Responding to a popular request, we are now sharing transcripts of our investor podcast interviews in this new series. The following interview with Don Hutchinson was recorded in October 2017.
Don Hutchison is one of the most experienced and long-term Angel investors in Silicon Valley. We discuss the trends of the industry and ways to mitigate the Series A gap that is a serious issue right now.
Sramana Mitra: You have been so prolific angel-investing in the Valley for so many years. Tell us a little bit about what you’ve seen over the years. What are the changes? How has angel investing evolved and how have you evolved with that?
Don Hutchinson: My hair used to be black, and now it’s gray. I began in the space in 2003. It was the aftermath of the dot-com bust. There was not very much angel investing. Most people that had been in angel or seed investing had been decimated by the bubble burst. There were much smaller number of participants and there was a lot of weariness.
What you found yourself doing at that point was putting relatively large amounts of money into fewer deals. These are probably much larger sums than seed investors should have been doing. You’re really fulfilling seed and early Series A equivalent. As the market recovered around 2004, you saw greater activity from the A’s. In a couple of years from that, you see A’s making a concerted effort to go into C although that would be relatively short-lived. You also saw many more individuals come back to seed investing.
You saw the emergence and growth of platforms like AngelList that would bring these investors together and provide an easier method. Coming out of the recession, you saw a fantastic growth in seed-stage funds. Prior that time, there had been some funds focused in the space. Truly, they were very limited. You can probably count them on one hand. At this point, I don’t know how many seed funds there are. A recent figure I saw said it’s around 2,200, which I don’t find to be unlikely.
Sramana Mitra: There are about 500 funds spanning pre-seed, seed, post-seed, pre-Series A.
Don Hutchinson: You touched on an interesting point. At one point, you had seed and Series A. You might have some bridge activity but bridges were relatively infrequent. Today, you’ve got friends and family, pre-seed, seed, post-seed, and bridge. It’s entirely possible that by the time you get your firm to a Series A, the Series A is their fourth or even sixth round of financing. In some ways, that’s insane. In other ways, there’s an appetite to support early stage companies that really wasn’t present previously. That’s encouraging.
There also is a tremendous sense of expectation. Assuming that your company isn’t in the flavor-of-the-month category, the expectations of an A series are easily what they would have been for what we call B or even post-B if you’ve established that you’ve got a viable product and there’s good fit in the market and you’re really raising the money to accelerate your growth. An A, in prior times, was a bet on a promising idea. The A was to test whether that promise really held water.
The expectations have grown. Part of that is you’ve had a massive increase in the range of 10x in the amount of seed funding. You haven’t had anywhere near similar increase in money set aside for Series A. It’s about flat. Maybe 12% increase. More generously, sometimes we see Series A increase by 50% to 100%.
You’ve got, on one hand, a 10x increase of seed and many more Series A candidates, but you don’t have an increase in Series A dollars. It’s a wonderful time to be a Series A investor. You can be highly selective. It’s very difficult for seed stage companies to cross that chasm.