What is the Definition of a Seed Round or an A Round?

Marc Andreessen kicked off another great debate on Twitter last night, one that I’ve been talking about incessantly in private circles for the past 2-3 years – what actually IS the definition of a seed vs. A-round.

This is something I think entrepreneurs don’t totally understand and it’s worthwhile they do. My view:

“Spending any time or energy trying to game the ‘definition’ of your round of fund raising is a total waste. Nobody cares. No VC will be so naive as not to see straight through it. And actually many will probably find the gamesmanship as a bad sign of lack of property priorities or perspective.”

Here’s how all the drama started for me.

When I first became a VC, seed rounds were typically $500k – $1.5 million. There weren’t a lot of seed funds in 2007 so this was often done by angels, funding consortia or sometimes early-stage funds that existed then (First Round Capital, True Ventures, SoftTech VC, etc.). A-rounds back then seemed to be anywhere from $2-3 million (LA or NYC) or up to $5 million in Silicon Valley. $5 million was always the classic definition of an A-round between the late nineties (crazy financings aside) and say 2007.

What changed — and why the definition changed — was it became 90+% cheaper to start companies and thus seed funds appeared en masse as did angels so the size of seed rounds actually INCREASED and the size of A-rounds in many instances decreased. Why the latter? My speculation is that entrepreneurs had more options and wanted to take less dilution so the old $5 million for 33%-40% of your company no longer made sense and on the VC side it made no sense to pay $20 million pre ($25 million post, which implies the VC gets 20% of the company = 5/25). [If you're newer to VC math here's a great primer]. So VCs started writing some smaller A-rounds.

If you want a great primer on how the VC and startup funding scene changed here’s a great primer.

But. [and there's always a but]

Entrepreneurs started demanding that VCs call their first-round financings “seed” rounds even if they were $3 million.

I saw this myself a few times in a row. I had very smart entrepreneurs where I gave the company $2-3 million and we raised anywhere between $3-5 million and when I put A-round in the term sheet they had their lawyers change it back to seed rounds. I found this annoying (I can’t think of a better word for the behavior) because it seemed like entrepreneurs were more concerned about the optics of the financing round than who was participating, would the lead (me) but supportive or simply focusing on building a great product and trusting that the financing nomenclature would work itself out. I think it would have been equally annoying if I had chosen to be dogmatic about it. If I had said, “You MUST call it an a round because be honest – it is an A-round” I think would make me a bit hypocritical. So I did not. I simply said, “Call it whatever you want but frankly I don’t understand why you’re obsessed with this. It seems such a silly thing to focus on.”

But since it was equally silly for me to fight, seed rounds they became. Equally silly were advisors & entrepreneurs insisting that founders use convertible notes but we funded a few of those, too.  I have come to realize that since the great tech boom started in 2009 and given the massive increase in first-time angels, first-time seed funds, first-time accelerators … the market is just filled with well-intentioned, but inexperience advice. Whom you take advice from really matters.

So back to reality. If it looks like an A-round, smells like an A-round & tastes like an A-round … it’s an A-round. My personal definition? It is less about actual money and more about structure of your Cap Table. If you have raised $2-4 million from a bunch of high-net-worth individuals I simply don’t see it as an A-round. If you raised $2 million from two small seed funds I probably don’t either (although in the past I would have). But if you raised $3-5 million from well-known seed funds or from a VC and you’re asking for $8-10 million in your next round … that next round is a B-round no matter what we collectively decide to call it when we VCs fund you.

I think an easier definition is “first institutional capital” which is what most A-round VCs think about what their personal funding strategies are. They want to be early and first.

I haven’t obsessed about what definitions people choose for precisely the reason I would advise entrepreneurs not to. It’s simply not worth the time, effort and drama. But I would say a couple of things:

- I now believe that entrepreneurs who are overly obsessed about the optics of the nomenclature of A-round probably set off some invisible red flag in some VC investors mind even if the VCs don’t internalize it themselves. I know it does in my mind. Obsessing about the wrong things in starting a company says something about one’s priorities even though this is subtle and hard to define. I’m not saying I won’t fund somebody who did a $4 million seed round before I got involved. I will. But if I’m funding their “first institution capital” round and they are obsessed about what we call it that is probably not a great sign for me.

- What Marc said above. Please know that I have never met an experienced VC who can’t pierce through any mechanics in your deal and see your company history in a fairly accurate light. If you raised $1m, then $1m, then $500k over a 2-year period they will most likely assume you had a hard time raising capital. That’s ok. It’s hard building a startup. But no amount of “spin” will change how they view you so it’s best just to be honest. And if you have raised $6 million from non-startup-type investors they will probably see you as an entrepreneur who prefers easy, dumb money over putting in the effort to find the right long-term investors no matter how you try to convince them your hedge-fund buddies really make great funding partners for a startup. If you have raised $6 million in a “seed” round and you’re looking for $10-12 million for your A-round they simply will mentally adjust that they’re funding your B.

In the end, like most things in life, none of it will matter unless you build shit people care about and use en masse and thus you can attract capital even if you call it a Z-round. But my advice to entrepreneurs – stop sweating the silly optics. It’s more likely a negative signal to VCs than a positive one.



Reblogged via http://www.bothsidesofthetable.com/2014/10/07/what-is-the-definition-of-a-seed-round-or-an-a-round/

Public Company Executives Rarely Adapt To A Startup

Corporate boardroom image via Wikipedia

Corporate boardroom image via Wikipedia

Mid-level or even top executives who “grew up” in large companies often look with envy at startups, and dream of how easy it must be running a small organization, where you can see the whole picture and it appears you have total control. In reality, very few executives or professional stars from large corporations survive in the early-stage startup environment.

The job of a big-company executive is very different from the job of a small-company executive. The culture is different, the skills required are different, and the experience from one may be the exact opposite of what you need for the other. I agree with the seven survival challenges from Michael Fertik, in an old Harvard Business Review article, for executives making the transition: Read more

Martin Zwilling , Founder and CEO, Startup Professionals
October 5th, 2014

How do I get in touch with investors/funds with just an idea and no product?

There are many wonderful ideas, and they are not necessarily easy to come up with. So congratulations on having thought of one!


“Having value” and “Being fundable” are two completely different things. What the more experienced responders here are saying is completely accurate: while a good idea is usually a necessary ingredient for the formation of a good company, it is not sufficient by itself for any serious investor to fund.

Why? Because there are also other good ideas out there, some of which have already been developed, tested and put into practice, thus decreasing the amount of risk an investor will be taking. The bottom line is that ideas by themselves are simply not fundable by professional investors (although, as a couple of other answers have suggested, you may be able to raise some initial money from your friends or family members.)

Here, in a great post by Derek Sivers, is a graphic (and accurate) explanation of why investors place greater value on execution than they do on ideas:

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Entrepreneurshit. The Blog Post on What It’s Really Like.

It’s 4.50am. Sunday morning. And I couldn’t sleep. I have much on my mind since I just returned from a week on the road. 5 days. 3 cities.

Late night Mexican food. Beers. Airports. Delays.

I left on a Sunday. I had to miss a full day with my family, camping in the mountains. I returned home Friday night at 10pm – too late to see my kids.

I’m reminded of this feeling. It’s all too familiar. It’s what life was like as an entrepreneur. I didn’t sleep much back then. I was on the road much and I internalized much of the stress so that others didn’t have to.

And so it goes again. I’ve been on the road much of 2012 and part of 2011. According to the SEC we’re not allowed to market the fact that we’re fund raising, so I won’t. But for some strange reason they make you file your progress on fund raising, which is the widely picked up by the press. Go figure.

So it is now publicly known that we have closed $150 million in our 4th fund. Ok, well, it’s more than this but I’m not allowed to tell you specifics.  I plan to write about it early next year when we’re all through. We have a little more to go until the finish line. It has been a fascinating experience. But now you know why I’ve had many nights away, many airports and much time on the road.

And why I woke up at 4.50am. But this is nothing like the stress of being an entrepreneur. As I’ve written about before, You’d Have to be a Big Baby to Complain about Being a VC.

What’s it really like being an entrepreneur?

That was the topic of my keynote at Seedcon, an event hosted by the University of Chicago, where I am a  graduate of the MBA program.

I like to speak about this topic with first-time wantrapreneurs because if you read the tech press every day you’d get the impression that it all glamor. It’s not.

You’d imagine that every founder was getting rich. Actually, positive outcomes for founders are quite rare. You probably follow some high-profile entrepreneurs on Instagram and Twitter and see conference pictures of them in Davos, Mexico, Monaco or wherever. You might be psyched out into thinking you’re doing something wrong for being in your shitty little windowless office. Clicking on their glam party pictures. You’re not. You’re where you should be.

There is a difference between a Conference Ho and a successful entrepreneur. But it’s hard to know that from the press. From the Instagram and the Twitter.

As a startup founder you rarely have much money in your bank accounts. Neither in the personal nor business account. That’s stressful enough.

I recently had coffee with a young friend who just finished his first startup. It didn’t end how he would have liked. But he learned. And he’s young. And I’m certain he’ll bounce back.

He told me,

“I have $6,000 in my bank account. Throughout the course of last year I never had more than $8,000 in my account. 

I want to do this again. But I have to be careful. Maybe I need to do slightly later stage.”

He probably didn’t know but he has more in his account than most Americans so there’s that. He had raised nearly $500,000 from investors. Many are well known. He shut down his company gracefully and even thought it must have felt like a crap sandwich doing so I’ll bet his reputation is still solid with his backers.

Think about it – most entrepreneurs who manage to raise seed money or venture capital usually raise enough money for 12-18 months maximum. Many times it’s less. So at any given point you are likely operating with a maximum of 9 month’s cash.

And yet you have to ..

  • Recruit employees in the blind belief that the amazing job they’re quitting to join you will be worth it in the long run
  • Sign up customers who are paying you money for a service you can’t 100% guarantee is going to be operational for the full period that they’re expecting
  • Tell the press how great you are and hope that they aren’t publishing your obituary 9 months later rendering you a fool.
  • Tamp down the enthusiasm your naive family has about your “impending IPO” (honey, when can we buy shares? Uncle Morty wants to know) from “your successful daughter” (we’re so proud of her! she’s so successful! we always knew she would be. she was so precocious in high school. that’s my daughter – did you see her mentioned in the New York Times!) Shit, ma, stop sayin’ that. I don’t want you to have to eat humble pie with your friends next year!
  • Raise money. Need money. More money. Yes, please give me money. No, I don’t really know if I’m going to be able to return it. But without it I know I’m forked. I need it. So I’ll ask anyway and hope like hell I don’t have to avoid you at future cocktail parties. Quick – why don’t entrepreneurs celebrate when they raise money? Because they know that they’ve just signed up for much more obligation.

Early on in my first company I had an employee ask if it was a good time to buy a home. We had less than 6 months’ cash in the bank. I was pretty sure we were going to raise another round of capital. But not sure, sure. I mean you never know if your investors are REALLY going to keep backing you. And you can’t go around telling all of your employees your deepest insecurities about it or you’ll soon have no more of said employees.

Trust you? Yeah, I trust you. But why don’t you just give me the damn term sheet you promised so I can trust you even more.

You have secret doubts about your co-founder. She seems depressed. And she isn’t pulling weekends anymore like you are. I know, right? Total bullshit. She’s just not as committed as she once was. I don’t think she really believes any more. If I told my VCs would they then lose interest in our next round? Would they blame me? Would they back me or think I had gone off the rails?

So Facebook just announced that they’re going to compete with you. Apple announced that they’re shutting down your category. Salesforce.com just bought your main competitor. Your main competitor just raised $75 million and took all of the oxygen out of the room.

Far fetched stuff. If you’re not an entrepreneur. If you’ve been one for a while you know how much you fear every WWDC. Every F8. Or DreamForce. What announcements are going to crush you? [I wrote about what to do when this happens here.]

My biggest fear as an entrepreneur? I was worried that I was going to get married and be on the altar unemployed. “There’s my son. He should have been a doctor like his father!” Truthfully, that’s one of the things that kept me going. I didn’t want to disappoint.

I didn’t want to disappoint my parents. My wife. My employees. The press who trusted me enough to report on our successes.

I didn’t want to disappoint my customers. People seldom understand that when enterprise customers choose your software it isn’t just a purchase order. It’s a human being inside the buying organization who has trusted you. He went to his bosses and asked for budget. He beat down the other factions that wanted to choose your competitor. He has staked his reputation on a project to use the software of some shitty 2-year-old startup company because he believes! In you.

So you ask why on Earth being a founder is stressful?

No, it’s not as bad as working in coal mines. But it is quite the roller coaster and the stress is real.  Some people love roller coasters. Others prefer a smoother ride.

One of the most asked questions I get about being a VC who was formerly  an entrepreneur is if I ever miss being an entrepreneur? Do I ever want to go back to it?

Of course I do! How could you not want to go back to it. It’s addicting. It’s an adrenaline rush like no other.

I often answer this way:

It’s like sports. If you have a chance to be on court and shooting 3-pointers as the game clock is winding down OF COURSE you still want to be on the court. There is no comparable feeling from the sidelines.

Yet one day you wake up and you realize you can’t run as fast as the young guys. You can’t quite hit the 3-pointers as often. Yes, you have maturity that makes you a wiser player. But you realize that you can be more helpful as a coach.

And yes, I sleep better at night as a coach. And I’m happy as a VC.

Remember that if you choose to be an entrepreneur or to at least try – it’s stressful for everybody who does it. Your competitors have just as much angst as you do. You read their press releases and think that it’s all rainbows & lollipops at their offices. It’s not. You’re just reading their press bullshit. They have their secret doubts. And they’re in their offices reading your press releases and wondering why life is much easier for you. And they’re fighting with their co-founders and struggling to ship code on time.

As I like to say, “we’re all naked in the mirror.” We stare at our own imperfections. And then we go out everyday and see everybody else in their fine threads and wonder why it’s much easier for them.

Being an entrepreneur is about finding your inner self confidence.

  • To be constantly told “it won’t work” but to keep plugging away anyways.
  • To be kicked a lot and still keep standing.
  • To hide your demons so that you don’t scare the bejesus out of your employees.
  • To inspire others to join your cause when by all rational accounts they should not.
  • And having the cojones to have them join you anyways. Pottery Barn rule. You hire them, you own them now. As in your responsible for these lines on their future resume. Don’t fuck them up.
  • To swallow your stresses and insecurities and keep your optimistic game face on in the office. And on your home front. Maybe even try to believe it in your own head.
  • It’s about wanting the right speaking slot at an important conference and hounding the organizer until he lets you do it.
  • It’s telling your creditors that you need 60 extra days to pay. Please. Yes, most entrepreneurs will be nodding their heads right now. Not fun, hey? But that’s what it takes.
  • Firing? Hell, get used to it. It’s a necessity. You better be good at it. Develop a thick skin for it. Not put off the difficult fires. You don’t have the spare budget to suffer fools. Hire fast, fire faster.
  • Friday night in the office while others are at the bar. Sundays in the back of a plane. Center seat. Smelly dude next to you.
  • Investor emails. They are forwarding you yet another mother fucking link to an article about your competitors. And wondering why the hell are we not doing THIS like they are. Enough already!?! I told you not to worry about their move into Latin America. I promise you that won’t be a bit market for us. What? No, I’m not worried that they’re higher in the App Store charts than us. They’re paying for traffic. Paying I say! They can’t have a positive LTV on these downloads. You want me to throw around my money like that too, bro?

Hell, I send those emails. I’ll admit it.

Entrepreneurshit. It never ends. It’s not all glamor. It’s mostly not glamorous at all. It’s just something you have to do. Often because you’re unemployable. Your impertinence would get you fired in 2 days for telling your boss he’s a fuck wit. And it’s why you probably will quit on day 366 after the acquisition.

You’re unemployable. You’re an entrepreneur.

It’s not for everybody and you shouldn’t feel bad if you aren’t one of those that chooses this life. You’ll probably be healthier and wealthier. Despite the fact that only the Lotto winners get reported. Many more people play.

But if you do want to go for it, don’t wait. It doesn’t get easier later in life. It gets harder. You’re probably going to fail or have limited success. The math says so. So better that you try as young as you can when failure is easier to bounce back from. When you can wear it as a badge of honor.

I’m not ageist. I’ve backed several entrepreneurs in their forties. No problem. I’m just telling you that if you’ve never done it before and WANT to then the earlier you try, the better. That’s all.

Good luck. Enjoy the ride. I’ll be rooting you on from my far comfier seat on the sidelines. Secretly. Wishing. I were still in the game.

If you want to read more on the topic:

** Images from top were from this week’s travel. The left hand side was dinner, terminal 3, Chicago O’Hare. The right hand side was the view from my two-hour delay at Newark Airport. Nice view, actually.


Reblogged via http://www.bothsidesofthetable.com/2012/11/18/entrepreneurshit-the-blog-post-on-what-its-really-like/

Is there an incubator for aspiring Angel Investors or VCs?

No, but there are several sets of courses on angel investing that can provide a good base from which to start. The most comprehensive and best known is the Power of Angel Investing seminar series developed by the Angel Resource Institute (formerly known as the Angel Capital Education Foundation, and prior to that part of the Angel Capital Association). It was co-funded by the Kauffman Foundation, and primarily written by Bill Payne and John May.

Another course (that is getting a bit long in the tooth now) is Angel Investing as a Team Sport, developed by the National Association of Seed and Venture Funds (now part of SSTI).

A third is the in-house course developed for its members by the Golden Seeds angel network.

For individual angels not affiliated with a group, rumor has it that a definitive introductory book on angel investing is on the way early next year from a major publisher.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Apply Lessons Learned To Gain From Startup Failure

Crossroads: Success or Failure by StockMonkeys.com, on Flickr

Crossroads: Success or Failure by StockMonkeys.com, on Flickr

Your startup is gone, it’s never coming back, and you are in mourning. An entrepreneur whose business fails grieves similarly to anyone who has lost a loved one. The pain of losing a business is not only about a significant loss of income, but can send your entire identity into turmoil.

Most entrepreneurs define themselves by their business projects. They calibrate self-worth by what they accomplish or do not accomplish. In other words, if a project fails, then they are failures. If a project takes off, then they are wonderful. It’s the universal entrepreneur reaction. Read more

Martin Zwilling , Founder and CEO, Startup Professionals
September 28th, 2014

Joining A Startup As CFO Is A Good Path To The Top

Indra Nooyi, CEO and former CFO, PepsiCo, via Wikipedia

Indra Nooyi, CEO and former CFO, PepsiCo, via Wikipedia

Every investor is looking for the “dream team” of executives to put money on. Often I find that experienced investors scan ahead to the management page of a business plan, even before they read the product description. That’s how important the people are. The Chief Financial Officer (CFO) role is usually considered second only to the CEO, because financials are critical.

In fact, about 25% of CFOs make it to the CEO position, although not necessarily in a single step, like Indra Nooyi, PepsiCo’s CEO. The latest Crist Kolder report finds that the percent of female CFOs, as well as CEOs, continues to rise and is at an all-time high. Read more

Martin Zwilling , Founder and CEO, Startup Professionals
September 21st, 2014