Our venture fund Homebrew is focused on seed stage because that’s where we can be of most value to entrepreneurs by going “all in” for them early: leading a round, bringing on other great investors, putting together a board and helping them build the product/company/culture they imagine. Since we launched in May, there have also been a surprising number of what I’d call “special opportunities” – namely, companies which have raised a seed within the last two years looking to replenish their coffers without doing a full next round.
You write your principles in pen and your business plan in pencil, so we’re definitely taking a look at these, although we haven’t invested in any yet (all our commitments to date have been in true seed rounds). As we review them there are clearly two different scenarios, one of which is way more attractive than the other:
One I’d call the Seed+ — that means the team hasn’t yet hit the milestones they hoped to accomplish with the capital from their seed financing and need funding to continue. The reasons for the miss are varied – market developed more slowly, distribution took longer, team struggled to hire or hit their stride. Seed+ rounds seem to be priced at the same terms of seed (obviously dilutive), or slightly improved terms recognizing progress team has made. When evaluating Seed+ we ask the following:
- Current investors: are they still supportive? are any putting more money in?
- Team: how is morale? are founders still confident, or has the slog started to take its toll? Have they lost any key team members?
- Deal: are founders properly assessing the value created to date, or lack there of?
- Why?: Why are they running out of money? If it was an external event they couldn’t control, are they now executing as expected? If it was internal to the company has the issue been resolved?
Sometimes founders/current investors will tell us it’s worth bridging because it’s a small technical team and they can probably soft land if this doesn’t work out. That’s not of interest to us – in fact, probably a negative signal. As venture investors we’re not looking to say “let’s put a little more money in on this seed+ and likely outcome is they sell to Yahoo and we get our money back.” We need teams that still have the conviction they’ll build a company of merit and value.
If it’s not a Seed+ plus then it’s what I’d call a Pre-A. These startups have enough momentum to likely raise an A round at reasonable terms but are betting if they hit just a few more milestones, they’ll be in a position of even greater leverage. These are sexy as hell because not only is it a company heading in the right direction but a team that believes in itself enough to make a thoughtful, somewhat non-traditional decision. Many times Pre-A rounds will be taken fully by current investors but founders may want to bring in a new party as another pair of helping hands. Even better if, like Homebrew, they’re a seed institution that is likely to follow on in the A round. Pre-As are usually structured as a convertible, with a cap and/or discount to the A round.
Hopefully this helps entrepreneurs who are approaching their next funding decision. If you have any questions or want to discuss Homebrew investing, you can email me hunter at homebrew dot co.