’d like to know if it ended up going anywhere. I’ve had founders who didn’t tell me that one of my introductions resulted in an investment from another angel/fund. It’s not just rude but it’s a chance to continue building our relationship. I want to cheer you on!

5. DO update me periodically with news about your progress

Even if all you eventually want from me are funding introductions, you shouldn’t go quiet in-between these requests. Putting me on your “friends of” email update is a great way to keep me passively in the loop. Just ask first but personally I’ve never said ‘no’ to anyone. If we’ve gotten this far, I’m definitely curious about how you progress.

Hopefully that helps you get more investor <> investor introductions. Throw any questions into the comments and I’ll respond.

*Note, I’m talking specifically about introductions when Homebrew wouldn’t be investing, not syndicating a deal where we are participating.