First off, if you are conducting a Seed round, you should raise all, or most all, of your capital from your network. Not VCs. Not strategics. Not family offices. These groups are not going to invest … you are wasting your time. There are exceptions, but the math says you are not one of them. The one likely exception is the surgeon-entrepreneur. She/He can often get some seed capital from the hospital system where they work, or from the medical device company they consult for. Know, this has less to do with your idea and more to do with keeping you happy. Don’t confuse the two. In the end, it all spends the same, but it does mean this is less of a validation for other institutional investor types who know what they are doing.
You should also know that it doesn’t matter what you call your rounds. There is some tradition to the naming conventions, but when we say “Seed”, “Series A” etc., we are really talking about pre-commercialization companies. (note: therapeutics are a totally different animal) In earlier rounds, investors are essentially betting on the team far more than the idea. The idea has to be solid, and you have to show you have done your homework, but so much will iterate and shift between now and your exit should you have a successful conclusion. Given that so much is going to change, the investors are really betting on the team’s ability to figure out the puzzle. Don’t worry about word-smithing the deck to death. Put a solid foot forward and show you can think and speak on your feet.
The Valley of Death occurs in between the “angel” rounds and those that are generally institutional in nature. The main difference is that institutional investors are doing this for a living. They are going to invest based on the idea and traction … still accounting for the team. The reality is the later stage the company, the more factors in addition to team will be added into the equation. The other difference is that the further along you are in your operational lifecycle, the bigger the investment requirements will get. There are exceptions, but we are focusing on the norm. If you get to the end of the road with individual investors and still don’t have a solid product-market fit etc., you are going to end up in the Valley of Death. You don’t have metrics institutional investors can rally behind, and you are usually too far along to be fueled by individuals.
As an investor, you want to see companies get through the early period as fast as possible … even if it means it doesn’t work. Real death is lingering in no man’s land where there is not a clear business opportunity but there is enough to keep feeding the machine. This results in good money chasing bad when you are usually better off taking the write off and focusing your energy elsewhere. Again, there are always exceptions.
Finally, the old adage “Friends, Family and Fools” is funny, but absurd. Investing in later stage deals with clear metrics is great, but it’s not the only place money is made. It does mean you want to have optimal terms if you are participating in the earlier rounds to ensure you have the best chance of reaping rewards if the venture goes well. The “Fools” label is really only applicable if you invest in an early round and have terms that enable later stage investors to trump you in some fashion. Obviously the world is not always fair and linear, but we like to see the earliest investors generate the best returns more often than not. If you follow our blog and other media channels, you’ll pick up a lot of tips and tricks for being smart in these transactions. We also have recent posts on tactically how to leverage your personal network. Focus close to home.