As many of you know, I’ve been elected to my third consecutive term as the Chairman of Startups & the Interwebs. In this official capacity it is my responsibility to give an official definition of confusing or debated terms.
Clearly the most confusing topic of the past year is, “What’s a Seed round vs. an A round?”
Today I will give you a clear definition of these rounds of financing defined by the function of that money. Hopefully we can all be on the same page.
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— Pre-funding: You build a prototype of your product.
— Seed Round: The funding necessary to launch your product.
— A Round: The funding necessary to get product traction.
— B Round: The funding necessary to scale your product.
Now, it didn’t used to be this way. It used to be that you were raising Seed funding to build your prototype!
— Pre-funding: You talk about your idea & write a business plan.
— Seed Round: You build a prototype of your product.
— A Round: The funding necessary to launch your product.
— B Round: The funding necessary to get product traction.
— C Round: The funding necessary to scale your product.
Of course, given where this is going we’re going to hit the following model soon, in 2015.
— Pre-funding: You talk about your idea, you build a prototype & launch an MVP.
— Seed Round: The funding necessary to get product traction.
— A Round: The funding necessary to scale your product.
— B Round: The funding necessary to get founder liquidity, build groovy headquarters, and make competitors give up (or not start in the first place).
What does this mean for founders?
- If you’re a founder who has great ideas and is good at writing business plans, you are going extinct. No one cares about you any more — unless you’ve had exits that made people money. If you’re Mark Pincus, Evan Williams, etc., sure, you can raise money on your ideas or your deck. However, you are probably not in this category if you are reading my blog.
- If you’re a founder who can design gorgeous prototypes, you’re going to get a lot of meetings, but you might not get funded.
- If you’re a founder who can design a slick MVP that does one thing well, you are probably going to get funded.
In summary: build simple products that get one thing done well and then go for funding from a position of strength. Don’t ask for meetings with important people with only a business plan or idea; perhaps ask for a meeting if you have a prototype that is absolutely worthy of being featured by Apple as the App of the Week. Other than that, you’re not competitive and you need to go back and refine your skills.
What does this mean for angel investors?
- Don’t invest in business plans. It’s a road to nowhere; you’ll simply be asked to fund the project over and over again because they are too far from VC money.
- Only invest in prototypes that you think an angel round of $500-1m will be able to build and keep afloat in the market for at least 12 months. So, if you’re putting in $500,000 the burn rate should be no more than $25-30k (18 months or so: 6 to build, 12 to test in market).
- Seek out functioning MVPs that have users engaging with them.
What about incubators?
Great question. We recently started our incubator (“The Launch Incubator”) so I’m in the middle of this right now.
We had 150 applications and we wanted to accept 20 of those folks. We picked 7 of those 20 and were heartbroken to let the other dozen go.
Of those seven, 5 had a functioning MVP, one *almost* had a functioning MVP, and one had an impressive prototype. Of those seven, 6 are impressive right now and the one that came with a prototype had to pivot and just got their developer resources online — in week 7 (of 12).
If we could do it again, we would have only let that 7th one in after they had their MVP ready. Next class for the incubator we will only take folks with an MVP, and users — even if it’s 25 users.
I do think some incubators let folks in with a prototype, but for me it’s a road to 12 weeks of people saying “when we get developers building this will be awesome!” as opposed to “We made these changes and tested them last week, and here are the results.”
You’ll see these 7 startups on March 2nd, on the first day of the LAUNCH Festival.
The definition and size of rounds aren’t as import as the goals for each one.
Always ask the simple question: “What will we have accomplished with this investment, and what do we need to show to get our next round of funding?”
PS – At our last LAUNCH Incubator class, we were lucky to have Sam Shank, CEO & Cofounder of Hotel Tonight, tell us exactly how he built & grew the world’s most loved hotel app. An amazingly valuable & tactical talk that you can watch here.