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Microfunding Defining Investment Rounds amp Advice for Founders

The question comes up all the time, "what's the definition of a series seed/A and how much should I be raising?"  It used to be the case that if you were raising a seed, A or B round, you would fall between specific ranges (in $) to identify the type of stage.  With the success of companies such as Twitter, Yahoo!, Facebook, etc., the lines have blurred and distinguishing a round based off of the dollar amount alone, is not always a determining factor.

Earlier this week, we held our microfunding event and brought in investors to share their perspectives on the current tech market.  They discussed definitions and shed light on what founders should be aware of when looking to raise funds.  On the main stage included Aileen Lee from Cowboy Ventures, Manu Kumar at K9 Ventures, Tim Connors at PivotNorth Capital, and Greg Sands from Costanoa Venture Capital.  The event was moderated by Mitch Zuklie from Orrick.

Some notable points to mention from the panel:
  • The market has shifted and with more money being spent during the early stages of a company, definitions have changed.  It used to be that if you were raising $250,000 up to $3 million, you'd be raising your series A, but nowadays, that's the norm for a seed round.  What used to be a Series B ($6 million to $15 million+) is now a Series A.
  • When Adobe went public in 1986, they had raised $6 million.  ~ Tim Connors on putting things in perspective.
  • Pre-seed is the stage where there is usually minimal proof of concept with only the founder or two co-founders running the show.  It's the round before you go out and raise your first $1 million to $1.5 million.
  • Milestones are what matter.  Companies raise money to reach the next milestone, but the faster you can get your product out to a specific channel to sell your product, the least likely you'll need to raise additional funding (or alternatively, to raise a round).
  • The needs of entrepreneurs haven't changed dramatically to build the product or prototype, but there's more working capital now for companies to continue raising rounds well into the billions.
  • When choosing an investor, take money from people who matter; those who can help you with a follow on round or get you the relationships to take you to the next level.  Find out what their business is like, how much they write their checks for, and really get to know them as a partner.
  • Milestones will vary for each company and the definition of growth or scale can be very different depending on the type of business you are.  As Aileen mentioned, if you are an audience based company such as Snapchat, Facebook, Twitter, etc., monetization isn't that important whereas user acquisition and adoption is extremely important.  If you are a SaaS business selling to SMBs or enterprises, freemium models v. enterprise sales and sales cycles can be very different.
  • Convertible notes and equity - go to 30:00 to get their take on it.  A really interesting debate as to why many investors are against convertible notes.
  • AngelList is a great way for companies to find investors and publicize their startups after they've gained traction.  If founders are looking towards AngelList to help them get the initial traction, it's not the best path to take.
  • Crowdfunding is also a wonderful way for companies to get funding to prove their business concept, but it's not always the best alternative for companies as they look towards the larger amounts of funding.  Party rounds where there isn't a clear lead investor, is not generally advised.  You want to have structure early on in the life cycle of your business; advisors, board members, etc.  These are things party rounds can't provide.
  • Fast forward to 58:20 on the video.  The investors give a rundown of their thoughts on the different tech industries/sectors (hardware, auto, health, education, bitcoin, etc.) - really interesting!

The event closed with demos from Aileen Lee for DocSend, Manu Kumar for Tangible Play, and JT Sison, VP of Marketing and Alliances for WhoKnows.

To watch the full video, see below.