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Challenges for Start-ups: Is USV Early Stage or Is Early Stage Changing?

logoYou bet I am studying the start-up ecosystem closely.

Great article by Bill Burnham recently.  His thesis: It is hard to swing for the fences when investors won’t put a lot of money into an idea prior to finding out if it has traction.  Every business idea has to be based on a quick launch scheme that demonstrates near instant traction.  Something that actually requires rocket science is hard to do in a funding environment where people feel a lot of pressure to put more capital to work in deals.

The second I read this article, I thought of Fred Wilson.  He recently wrote about how he rarely invests in services that are not launched.  Venture Capitalists don’t get much earlier than Union Square.  Charlie O’Donnell, previously an associate at USV and now an EIR at First Round, recently wrote about First Round that he wants to write checks before people even have decks.  This is an interesting tension, because I suspect that Charlie would not think that First Round is trying to be earlier than USV.  But anyway, if the earliest of early stage guys, Union Square, doesn’t do deals until a site is launched, what is someone to do if an idea takes more than a few hundred thousand dollars to get to launch.

I imagine the rejoinder is that people that can’t raise millions before launch have no business starting companies that require millions to launch.  At least, that was the gist of the comments on Bill’s article.  But that really isn’t true.  That is simply a circular and self-fulfilling prophecy.  Certainly, rapid iterations and the inexpensive architecture of Web 2.0 theoretically allow products to get to market faster, but hearing that the market to raise capital for companies that are pre-launch has basically been left to angels for all but the most savvy and experienced serial entrepreneurs is a bad message for East Coast entrepreneurs.

On the one hand, this isn’t entirely accurate, but as both Bill and Fred seem to agree, it isn’t far from the case either.

2 Responses to “Challenges for Start-ups: Is USV Early Stage or Is Early Stage Changing?”

  1. Dave McClure Says:

    hmm… interesting observation, but i slightly disagree with the “VCs don’t get much earlier than Union Square” stmt. also with the “needs to demonstrate near-instant traction”. in fact, quite the opposite — there are multiple players investing incrementally larger amounts, with incrementally more significant milestones / results, and the ecosystem works quite well… for most everyone who isn’t a huge VC fund, that is.

    i co-invest with both USV & First Round Capital, and there are a number of “Super-Angels” like me and/or smaller VC funds of $5-50M that are typically doing angel or seed investments slightly before USV or FRC, with a very symbiotic relationship with them, as well as others like True Ventures or Founders Fund (whom i currently work for).

    there are also several incubator programs like Y-Combinator, TechStars, and fbFund REV (which i ran this past summer) that produce 10-20 startups per program, of which very typically 5+ get funded soon after “graduation” by the same angels, seed VCs, and others like USV & FRC.

    for “traditional” VC firms with funds of size $100M+ or greater, most of the activity i mentioned above can fall beneath their radar, but it’s definitely a reshaping of the venture market and there are multiple participants in the startup ecosystem who are doing quite fine in the new VC 2.0 era.

    for more on this topic, see my presentation on Startup 2.0 here:

  2. brent Says:

    Wow, great to hear from you Dave! It is exciting for me when people like you come to my little blog! I am a big fan and respect your opinion.

    I think we are in fairly violent agreement. Clearly if USV is suddenly acting like a new market-ish pseudo-mezzanine investor, waiting until sites launch to invest, there are lots of opportunities for angels, super-angels, and smaller VCs to insert themselves earlier into the process. At the same time, I doubt that Fred would think this is a completely accurate characterization of his firm, despite the fact that it is based on his off-the-cuff-ish statement. Similarly, FRC is touting that they will invest before a deck is even written, and they have a similarly sized fund.

    But I do wonder if that network of super-angels and smaller VCs exists on the East Coast or if it is only in the valley. You would know better than me, would love to hear your thoughts!