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

Guest Commentary: After reading GeekWire’s post about how Washington state is lagging California, New York and Massachusetts in venture capital deals, some data points struck a chord with something I’ve been observing for several years: Seattle’s early-stage investment community is very weak.

I looked at the same data in the CB Insights report, looking for something very specific. What is the number of seed deals in each of those states? Over the last five quarters, California had 155 seed deals from venture capitalists. New York had 56. Massachusetts had 32. And Washington had… 13!

A total of 13 seed-stage deals in 5-quarters. That’s less than 1 a month.

The report doesn’t tell the full story because it focuses only on venture capital deals, excluding angel-funded deals like the startup I work at. The Alliance of Angels funds at least one or two startups per month, and the other angel networks in Seattle also are pretty active.

But California, New York and Massachusetts also have their own angel groups, funding deals in their states. So, yes, it appears that we are at the bottom at least compared to the major innovation centers in the U.S.

Marcelo Calbucci

About three years ago I met with a respected venture capitalist in the Seattle area who told me that, for the first time, they were actively looking for deals outside of the region. The reason?

He said there just weren’t enough companies with a potential of a $100 million exit or more, so they needed to find those deals somewhere else. Shortly after that conversation, two other venture capitalists from two different firms said something similar to me.

Basically, if you sum it up, they believe there aren’t enough VC-style deals in Seattle.

We are now seeing the consequences of those conversations, with top funds like Ignition, Madrona, Maveron, OVP and others investing in startup companies all over the country. They have to.

Otherwise, they won’t get the best outcome for their limited-partners. With that comes higher costs of investment. (More travel for due diligence and board meetings, more time having to seek new deals, etc.)

If you have not made the connection yet, let me be explicit: Seattle VCs are suffering the consequences of a self-inflicted wound.

They have been “gun shy” on seed-stage deals, which clearly comes with its own perils (hours per dollar per deal, “spray and pray” label, fear of being duped, etc.).

Now, we are going through another cycle. The startup industry here in Seattle is right at the beginning of another self-fulfilling prophecy. We are not doing enough seed-stage deals. And the consequence is that there will not be enough later-stage deals in the next couple of years.

Here’s what I think needs to happen. One or more of the visionary venture capitalists in the region needs to step up to the plate and lead a charge to make 100 seed-stage investments of $100,000 to $500,000 over the next 24 months.

At a cost of $30 million, it will guarantee dozens of series A deals one to three years from now. It will work as an accelerant in our region, creating more opportunities, driving more returns and recycling more capital back into startups.

Any takers?

Marcelo Calbucci is the co-founder and CTO at EveryMove.org, a startup giving consumers new powers to benefit from their healthy lifestyle choices. He’s also the founder of Seattle 2.0.

Counterpoint Guest PostA challenge to Seattle entrepreneurs: Generate 100 investment-worthy startups in 24 months

  • http://www.facebook.com/mikewat Mike Watson

    My Seattle startup is self funded and all the founders I know are in the same boat. Many of us are bootstrapping. It’s slow and painful, but there’s not really alternative. 

    • http://trevinchow.com/blog Trevin

      +1

  • Anonymous

    Ignition does have a seed fund, but I believe all their seed investments are in the bay area.

  • http://twitter.com/cliffrudolph Cliff Rudolph

    Great comments Marcelo.  

  • http://blog.daryn.net daryn

    Yes, we need more local seed investments to funnel more later stage investments, but I’m not sure if there are 100 companies in this city who can realize that potential if we don’t have a stronger support system beyond financing to nuture them. Techstars is great (or so I hear) for the handful of companies that participate, but beyond that there is a big void. 

    The 13 number does seems somewhat meaningless though, since as you said, there are way more companies who got their seed money from angels and friends & family.

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

      That’s how a lot of people see this problem. Why try to invest in 100 companies if I don’t see where they will come from? It’s all connected and the right funding vehicle can break the cycle we are in.

      The 13 is not meaningless in the context of VC seed-deals. It’s the reality. It doesn’t mean we have 13 startups seed-funded on the last 15 months, but it’s a valid data point about the problem we have now which will be a much bigger problem in a couple of years.

      • http://blog.daryn.net daryn

        seed funding is a lot more valuable with mentorship. I’d rather see 1/2 the number of companies funded initially, with the other money going into a community education program that builds better startups. I think that’s bigger long term vision than scatter-shot. 

        As far the the 13, I said “somewhat” meaningless, as in, if there are 100 companies getting seed funded, does it matter what the ratio of angel to vc is? 

        • http://twitter.com/madelineelectro Madeline Puckette

          I’d like to agree with you Daryn.  Seattle ‘feels’ like that it is full of great idea-sprites not full-on startup entrepreneurs with scalable/growable vision. But then again, there are a milieu of startups that are self-funded because there is a large community of intelligent programmers (a skill that does not come cheap in other markets).  looking forward to what happens at startup riot

          • http://www.sanjayparekh.com Sanjay Parekh

            This is the exact thing we’ve been trying to help with in Atlanta.  Hoping we can do the same in Seattle.  We need the entrepreneurs with the great ideas to get in gear and apply to present though. The magic will only happen if they come out in force and represent.

    • http://www.facebook.com/people/Devin-Miller/100001051294818 Devin Miller

      asdf

      • http://twitter.com/madelineelectro Madeline Puckette

        Does that mean we need a bunch of VC Californians to relocate to the beautiful Northwest?

      • http://twitter.com/nickhuzar Nick

        Devin, I agree with you on this statement somewhat.   I cannot tell you how happy I am with the advisers who have been supporting me around Seattle on my latest venture OfferUp (www.offerupnow.com).  However, we simply need more of them.  More angels, more advisers, more capital.  It’s a vibrant ecoyostem that we lack.  I am confident we can get there but it will require greater risks, bigger visions and more support early on than presently exists today. 

    • http://twitter.com/iHearGeoff Geoff Simons

      Keep in mind that we’re talking about 100 startups over 24 months. That’s a little more than 4 startups per month, which may be a bit optimistic, but you have to also factor in the feedback loop effect. If we doubled the number of startups getting seed deals to 26 this year, maybe we’d get 26 in the first half of next year, and the remaining 48 in the 2nd half of next year as things snowball, people at MSFT, AMZN, GOOG, and others hear about the money and decide to take the leap into startups. There are good people locked up in these safe institutions who might do something else if the risk weren’t so high.

      Until then, we have to step up our own efforts to show that we have good startups and are worth investing in.

    • Janis Machala

      There are great advisors to be found, great board members and great infrastructure providers. It might be you don’t how to find them. With the right advisors and/or board they can lighten the load for all those other things.
      I’ve worked with mentoring and coaching founders for 15 years here and I know how much time and money I save. Whether it’s me or others, we are out there but we are not in your face about our services–same issue we all have, we don’t beat our chests about how good we all are, not Seattle style.

      • http://blog.daryn.net daryn

        “It might be you don’t how to find them.” — Gee thanks, Janis. I’m glad
        they’re all so tactful too.

        Sure, there are an ample amount of individuals with experience and opinions
        out there, but I think we’d be much better off if we figured out how to
        build a resource that could spread the education of an incubator like
        techstars or yc with a wider community. For tech startups, there’s a bunch
        of foundational knowledge that isn’t commonly held by first timers (seo,
        sem, lots of operational and tech stuff) and if we had a program in place
        that could teach a core curriculum to people starting out, everyone would
        win. General Assembly in NYC is my go-to example.

  • Victor

    VCs are investors, and like all investors, they do “suffer” from recency effect. When is the last time this area has had a bumper crop of exits? When is the last time those other tech centers in the country had a bunch of fantastic exits? Seattle hasn’t had much to brag about since the late 90s. It is a bit of chicken and eggs, until we see some decent returns, I doubt very much the VCs will step up to the plate. They are only in it for the returns. 

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

      That’s exactly right, and that’s why I explicitly used the word “visionary”. We need one or more people who can extrapolate a world where this bad cycle we are is broken and who have the resources to make it happen.

    • johnhcook

      I’ve been talking about the lack of big exits for a long-time in the Seattle area, and agree that it is a missing ingredient. At one point, most of the big returns for Seattle venture capital firms were from portfolio companies outside the area (Ignition with Heroku and ChinaCache). Maveron and Frazier also saw some of their big exits outside the region.

      Problem is, once VCs see success elsewhere, there are a host of reasons why they might go back to that well again and again.Madrona did see a very nice return on Isilon Systems. It is also worth noting that PopCap bootstrapped to its success for its first nine years, and then raised cash from Silicon Valley’s Meritech (a late-stage investor). I still contend that Seattle needs a big success along the lines of a Zynga, LinkedIn, Twitter, Facebook or Salesforce. It has been a long time since a company of that size was created here. 

      • Victor

        There is another way for VCs to eventually find their way back, but not for the reasons Marcelo is pushing for. Investors are constantly weighing the risks vs. potential returns, so there is a good reason they keep going back to the Bay area. Startups in Seattle get the “Seattle discount” because our relative sparse infrastructure (and this is why some startups leave); VCs will continue to invest in Bay area startups until the premium/discount disparity gets to be too large. 

        I am of the view that we are still in the early phases of a bubble (I am a fan of bubbles BTW), we will eventually see even more froth and that will lead VCs to look for relative values. Seattle would be a natural place for them to look. I see plenty of this kind of parallel even in China. Manufacturers are going into inland China to seek relative bargains in labor costs, resources and so on. Startup guys like me may think whatever we do is unique or special, VCs don’t hold that view. We are far more fungilble than we think.

        • Jonathan Sherry

          Hi Victor – good comment. I’m one of the co-founders of CB Insights, and so have been pretty close to the data for some time. And if you’re correct that we are still in the early stages of a bubble, it may very well be the fact that Seattle catches up as investors look for new places to put their money. But the fact of the matter is that California, New York, and to a lesser yet still noticeable extent, Massachusetts have all capitalized on the growing seed/early stage investing trend stretching back for numerous quarters now. If Seattle is going to play a role in this trend, it’s surprising that they haven’t really shown any “pop” as of yet. That said, we will continue to keep an eye on this story for quarters to come as I agree that the seed investing trend doesn’t show signs of letting up on a national level.

  • Janis Machala

    Washington State does not have a large base of local VCs. CA-based VCs tend not to do seed stage deals out of region. CA-based VCs also are a mix of arch-angel type of VCs and major “knock the ball out of the park” and we want the huge exit VCs. WA does not have these more arch-angel type of VCs (ie, Google ex-execs, PayPal/eBay ex-execs, etc.) who are the type tending to do seed stage deals. I’d look at who is doing seed stage by region and suspect you will find VCs who would not do a WA-based seed deal doing bulk of the seed stage type of investing. WA has a structural issue and angels can only do so many of these. With PopCap and Zillow and other M&A and IPOs happening for WA this might change!

    • http://www.facebook.com/people/Devin-Miller/100001051294818 Devin Miller

      Janis,

      My company raised a considerable amount of seed money from VCs in the the Valley recently.  We had no prior relationships.

      There are quite a few firms in the valley that are more than willing to back seed stage stuff in Seattle / Portland it seems.  Firms that we talked to said that they expect this trend to continue as Series A / B deals get more competitive, it is to their benefit to have a number of early bets in industries or teams that they like.

      As I stated in a comment above, the key element that Seattle is lagging that the Valley in particular has in abundance is a lot of wealthy ex-tech executives / entrepreneurs that want to get involved and are willing to put $100 – $500K a year into 5-10 startups and then help them out as much as possible.

      We have these same folks in Seattle but it just not seem like enough.

      • Janis Machala

        Your experience is not typical with respect to Bay area funds and entrepreneurs investing in a seed stage company from outside their location. Not impossible (Marketfish and Glympse I know both got funding from CA and elsewhere but they started with some “friends and family” betting on the founders AND a domain savvy investor(s) who validated their market opportunity. Plus, the founders were experienced business types with technical chops versus a couple of engineers with a good idea. Yes, more angels and seed stage VCs are investing outside of their drivable range but it is still the minority and more an exception. What sways this: market, idea, experience and track record of the team (this is huge), founder skin in the game (each of these founders went without salary and put some of their own cash in early on for maybe the first year or so), and the herd effect of a space that people might be flocking to. It also takes a commitment to work the Valley and not to expect these investors will show up asking in–the founders need to be at events down there, they need to network heavily founding CEOs wherever they want to solicit funding, have advisors or board members with good connections, etc. It is working on the business of fundraising day and coding/working on the product and marketing night as founders have 2+ full-time jobs.

        Remember, everyone, that the WA roots are Scandinavian and that means most long-timers don’t beat their chest too much or over inflate what their company/idea/technology might be capable of. There’s an understated element to our culture in WA and that is one reason people think there’s less here than there is. I suspect there’s more bootstrapping per capita and more angel funding per capita and more customer funding per capita here than the Valley where VCs do rule and are much higher per capita. We do NOT have the VCs per capita as CA does.
        Don’t think all VCs are equal either as there are many VCs who are not seeking a $100M exit but are shooting for doubles and triples expecting maybe a “fluke” like Facebook or LinkedIn in a blue moon. The arch-angel VC types which we do not have many of (ie, Second Avenue Partners) have different parameters and expectations and come in early for the great outcome as step-ups do occur because they help actively build value.

      • http://twitter.com/nickhuzar Nick

        Janis, agreed 100%.  At present, I am getting more interest for what we’re doing from the Valley then here in Seattle. 

    • Anonymous

      Great point about the virtuous cycle, Janis– Marcelo did a great job identifying the need for seed-stage investment on the front end (in combination with entrepreneurs who are swinging for the fences), and on the back-end, it’s these exits that puts fuel back in the tank.  Wealth creation is a critical piece of the puzzle, and is necessary, but not sufficient.  In my time at the Alliance of Angels, we had the pleasure of hosting the regional meetings for the Angel Capital Association, and hearing from the heads of groups from Oregon to BC to Montana.  When we asked their single biggest challenge, almost to a person it was the cultivation of “lead investors.”  What we heard then is that seed-stage deals get queued up to the groups, angels indicate an interest, and when asked “who will lead this deal?” many tend to take a giant step backwards. 
      It turns out, angel investing isn’t for the faint of heart, and they don’t hand you a lead investor manual when you become a multi-millionaire (or so I’ve heard. I’m not an accredited investor, nor a VC…just play one on TV via teaching a class on venture capital investing in the UW Foster MBA program). Leading a deal, doing diligence, negotiating term sheets and still more importantly, playing a strategic role in supporting the company (whether as an advisor or board director) is a serious challenge. So if I were to add to Marcelo’s challenge, it would be for more to do as Dan Shapiro did when he sold Sparkbuy– put some fuel back in the entrepreneurial tank by dint of hanging a shingle out saying “hey startups! pitch me! I’ve got money to spend!” Or like GeekWire’s own Jonathan Sposato with a breadth of entrepreneurial ventures. And well-publicized others such as the entire Founder’s Co-Op gang.
      So here’s hoping we’ll see more qualified investors (or arch-angels, as Janis describes) stepping up to lead! Others will follow and the virtuous cycle continues.

  • http://twitter.com/brianmba Brian Ostrovsky

    I can’t comment on the quality of deals in Seattle but I can say that when I read blogs and other rhetoric from people in CA they talk about deal heat and action and a sense of urgency. Sure. the bubble thing with higher-than-rational valuations is happening but in Seattle I hear how it’s tough times, and investors (angels included) aren’t really investing etc. There’s a fundamental difference in mindset on the investor side – probably the entrepreneur side as well.

    I talked with a VC in the Bay who said a ‘high seed valuation is $4+M pre’, the sentiment I gather in Seattle is $1M-2. Seattle should be killing it especially with the lack of personal income tax, sure an exit is low probability but never for ‘my startup’ so those sorts of things should be attracting startups and money not seeing an exodus.It’s almost as if people seem gun-shy and don’t want to be the person that invested in THAT deal or don’t want to be the last one looking for a chair when the bubble bursts so the easiest way to not get caught is to not really play the game. It’s their money but it seems to me that pressing a rush isn’t a bad thing and as long as you’re not all in when the bubble bursts you’ll be ahead on net.

  • http://www.puzzazz.com Roy Leban

    I think a good part of this is bubble envy. Silicon Valley has a bubble. Why can’t we have one too? In SV, companies with no hopes of actually making a profit are getting funding. That’s a bad thing, not a good thing.
    Sure, it’s hard bootstrapping. It’s hard building a product when you need to hold down a day job or do consulting to pay your bills. It’s hard putting together a team when you can’t pay them yet. Yeah, it would be so much easier if someone else took all the risk and put up the money so you could do that. But there’s a good description of that: it’s called getting a job and Microsoft, Amazon, and Google are all hiring. And Facebook, Zynga, and others have opened offices here too.

    But build something great, put together a great team, bring in revenue, and have real potential for growth, and it will be much easier to find investors. Concentrate on building a real business first instead of raising money first and it will be much easier to find investors. In fact, some of them will find you.

    There are two types of people who start companies. Entrepreneurs are driven to build things and it just happens to be a company they are building. Opportunists think that starting a company is the way to riches. No good can come of artificially channeling investment money to that second group of people.

    • http://twitter.com/SnappyDesk SnappyDesk

      How many pluses can I give here? Roy nails the landing. There is startling opportunity now. And the deal is as simple as “But build something great,…”. It has been said, “When the flower blooms, the bees come uninvited.” Following that success, why not follow up by becoming the next investor with a vision and fill the breach? I cannot expect an investor to dream bigger or execute better than myself.

  • Thatcherlink92

    The Seattle slump is a result of past behavior – no one has had much of an interest in fostering a great entrepeneurial community until pretty recently, and now it’s really hard to make a case that your company is better off in Seattle than down in the valley. It’s hard enough to build something great without fighting the inertia and attitude up here.

  • http://www.jrotech.com/ Jeff Rodenburg

    Some of this is simply the result of culture differences, especially with Sili Valley. I can’t speak to how capitalists and investors view it, but culturally it’s significantly different — and I find it leaves Seattle in the dust from an “intensity” point-of-view.

    This is anecdotal and based on my own experiences, but I feel a vibrancy in Silicon Valley that eclipses that of Seattle.  Of course there are exceptions, and I have many friends busting their butt in Seattle startups.  But, if I had to place a wager on which region had more eagerness/drive in their culture, I would say the Bay Area.

    We talk about the chicken-and-egg thing, but I know a number of startups in the Bay Area that are bootstrapped as well — more so than here.  It’s not investors who are wagging the dog; they’re going to where the action is.

    Seattle is not going to change because we are who we are, but I certainly see culture as having a big effect on this overall discussion.

  • http://www.jrotech.com/ Jeff Rodenburg

    Some of this is simply the result of culture differences, especially with Sili Valley. I can’t speak to how capitalists and investors view it, but culturally it’s significantly different — and I find it leaves Seattle in the dust from an “intensity” point-of-view.

    This is anecdotal and based on my own experiences, but I feel a vibrancy in Silicon Valley that eclipses that of Seattle.  Of course there are exceptions, and I have many friends busting their butt in Seattle startups.  But, if I had to place a wager on which region had more eagerness/drive in their culture, I would say the Bay Area.

    We talk about the chicken-and-egg thing, but I know a number of startups in the Bay Area that are bootstrapped as well — more so than here.  It’s not investors who are wagging the dog; they’re going to where the action is.

    Seattle is not going to change because we are who we are, but I certainly see culture as having a big effect on this overall discussion.

  • http://www.rescuetime.com Anonymous

    “He said there just weren’t enough companies with a potential of a $100 million exit or more, so they needed to find those deals somewhere else.”

    I’m not sure if seed-stage companies that exit for $100M+ are identifiable as such when they’re in the seed stage.  AirBnB?  Dropbox?  They wouldn’t have passed that test.  Google wasn’t especially fundable– search at the time was crowded and no one figured out how to make great margins there.  When Facebook started, MySpace was growing like crazy, and Boston VCs fairly famously passed on investing.  Craigslist started as a mailing list for San Francisco.

    There’s a great excerpt from a Paul Graham essay:

    “I used to think of VCs as piratical: bold but unscrupulous. On closer acquaintance they turn out to be more like bureaucrats. They’re more upstanding than I used to think (the good ones, at least), but less bold. Maybe the VC industry has changed. Maybe they used to be bolder. But I suspect it’s the startup world that has changed, not them. The low cost of starting a startup means the average good bet is a riskier one, but most existing VC firms still operate as if they were investing in hardware startups in 1985.”

    Entrepreneurs need to have bigger visions (“Yeah, it STARTS as a mailing list in SF, but imagine if…”) and VCs need to invest in smaller/weirder companies that could expand to bigger/broader markets.

    • http://thinkmaya.com Maya Bisineer

      I agree completely with Tony. It is  impossible to see how “big” an idea could be at seed. I love this post by Fred Wilson talking about how they missed out on AirBnB.  http://www.avc.com/a_vc/2011/03/airbnb.html

      Sure, everyone can build companies slowly while keeping day jobs, validate, raise capital and so on, but there has to be enough “crazy” in the system too. “Crazy” investors who will invest in a company super early and take a big risk because it could possibly be big one day. “Crazy” in a way that they can see the potential in people.  Entrepreneurs with “crazy” visions. I hope people like Dan Shapiro can get this cycle going.

      But yes, more $ and lead investors in the Seattle area can certainly make a HUGE difference.

  • http://www.revenews.com Angel Djambazov

    Comments that Seattle hasn’t had a “recent bumper crop of exits” or that the local environment may not be right because we lack “Angel investors / mentors with real experience” while California is  “overflowing with these sorts of folks”…all seem very self-fulling to me.

    The reason investors flock to the Valley is the same reason large film companies make sequels or reboots; both only want to risk their money on sure bets.

    I think Marcelo’s throwing down the gauntlet is well played. If Seattle area investors want to encourage local innovation they have to help build that community up…not seed it elsewhere.

  • http://www.revenews.com Angel Djambazov

    Also, shouldn’t somebody ping Michael Arrington and convince him that he should spend some of his rumored CrunchFund here in Seattle now that he is a local: http://thenextweb.com/insider/2011/07/15/is-mike-arrington-launching-a-crunch-fund-to-fund-new-startups/

  • Bob Crimmins

    Good post, Marcelo.  Lot’s of great comments, observations, opinions as well.  There are two things that I find interesting here.  First, the challenge (and some of the responses) highlight that the role of investors isn’t just to feed at the trough of good ideas/entrepreneurs/companies in the region… they also can have a significant impact on the length and depth of the trough from which they feed. 

    I don’t know off the top of my head what the total capital under management is for the top six or so Seattle VC firms but It’s gotta be a few billion at least, right?  Seeding 100 early stage companies at an average of, say $300k, would be $30M, or about about 1% of total capital under management.  That $30M would equate to about 6 Series A fundings averaging $5M each.  Out of those six Series A investments of $5M would a VC expect to hit a grand slam with, i.e., a $100M+ exit?  I’m not a VC but I’m gonna guess the expectation would be that less than one of them on average would get there.  And as Tony reminds us, you don’t really have any way to know which one is likely to be the one that gets there either.  The number of them that are likely NOT to be $100M+ exits?  Virtually all of them.  And how many are going to end up as a tax write off?  Perhaps two out of six?  The others are gonna be somewhere between roughly break even and a ground rule double… with that one outlier that ends up being the stand-up triple that raises the tide for the portfolio. 

    So what if each of the top six firms took one Series A investment of $5M and spread it out over, say, 10 to 20 promising seed stage companies?  Even if only a few of the 100 companies ended up doing really great things and all the rest fell roughly in to the bell curve of early stage company results, the risk to each of the VCs is not much more that simply make a standard Series A investment; I think you could argues that the law of averages and greater diversification might actually lower the risk profile of the seed investments taken together.  Of course, the overhead of making the investment would have to be managed and certainly would not warrant the typical engagement model of board seats and complex investment documentation and diligence.  But come… VCs are smart… I’m sure they could figure out a simpler engagement model.  And if it’s a struggle to figure it out I’m sure folks like Founders Coop could help them figure it out.

    I think that part of Marcelo’s motivation in the challenge is that it’s not just about getting 100 companies funded and the expected returns on those investments but how such a program might have an even greater, and longer lasting, impact on the startup ecosystem generally.  That brings me to the second thing I find interesting about Marcelo’s challenge, namely the reasons not to take him up on it.  There are probably other reasons but here’s what comes to my mind:

    1) The VCs might loose the money they invest in seed stage companies.
    2) There may not be a lasing positive impact on the region that creates a more-profitable future for Seattle investors.
    3) VCs (and there LPs) aren’t equipped/capable/allowed to make small investments.
    4) There aren’t 15 seed stage opportunities in markets that the VC has expertise in.

    Barring any formal commitments  or contractual agreements prohibiting seed stage investments, these strike me as really weak reasons.  Yeah, VCs might loose some of that $5M seed pool but it would be highly unlikely that 100% of their seed investments would go completely south and the added diversification would create new opportunities.  But lets face it, most VC investment don’t meet original expectations either so if this seed program didn’t work out great it wouldn’t be very much different from a standard investment.  And sure, VCs might have to take on an additional FTE to manage the seed portfolio.  The other reasons seem obviously to have solutions that each firm could work out for themselves. 

    And here’s the rub… let’s say that in 24 months everyone looks back and say, “damn, that didn’t work.”  What’s so bad about that?  After all, the “V” in VC is supposed to stand for “venture.”  But if the venture community is utterly un-persuaded that seeding 100 companies would have a significant, positive and lasting impact on future investment opportunities in the region then it definitely wouldn’t make sense for them to take the challenge.  But I think they’d be wrong about that.

    • Victor

      I am willing to bet most VCs cannot make small investments, at least not with their existing funds. VCs have to spend a lot of time selling to institutional investors (their LPs), and it is almost certain they have to put themselves into certain boxes. This is true for private equity, mutual fund and hedge fund managers as well. This is why you find VCs starting new funds (I remember Charles Rivers being one of the first ones) just to do seed stage investing. Even if they have the desire to start a new fund to do seed stage investing, what can they  to convince LPs that all the sudden they are the right ones to do it? This is really no different than mutual funds that invest in large caps all the sudden decide to switch gear and do small cap stocks. 

      I just think our pool is just too shallow, and VCs have their hands tied. Why else do you find VCs like Geoff Entress leaving an establish VC outfit like Madrona? 

      • Bob Crimmins

        Yep, there are contractual obligations they gotta adhere to.  But look at you… all smart and stuff… proposing a simple solution, i.e., a kind of hybrid of a sidecar fund that could make seed investments “in cooperation with” the VC. 

        Actually, I know that there are some non-trivial logistics to overcome for some VCs.  But VC are really smart folks that could figure it out if they thought there was a compelling reason to do so. 

        Your comment about the depth of the our pool is well taken but I would be shocked if there weren’t 100 legit seed opportunities to be found in Seattle in the next 24 months — that’s only 4 deals per month… which would only be two deals every three months for each of six VCs.  Do you really think the pool here is that shallow???  If that were true then there would be nothing for the angles to invest in but they don’t seem to have trouble rooting out opportunities.

        • Janis Machala

          Check out current issue of PSBJ and look at the VC list and you will find that the top VC firms here are not really here. Polaris is #1 with $3B under management across their funds but their locus of control is Boston and they have just shuttered their Seattle office. Frazier Technology Ventures is on the list and they are no longer. Frazier Healthcare Ventures does almost all of its deals outside of Seattle. ARCH is a Chicago-based VC with little presence in Seattle (declined significantly over the past 5 years here). Endeavor, Evergreen, Bluepoint are PE firms. Fluke may/may not raise another fund. SeaPoint is not raising another fund. Integra couldn’t raise another fund, they tried to do so. Maveron has done most of its deals outside of Seattle. What this leaves for tech entrepreneurs is: Ignition, Madrona, OVP, Voyager, Montlake, WRF Capital, Benaroya and Divergent. Zefram/Bezos Family money does not even show up-they are under the radar as is the Prentice Family Office. There are more of these quasi-VC (Cascade, Russell Family, etc.) firms under the radar because again we don’t tout ourselves out there as “open for business” because family offices tend to be private here in Seattle. This is an incredibly small pool to count on and seed deals are time consuming on the part of the partnerships which means a small yield from this small group. How about we go recruit Google Ventures, eBay and PayPal execs, Amazon execs, Microsoft execs to start a seed effort and convince them why it is worth them to do so. We have to want it and make a case for it with the arch-angels we so desperately need to round up other angels with no time to do due diligence, sit on board, lead a term sheet negotiation, etc. Leadership is what this will take! Any takers?

  • http://www.twitter.com/algard algard

    Kudos to Marcelo for the inspirational post to make some stuff happen and also calling out an embarrassing statistic. All the other data points for Seattle are great. We have a solid angel community, support infrastructure, and a deep talent pool here in Seattle relative to the rest of the US. After all, we have become the favorite recruiting outpost for Bay Area companies. And now there’s a good string of exits as well for the investors that placed bets in Seattle. Whether it’s 50 or 100 start-ups, I’m convinced that this last deplorable stat will be wiped out soon too. How could it not be?

  • http://twitter.com/libtuck libtuck

    Doesn’t the fact that there’s a talent pool and several entrepreneurs but a gap in seed funding mean that there should be more focus on giving seed funding and mentoring entrepreneurs at that stage?  

    Seed funding with a pivotable concept equating to $100 m exit is very obscure, which Tony and others have already pointed out.  I think Rebecca nailed it when she said that investors get excited but then take a giant step backwards.  As an entrepreneur in Seattle, this can be frustrating.  My sentiment is that Seattle investors don’t pull the trigger easily, which makes their interest in a company misleading.  That leaves entrepreneurs looking outside of their own Seattle community also.  

    Marcelo, as you said, someone needs to step up to the plate and fuel the investment climate.  Being a tight-knit community, I think that also affects the gun shy / ‘what if’ mentality.  But, somebody has to do it or both talent pool and investors will look elsewhere.  

    • Janis Machala

      VCs of the size of Ignition or OVP, etc. have a hard time making a case for a large number of seed deals (especially with unproven teams) because they take more work for the return (remember, it is all about the return to their LPs and not in making Seattle a mecca of entrepreneurship…they have “bosses” they have to answer to; being in a deal that IPOs like Google, LinkedIn, Zynga, etc. will create greater returns by putting $5-10M into one deal than seed funding 20 deals where the mixed return across all those seed stage deals won’t equal or exceed the Series A or B hit. The traditional VC game plays to “swing for the fences” and put a lot of money to work on proven entrepreneurs (look at stats across VCs and you will see preponderance of founders who have had previous successes and are known to the partners) versus the $500K to 2M into a deal that sells for $10-20M to Google, Microsoft, etc. The model looks for a deal to become Zynga or Google or eBay or Cisco or Sun or ??? There are a LOT of incremental or me-too deals which are not VC deals, here and in CA. Yes, LinkedIn didn’t know its revenue model when it was funded by angels (the founder had to move to the Valley to get it funded, by the way) but it was unique and the seed funders put a lot of work in building out its exec team, getting it VC funded, and to figure out how to monetize it. If you’re a 1st time VC fund or even on a 2nd or 3rd fund you’re not going to be able to take the early stage risk in the same way a Fund 5 or 10 can. Remember, VCs have to go raise money and show that hit (or more) in order to be alive and thrive over the long time. That’s more important from a fiduciary duty than taking pot shots at a lot of seed deals in order to make Seattle more vibrant. Sad as it is to say, this is the exact same sad song Seattle has been singing since I started mentoring start-ups in 1995. We are still relatively immature as a market and the next shiny penny is instead China or India versus another U.S. locale. What we need are to recruit some arch-angels from the Valley so we have more Founders’ Coop and Second Avenue Partners’ models to span the gap between the smaller angels and the more traditional VCs. Filling the gap in more creative ways is probably more viable than asking larger VCs to change the “contract” for highest ROI possible for their LPs by a formula that may work for their size and amount of capital.

  • Thomas

    Less QQ, More Pew Pew

    It seems like people keep forgetting that great companies (MSFT, AMZN, SBUX, etc.) were still built here in Seattle from the ground up despite the lack of a fostering seed funding environment. 

    Yes it may have been harder to build a successful $100 million+ company, but they still got it done. 

    If you call yourself an entrepreneur, it doesn’t matter where you start your company, you hustle and get shit done. If your biggest barrier to success is the lack of seed funding in Seattle, then you’re in for a rude awakening when it comes to running a business. 

    And as nice as it would be to have a Valley funding mentality here in Seattle, that change must come organically. The people with the money have to decide that they’re willing to take more risk and invest their own precious money and time into unproven entrepreneurs. As many people have pointed out already, yes more seed stage funding would be great for entrepreneurs but what’s in it for investors?

    There’s a reason startup investments are considered high risk. And before you say that VCs or Angels should invest in a seed fund, you need to answer a simple question for them. 

    “How does this help me get a better return for my investors (or myself) whom I have a fiduciary responsibility to?”

    It’s presumptuous to assume that simply by investing in 100 startups we’ll create something even remotely close to Silicon Valley. If it were that easy, every single major city would be Silicon Valley. 

    Instead of lamenting the lack of seed funding here in Seattle, people should focus on successfully exiting their own companies and then doing whatever they want with their own money.

    It’s hard to change others, it’s easier to change yourself. If you don’t like the situation, change the circumstances then come back and deal with it on your own terms.  

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

    I’ve posted an extensive response on STS, so here’s a summary.

    - Chris Dixon points out on his blog, the businesses that had made it big before, were often the “toy” type of companies, and those don’t usually look attractive, until they take off.

    read here – http://cdixon.org/2010/01/03/the-next-big-thing-will-start-out-looking-like-a-toy

    - From investors point of view, I could see why making safe bets feels good, but that’s no way of finding the next Google. Until people throw cash at half-baked crazy ideas, there won’t be any significant innovation coming out of Seattle.

    - I feel struggling to find validation for the idea, whether from customers or investors, is part of the process and is almost required, but it has to stop someplace so these dream companies could actually have a chance to get build.

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

    p.s. I wonder if @davemcclure:twitter just shakes his head every time people say that 100 companies in a year isn’t possible.

  • TechLaunchCenter.com

    Marcelo, this is exactly why I started 6 months ago the Technology Launch Center project as we do not have in Seattle the breath and depth to achieve this wide funding project.  Under the construct of the TLC the plan is to provide 250+ startup investments like TechStars (i.e. $20K to $50) and automatic support of qualified funding (i.e. superangel, angel group, VC) of 25% of the round up to $250K…  http://bit.ly/kUKsQ2

    Six months in the works it will need a “coalition” of the startup community to make it happen even having had many of the local “administrations” and angel groups supporting it.  Now is the time to make our voice heard.

  • http://andrewwoods.net/ Andrew Woods

    I think seattle entrepreneurs need education on what VCs and Angels are looking for. I know I do. They might have a great idea but think “they’ll never want to want to invest”. I think it’d be great there was an Ignite style event where VCs and Angels could do sessions on what makes a good startup investment. What type of projects are they looking for? how ambitious should the project be? is there a minimum dollar amount required? a maximum? what kinds of risks are attractive?  Do startups have to go thru an incubator like YC or TechStars? or is it just a good idea?

    For example I have a fairly ambitious music startup idea, and reasonable idea on how to monetize it.  But would investors think its too risky because the music industry has issues? Or is it just the kind of project they’re looking for? I have no idea. I imagine many other would be startup founders have their doubts. An ignite style event might be the inspiration / kick in the butt that some startups need. 

  • http://twitter.com/DaveParkerSEA Dave Parker

    First, thanks to Marcelo for being a mentor last night at the Founder Institute Seattle, #SEFI. During the Q&A we had some discussion about the post and ongoing discussion. So giving the credit where it’s due… here’s my summary of the discussion.

    The VC model doesn’t work (or is broken) for early stage deals. With a 2-2.5% management fee on committed capital and 20% carried interest a $30M fund doesn’t support a big team, and office space, given what you can make with a bigger (or overlapping) fund as a GP over the 8-10 year fund life.

    What’s the solution from the capital side of things? It’s probably an individual, investing their own capital into early and seed stage deals. Their timeline isn’t as limited (consider the age of the fund, years and capital remaining) and they don’t need the same kind of returns as the potential $100M exits.

    On the Entrepreneur side, it starts with the idea. Tech Stars has >500 apply and take ~15. Given the numbers there has to be more than 15 quality people? We see a similar process in FI with a small base of applicants. Founders go through a testing/screening process to screen for aptitude, and half will make it through, but you’re not required to have you idea baked at the start. For us the falloff comes by week four at the Mentor Idea review. By that point, we’ll lose 50% of the group.

    Why the huge cut? The fact that your idea sucks and it’s not worth 80+ hours a week over the next eight years of your life to pursue. Good news: hopefully the cut will force you to consider a new idea, the bad news, many of you won’t.

    Learning from your mistakes is key; my first startup was too early to market, and though we grew quickly our exit wasn’t positive. Knowing how and when to pivot your idea is critical, and that usually comes with experience and mistakes.

    So, why do Seattle entrepreneurs fly to the valley to raise capital? There are more early stage funds investing in deals that don’t have a $100M exit expectation.

    So though I hope someone will step up to Marcelo’s challenge and change the way Seattle startups are funded, like the way South Lake Union changed, I’m on a flight to the valley to talk to some VCs.

    P.S. I’m the Director of the Founder Institute Seattle. FI is a pre-seed incubator launched in 2009 with the stated goal of Globalizing Silicon Valley. The program is for first time entrepreneurs that want to keep their day job as they validate their idea. Today there are nearly 400 graduated companies with programs now in 16 cities worldwide.

  • Steve Gilbert

    Wow! Some really great comments for this post.  Glad to see so much discussion going on about this.  Just finished listening to an interesting podcast from Wired: Meet Generation Y by Steven Levy.  It is about Paul Graham’s Y Combinator down in Silicon Valley.

    A couple of things that I took away from it – the idea is less important than the team.  Get the right team together and they will develop the $100MM idea.  The second is that Silicon Valley is ALL about the startups.  While we have coffee flowing through our veins, they have seed money.

    I like the idea of throwing out a challenge of 100 funded startups – it gives us something for which to shoot.

  • http://twitter.com/nickhuzar Nick

    You cannot launch a rocket without gas.  As a CEO working on his 2nd start-up I really feel this pain point. There is a BIG gap still between Seed and SeriesA. 

    Daniel Todd and I created 114 as a way to help local founders.  If you are a local founder or exec at a startup visit here and request to join.  It’s taking off!
    http://www.linkedin.com/groups?homeNewMember=&gid=3993313&trk=vgh&goback=.mid_I166561914*49