I’m a pretty committed seed stage investor. Of my investments in 2016, Troupe, UltraCell, Blurr, and edivvy all qualify as seed since they were really early investments done as convertible notes. Nix86, while an equity investment led by two later stage groups, was the first money in, and the company was pre-revenue. Of my investments in the previous two years, three were seed investments and two were actually later stage (though both pre-revenue). I should also mention that Troupe, Blurr, and Edivvy were “solo” investment, i.e. I didn’t invest as part of a group effort.
So why am I such an idiot?
Firstly, and most importantly, this is the stage at which I feel I add most value. I’m pretty good at navigating the waters of angel investment here in Boston. I’m also pretty good at helping entrepreneurs refine their business plans and their pitches so that they are better able to launch. In addition my small investment size here has the biggest likelihood of making a difference. If the total investment is in low six figures, my low five figure investment looks a whole lot more interesting. In a couple of cases my investment has allowed a company to make a key hire or launch their product.
But there are economic reasons to jump in at the seed stage as well. I usually buy into a company at a pre-money valuation, when things convert, between $2M and $3M. For a moderately successful high growth company I can hope for exits in the $30M to $50M range. There are (I fervently hope) some outliers that will exceed these exit valuations into the $100 M to $0.5B range. While I will certainly have experienced some dilution along the way to these large exits, it is clear that a low entry valuation is a great way to see large multipliers in returns on exit. Data from studies sponsored by the Angel Capital Association and anecdotes from some of my angel group colleagues support the assertion that low valuations are critical to portfolio success. That’s the gambling game I’m playing. It does take a good deal of patience, though.
Finally, however, there’s the “this is a lot of fun” aspect to seed stage investing. While a later stage company might still have some issues, at the seed stage it’s just a few employees and the pivots can be wrenching, but terribly exciting. And everyone is learning so much every day that there’s never a dull moment. And many entrepreneurs, both experienced and newbies, are looking to their investors for advice. The good entrepreneurs listen and respond intelligently – I prefer not to invest in the others. Entrepreneurs should not necessarily follow my advice, but they ought to think about it.
I’ve been a member of several groups in Boston, and they change over time. Right now I’m seeing Walnut as the most seed-friendly group, though Launchpad, which moved to preferring later stage companies in around 2012, has sprouted an offshoot of members that are focusing on seed stage – they’ve been gracious enough to invite me to participate. Boston Harbor Angels is under new leadership and appears to be moving toward later stage, which may end up limiting my involvement if it were to go that way.