Can Seattle cultivate new startup seedlings (Photo: Rev Stan)

Guest commentary:  Yesterday, Marcelo Calbucci published a challenge to Seattle VCs here on GeekWire. Marcelo argues that seed-stage funding in Seattle is deficient, and challenges Seattle-area VCs to fund 100 seed-stage startups in the next 24 months.

That would be a great outcome, but it’s the entrepreneurs, rather than the VCs, who need to be stepping up to make it happen.

According to Marcelo, (1) seed-stage investments in Seattle have happened at a low rate; (2) investors say this is because they aren’t seeing investment-worthy propositions ($100 million at exit); (3) therefore, investors are placing their money outside of the Seattle area.

From this, Marcelo concludes that (4) the lack of investment-worthy proposals here in Seattle is somehow the fault of the investors.

Jonathan M. Smith, my doctoral adviser, tells his students: “When you read something, always look for the TAMH.” Every year, some dutiful doctoral student comes back with: “What’s a TAMH?” Smith replies: “Then A Miracle Happens.”

This is the point where the argument makes a leap that isn’t substantiated. Marcelo’s step 4 is the TAMH.

Jonathan Shapiro

Ten years ago, Seattle had one of the strongest boutique iBank ecosystems in the country. Enough so that people (including my company) came here seeking investment. That ecosystem shrank during the dot-bomb years, but people continue to look to this region as a source of funds.

As a result, those people now compete with Seattle-area entrepreneurs for funding. That’s a good thing. It promotes earlier infant mortality for weak ideas, leaving more capital available for viable propositions.

Seattle-based sources of funds exist. If people outside the Seattle area are putting forward more compelling propositions than we are, the investors are doing the right thing by sending them the money.

What we need to do as entrepreneurs is to step up, accept that competition, and produce investment-worthy propositions of our own.

For better or worse, “fundable” doesn’t just mean “it will make money.” It also means “big enough to be worth the investor’s time.”

Think about your personal investment portfolio for a moment.

Assuming you work at it, you have just about enough attention to manage 20-25 positions actively. The same holds for the VC.

If five VCs working together place 125 investments against a $300 million pool (which would be a lot of investments for a pool that size), the average placement needs to be $2.4 million. A more realistic number of positions for that $300 million fund would put the investment level in the $3 million to $7 million range, which is where first-round VC investments have been traditionally.

The VC may love your smaller-scale idea, but they are answerable to investors just like you, and they can only manage so many positions. It doesn’t mean they are gun-shy. It means they are doing the math and doing their jobs.

Marcelo is right on one point. It wouldn’t hurt if Seattle area VCs, collectively, take some modest steps to become a bit more visible to first-time entrepreneurs.

Knowing that the money exists might help to bring proposals out of the woodwork. At worst, we’ll all enjoy some wine and cheese. Hmm. This being Seattle, perhaps pizza and beer.

But taken overall, I think Marcelo’s challenge is directed to the wrong people. Here’s my counter challenge:

A Challenge to Seattle Entrepreneurs: Produce 100 Investment-Worthy Propositions in 24 Months

I’d say more, but it’s time to stop. In any case, I need to get back to work reducing that to 99.

Jonathan Shapiro is a Seattle area software entrepreneur and managing director of The EROS Group. He received a Ph.D. from the University of Pennsylvania in 1999.

Previously on GeekWire: A challenge to Seattle VCs: Back 100 seed-stage startups in 24 months

Comments

  • http://twitter.com/jchenry Colin Henry

    Bravo!

  • http://GeekAtSea.com/?utm_source=disqus&utm_medium=display_name&utm_campaign=disqus_display Kirill Zubovsky

    Johathan, valid points, but let me tell you a story. 

    A couple of years ago, I met a guy who learned to code on his way to Palo Alto, and then joined a startup. The founder, and the lead investor into that startup, thought that my friend was a moron; seemingly he didn’t work enough hours and didn’t do things right …etc. The founder eventually fired my friend, and some time later the startup failed.Now, fast-forward just a few months, my friend became the lead engineer in another valley-based startup, the company that was later was sold for millions of dollars. Sorry can’t  name the names, I’d like to keep the privacy of the story.

    The moral is, you just never know what the next big hit is. Sure, you can say this is an outlier and my friend just got luck, but the Silicon Valley is full of these stories of people getting lucky!

    If you want to play safe, then of course you’ll wait till the story looks right, but will it ever? Don’t the founders usually say – “the best time to start was yesterday, today is the next best time.”

    • Jonathan Shapiro

      That’s a great story. Happens all the time – or at least more than once in awhile. Not entirely sure how it’s relevant, unless your feel that investors are playing it too safe. I don’t think they are, but it doesn’t matter. Venture capitalists can’t make money on $750k deals. It’s that simple.

  • Anonymous

    Thanks, Jonathan.  Your point on the number of “investment grade” deals for VCs is spot on.  You point out that the size of the VC’s fund drives the required size of the investment and therefore the required exit size.  The economics of the VC industry dictate the kind of deal they can pursue.  In contrast, Angels and Angel Groups have a different economic premise.  As I’ve posted in the past (http://blog.drosenassoc.com/?p=10), this allows for smaller exits to still be great returns for both investors and entrepreneurs.  This is one of the reasons why the Alliance of Angels has done 153 transactions in the last 5 years.

  • Bill Bryant

    As an entrepreneur turned venture capitalist & angel, I agree with the sentiment expressed here.  Investors can only invest in what is presented to them.  If there were only 13 seed stage deals done in Seattle in 5 quarters, that’s a rough approximation of the “quality” projects that were spun up during this timeframe.  Are there occasional deals that should have been done?  Are there deals that investors missed? Just didn’t get? Absolutely, no question.

    But these are exceptions. Over the past ~ 4 yrs, I can think of two deals that in hindsight absolutely should have been done here in Seattle, were not, went down to the Valley, found investors, and became successes (Twilio and Docverse).  I met them both and frankly didn’t make the right call.  The founders were excellent, the idea was “good enough” and I should have pulled the trigger (as should others).  There may have been 1 or 2 others that I’m forgetting. 

    But its not 10.  Or 25.  Or 50.  Or 87.

    We appear to be coming into a resurgent market cycle (bubble?) where VCs are being chastised for “not doing more”.  How quickly we all forget that 9 months ago, we marked a full decade of NEGATIVE investor returns – on average, investors lost money by putting their capital into projects that well intentioned, earnest entrepreneurs assured them were based on “conservative estimates”. I’m not chastising entrepreneurs here – we’re all in this together.  When investors lose money over a decade, it means that founders, management and employees made no money either.

    There is one part of me that is envious around what its happening in Silicon Valley and NYC – the meteoric stories, the financings that get assembled overnight, the Groupon/Zynga kinds of success stories.  But for every Zynga, there is a Color.  A Blippy. 

    • http://blog.calbucci.com/ Marcelo Calbucci

      Bill, my question to you is when you look back 3-years from now, how many more startups you’ll say have fell off the Seattle-wagon? Or, more importantly, how many were crushed at point of inception because of lack of funds and could be the next $1B idea? Story is not only repeating itself, but making it worse.

      It will be hard for OVP, Ignition, Madrona, Voyager to raise large funds if they can justify it locally. No?

      • Bill Bryant

        If the two I mentioned had been done by Seattle investors, it wouldn’t make any difference to your argument, or mine.  My point is that the vast majority of “backable” deals do get done in Seattle. You raise the spectre of startups that *could have* been the next $1B idea if only they had been backed.  That’s an argument that neither of us can prove, since by definition we’ll never know.  The only thing we can point to are deals that tried to raise in Seattle, failed to do so, moved to some other geography or raised from another geography, and went on to success.  I can point to Twilio and Docverse as examples. I’m not sure there are others.  

    • Luni

      Good point Bill.  But in the past year, I’ve been helping out at the local business schools, talking with the “wannabe” entrepreneurs.  Many of people I’ve met have kernels of good ideas, but are stymied at the hurdles of 1) finishing those business plans, and 2) finding funding.

      The only viable way to meet Marcelo’s challenge is for someone or some org to step forward to help knock down hurdle #1 so that you and the other funders have far more choices.

      100 funded seed startups requires at least 500 fundable business plans to vet.

      Then again… Marcello… if these 500 viable plans did emerge, and if Seattle funded 100,  we might again in two years be talking about how Seattle funded only 100 vs. the 300-400 funded by CA, NY, and MA.

  • TechLaunchCenter.com

    Investment worthy… for who?  For the VC profiles referred to here?  Then it assumes that the startup has already gone through several “stages” (i.e. proof of concept, beta, customers, revenue traction)  to be worthy of a $3M – $7M investmeent level.   Aren’t we back to the debate of the “seed funding” gap Marcelo might be inferring?  If VCs won’t close that gap then angels and other sources will have to be part of the answer.
     
    What if…

    – There was a place (let’s say the AMZN former HQ on Beacon Hill which will likely be vacant for months…) decicated to support the launch of such startups
    – Which provided space to like minded startups (i.e. software as the foundation of innovation)
    – Facilated the availability and access to resources (i.e. the space is large enough that service providers, VCs, angel groups, etc. would all have a presence on-site)
    – Supported the early stage funding such as that provided by TechStars or YCombinators
    – Went a step further to provide 25% of a first round of qualified funding (i.e. say provided $250K for a Super-Angel, Angel Group or VC seed investments)
     
    Then wouldn’t we provide a kick-start to the challenge to of generating 100+ investment worthy startups?

    Audacious, ambitious project.  Share your thoughts as it could be coming near you with the right community support: http://bit.ly/kWsRtFu

    (Disclosure – project could be real…  has been worked on for 6+ months… needs a rallying of the startup community to make it hapeen…) 

    • Jonathan Shapiro

      Wish you the best with the TLC idea. I’ve seen incubators that do nearly all of what you seem to be contemplating, and some of them have done pretty well. I’d caution that “low selectiveness” is a sure recipe for failure. Regardless, I’d love to help out.

      We probably shouldn’t ignore the role of state-funded incubators, which do some amount of seed-level investment.

      • TechLaunchCenter.com

        Thanks Jonathan.  Let’s connect (stolzpascal@gmail.com)

  • http://www.impactinterview.com Lewis

    I’d love to hear a Seattle investor’s perspective on Marcelo’s original post.

    • Jonathan Shapiro

      Perhaps someone like Bill Bryant? (above)

  • http://www.facebook.com/aaron.a.bird Aaron Bird

    I totally agree and this is exactly what I thought when I read Marcelo’s post.  The way I see it the answer to the question of who’s fault it is it that more deals are not being done in Seattle by Seattle VC is simple:

    VCs care only about ROI – I think we can all agree on this :-).  The cost to for Seattle VCs to invest outside of Seattle is higher than investing in Seattle .  Traveling 4 times a year to board meetings, etc make it so you can do less deals if they are not in your hometown (see Fred Wilson’s recent post on why they don’t have more investments in Europe).  So given two deals with the same upside, one in Seattle and one outside Seattle, the Seattle startup will get the money because the cost is lower.  Obviously we (Seattle entrepenuers) aren’t showing deals with enough return, thus forcing Seattle VCs to fund (at a higher cost) deals outside of our region.

    I totally agree that the root problem for why we (Seattle entrepenuers) aren’t seeing more deal flow in Seattle is that we aren’t swinging for the fence enough.  Brewster Stanislaw wrote a post about this a few weeks ago on GeekWire and I think he was spot on.  We need to drop the small to medium sized lifestyle companies and swing for the fence.

    Anyone complaining about not having enough capital in Seattle should try to start a company in any of the other 1,000s of cities in the U.S. where there is NO VC firm and doing a deal means a Seattle VC partner has to take on the commitment to fly to your city 4 times a year vs. the deal they could have done 10 blocks away in South Lake Union.

    Now I need to get back to reducing the number to 98…

  • http://www.facebook.com/aaron.a.bird Aaron Bird

    I totally agree and this is exactly what I thought when I read Marcelo’s post.  The way I see it the answer to the question of who’s fault it is it that more deals are not being done in Seattle by Seattle VC is simple:

    VCs care only about ROI – I think we can all agree on this :-).  The cost to for Seattle VCs to invest outside of Seattle is higher than investing in Seattle .  Traveling 4 times a year to board meetings, etc make it so you can do less deals if they are not in your hometown (see Fred Wilson’s recent post on why they don’t have more investments in Europe).  So given two deals with the same upside, one in Seattle and one outside Seattle, the Seattle startup will get the money because the cost is lower.  Obviously we (Seattle entrepenuers) aren’t showing deals with enough return, thus forcing Seattle VCs to fund (at a higher cost) deals outside of our region.

    I totally agree that the root problem for why we (Seattle entrepenuers) aren’t seeing more deal flow in Seattle is that we aren’t swinging for the fence enough.  Brewster Stanislaw wrote a post about this a few weeks ago on GeekWire and I think he was spot on.  We need to drop the small to medium sized lifestyle companies and swing for the fence.

    Anyone complaining about not having enough capital in Seattle should try to start a company in any of the other 1,000s of cities in the U.S. where there is NO VC firm and doing a deal means a Seattle VC partner has to take on the commitment to fly to your city 4 times a year vs. the deal they could have done 10 blocks away in South Lake Union.

    Now I need to get back to reducing the number to 98…

  • http://blog.calbucci.com/ Marcelo Calbucci

    Jonathan, I couldn’t agree with your challenge more. Unabashedly, I can say I’m one of the top 3 or 4 people in Seattle who has made the most impact in improving the quality of entrepreneurs and startups around here, primarily through Seattle 2.0 events like StartupDay (www.startupday.com), the Seattle 2.0 Awards and me spending thousands of hours over the last 3 or 4 years mentoring and advising startups.

    That said, you got your point #2 completely wrong. VCs are not going outside of Seattle to look for Seed-deals. They are looking for Series-A and B deals. A seed-deal is more of a deal to prove some assumptions with an even higher risk of failure.

    Bill Bryan’s point about just two deals that should have been done in Seattle and they were not is also about a Series-A/B, not about seed. There are tens of startups over the last few hours that’ve gone to the Bay Area seeking seed-funding.

    All-in-all, better entrepreneurs, better startups, better VCs, better angels is all part of the same cycle. My call to action is for one or two individuals to break that cycle and put us at a different level.

    • Web3dot0

      “Unabashedly, I can say I’m one of the top 3 or 4 people in Seattle who has made the most impact in improving the quality of entrepreneurs and startups around here, primarily through Seattle 2.0 events like”

      Most interesting. As a former entrepreneur I find it interesting you put the blame on the money side, not the idea.

      To think the money propagatest the success of the idea is interesting. See Zillow….

      The problem today is it takes about a day to create a new idea. I am old school and find your premise questionable at best.

      In the old days, if you had a solid idea, had a business plan, you might get funding.

      Today, if you have an idea, expect funding.

      I don’t get it….

      • http://blog.calbucci.com/ Marcelo Calbucci

        Blame? What blame? I just painting a picture for a better startup scene in Seattle. 

        • http://www.bluestoneacct.com Ldodson

          It seems a bit strange to me as well.  The idea that you ‘deserve’ funding just because you have a startup. 

          However, this idea is prevelant in other types of businesses as well.  Unfortunately, “build it and they will come”, isn’t usually a viable business plan.

    • Ripley

      “Unabashedly, I can say I’m one of the top 3 or 4 people in Seattle who has made the most impact in improving the quality of entrepreneurs and startups around here”

      Unabashedly is not usually a synonym for arrogantly. Saying you’ve helped startups network and connect, ok. But declaring you’ve improved the quality of entrepeneurs is bs.

      Quality is measured by results-where are the successful exits that credit you for mentoring and advsing them?

      • http://blog.calbucci.com/ Marcelo Calbucci

        Touché. Back to my cave now.

        • http://twitter.com/chrisamccoy Chris McCoy

          Do not listen to these idiots. The fact that you show up is 99% more than what anybody else does. And your stuff if some of the best there is. There just needs to be more incentives for folks at AMZ and MS to be a part of it. 

          • http://twitter.com/chrisamccoy Chris McCoy

            In otherwords, Seattle needs more talent off the sidelines and in the game. Otherwise, it’s a bunch of social media specialists and middleman developers trying to build $100B businesses and that’s just not the way to do it. You have to own the data. 

      • Anonymous

        Completely agree.

        I think Marcelo has done some good things to organize conferences and create a web site for local entrepreneurs. But, as a bay area transplant, I have to say these accomplishments would not have gotten this much attention and fame in the bay area. In fact, this is an example of how much behind Seattle is comparing to the silicon valley.

      • http://twitter.com/chrisamccoy Chris McCoy

        What the hell are you doing for the Seattle startup community Believe It Or Not?

        Use your real name or be an idiot. 

    • http://www.rescuetime.com Anonymous

      “That said, you got your point #2 completely wrong. VCs are not going outside of Seattle to look for Seed-deals. ”

      Ignition is.  I believe they’ve done 10-15 in less than a year.

  • http://twitter.com/chrisamccoy Chris McCoy

    My fellow Seattle entrepreneurs. Build businesses that capture social data. Lots of it. You won’t need to find investors. They will find you. 

    Also, become a sponge on Quora. It will change your entrepreneurial trajectory. The best minds, ideas, and information in the world today are being shared on there. The stuff on startups and technology is just ridiculous.

    Understand the differences between implicit and explicit data. How they drive social recommendations. How social recommendations drive 20% of Amazon’s revenue. How many vertical industries will be disrupted with social data, with the sharing economy. Take down EVERYTHING in these links, it’s gold and there’s nothing else like it:- http://stanford2011.wikispaces.com/- http://stanford2010.wikispaces.com/- http://stanford2009.wikispaces.com/

    Seattle investors: learn about social data so you can invest in it. Or point Seattle entrepreneurs in that direction. No more iPhone apps businesses unless they have a tremendous customer acquisition model which is difficult on a gov’t controlled (Apple) platform.

    John and Geekwire team: focus on the lack of innovation in this space coming out of the Univ of Washing where you have a) some of the state’s brightest students with low risk profiles and b) a funded “innovation lab” that isn’t really innovating to the tune of Stanford, MIT, etc. It should be. 

    I’m on the outside looking in but very much on the inside of the pulse of what’s happening and it’s damn frustrating.

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