Anatomy of a VC “seed program” (and you)

Seed investing is different than any other stage of investing. Unlike Series A, B, C, D etc… there is little to no history of milestones, numbers, customers, references, etc to evidence an investment decision. Further, many of the seed “milestones” of the past like MVP, product launch, first customers are no longer strong evidence. In a world of technophile consumers and businesses, it’s not hard to build something and sell it to someone… it is doing that repeatedly and retentively in a sea of proliferating competition that is hard.

At Hyde Park VP, we invest 5-7% of our capital in seed investments with small $100-200K checks, primarily to contribute early to high potential opportunities and teams in which we might want to earn a Series A position later. About 25% of our seed deals have become core deals with larger HPVP checks behind them.

Yet, we’ve never articulated externally how we look at seed deals and what we think entrepreneurs should look for in us or any seed investor. So here it is.

Where does Seed end and Series A start?

I think about the spectrum as follows in B2B terms:

It is rarely easy to tell exactly where a startup falls on the spectrum because it’s the CEOs job to convince customers and investors the company is farther along than it is; it is investors’ job to be skeptical. Mistakes happen. We’ve made a few “Series A” investments that turned out to be “Seed”, but fortunately also a few “Seed” that turned out to be “Series A” stage!

If MVP, launch and first customers don’t count for much, how do we merit a seed investment?

For any investment, we look at five characteristics of a startup – the 5 Ms – Management, Market, Momentum, Magic and Money. Many thanks to my early mentors at Arch for this framework.

When we make a seed investment, we need to see bold check marks next to Management and Market, and a shadow of a check next to at least one other area. In most cases, it’s a bit of Momentum or something really unique in Magic that gets us over the hump. These days with Seed rounds habitually overpriced, it is rarely the price that seems attractive – another reason why we only write small checks at seed. In a Series A deal, however, we need to see a strong case for all five of the Ms to invest.

Investing on a Management team and a Market is about (1) the track record of the entrepreneur(s), (2) how they engage with investors and make things happen over the few months or weeks we get to know them and (3) promise of the overall market need and unique solution. Most startup “milestone” type evidence (customer, revenue, renewal progress) falls into Momentum and Magic where the check marks are usually weak at seed. Again, having a little of this type of evidence has become table stakes and undifferentiated at Seed these days.

Our decisions on seed investments are made in one or two meetings. We typically do this without the benefit of having developed a “movie” of the company as we do for Series A via long-term relationships and deep diligence. Why so fast on seed deals? Our seed check sizes are immaterial to our fund size – what is valuable is future access – so we don’t need to slow the entrepreneur down with painful diligence for a small check. After we write a check, we want to be helpful without being annoying and prefer entrepreneurs to tell us where/when they want help. As it turns out, we hear from the best entrepreneurs a lot… not so much from the not so good ones. Some of our best investments started as seed deals, so the model seems to work. Of course, we’re not the only fund doing this….

…so how should an entrepreneur choose their seed investors?

Assuming you have choices and don’t just need any money, here are some quick questions to separate the investor wheat from the investor chaff. How do you answer these questions? Do you own diligence by asking other entrepreneurs backed by the same investors.

Can the investor be helpful in your space/stage?

Consider whether the investor does a lot of similar industry, business model or stage investing. While at the seed stage it is fantastic to have experienced industry investors, so much of the challenge at the seed stage is basic business model, team and other startup 101 stuff. Look for an investor who matches your B2B or B2C focus and regularly invests in seed and so can work with you on the basics. They may be as helpful or more than an industry guru.

Can the investor tolerate 360 degree oscillations?

Most seed stage companies “pivot” at some point… many Series A and later companies do to. But seed stage pivots can often be the 360 degree type not the <90 degree pivots seen at later stages. Here’s my mental image of this:

Find investors who will trust you when you decide to pivot – or even ones who will encourage you to before you are ready. Investors who are stuck on the old plan, old business model or old customer will slow you down at the seed stage.

Will the investor respond to emails and phone calls when you need them?

This seems obvious, but you’d be amazed. At a minimum, you at least need to know you’ll be able to get their signature when it’s time to convert their note in the next round!

Does the check size justify the effort?

If you hear “investment committee” from a $50M+ fund offering a $100K check, run. They are clearly not setup to be nimble for seed investing and will likely make you work like you’re seeking a $2M check, not the $100K they’re offering. Unless you are desperate, not worth it.

Are there other “services” you get with the investment?

More and more funds are offering talent, design and networking services to their entire portfolio, including their seed portfolios. This can be a nice cherry on top.