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The Seed Quest Continues

Posted on Friday, Oct 6th 2006

It is true. Most VCs don’t do much early-stage investment anymore.

But since you would have to continue building your businesses, you need to find angels & perhaps some smaller VCs who would do your seed round. There are a few exceptions.

Here are four interviews with VCs from my Investment Thesis series that might help you think through your choices. I will continue this series further, and dig more into the topic later.

George Zachary, Charles River Ventures – Does seed investments, mostly in consumer plays, and open to any entrepreneur – proven or not.
Alessandro Biral, Dali Hook Ventures – Does seed only if they already know you.
Sumir Chadha, Sequoia Capital – Does seed, especially because his focus is India, and there are hardly any seed funds in India. Looking aggressively for deals, and competing in a very hot market.
Alex Osadzinski, Trinity Ventures – Does seed only if they already know you.

I also often see VCs liking the business, but unwilling to fund the entrepreneur as the CEO. In your fund-raising efforts, if you know that you lack track-record, it may serve you well to position yourself in a role other than the CEO, and offer to voluntarily give up the CEO job to someone more experienced. I provide you an interview with Darlene Mann to shed some light on the subject.

Other issues that you will face are questions like, “Is your business scalable, or is it a built-to-flip?” Understand, that some businesses are excellent cash businesses, but not necessarily massively scalable businesses that warrant venture-style investment, exit, return. If you have one of these, you are better off with small-time investors who don’t mind flipping the company for a 2X return.

My personal preference with these kinds of deals, if possible, is to run them as cash businesses. Frugally. Efficiently. Organically. And with NO OUTSIDE MONEY. Collect fat salaries and bonuses, give your investors good dividends. Life can be very comfortable. All consulting-oriented businesses have this dynamic.

Hits businesses is another issue to pay attention to, in this boom-era of consumer internet & digital media. If your business is characterized as a Hits business, then the likelihood of getting seed financing is miniscule. You have to bootstrap, show traction, and then raise money, unless you are Trip Hawkins, perhaps.

Finally, VCs prefer capital-efficient businesses. You should too. If your business takes more than $20-$25 Million to break even, you will get so diluted by the time it’s done, that all you will have is a glorified job, working for a bunch of VCs. Really not worth it. It may end up taking you 7 years to make $2 Million, with all the sacrifices that an entrepreneur typically makes. Unless you have a Google in your hands, in which case, go for it!

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hi i am getting hooked to your writing slowly. we are a start up looking for early stage funding. have a beta ready. have demonstrated capability for sms queries.have included maps and wap-enabled also.

If you come across someone who would be interested in our space or what we are doing , we would be delighted if u can point them our way!

Ram Saturday, December 15, 2007 at 11:39 PM PT