I recently sat down with Ullas Naik, Founder and General Partner of Streamlined Ventures, to discuss the current seed fundraising market.
Streamlined Ventures is a seed stage firm that focuses on investing in business application and infrastructure software companies. Ullas has nearly two decades of investing experience and previously 12+ years as a senior Partner at Globespan Capital Partners.
Tell us a bit about why you formed Streamlined Ventures?
At Globespan, we primary focused on early/mid growth stage investing, but I always gravitated toward early stage investing. When I parted ways with the firm 2 years ago, I continued angel investing and realized that there were many interesting investment opportunities where I could invest my personal money and lead seed rounds. I started to think about raising a fund where I could lead these rounds and that dovetailed with a specific thesis that was formulating in my mind around business applications and infrastructure and how to get companies in these spaces to extreme scale with limited dollars.
You’ve had a long history in investing as both an investor and as an angel. What are the differences between investment philosophies between the two and should this affect the way entrepreneurs approach pitch meetings?
It all depends on the stage of the business. A very early stage company with limited proof points is probably not ready for today’s institutional lifecycle VC. They may take a meeting because of prior relationships but it’s unlikely that they will invest.
At this point, the most realistic option is to raise money from F&F/ angels, and potentially Micro-VCs. Although these days even the opportunities Micro-VCs are seeing have a lot of business progress and traction. There seems to be a fairly established fundraising pattern that companies follow where the first $300K-$500K is raised from F&F/ angels round, followed by 1.5M -$2MM from Micro-VC’s, and then a traditional institutional round.
What are some of the other options for companies have proof points and are seeking to raise between $500K to $1M to get them to the next milestone?
Micro-VCs and angels are probably the only option when you’re raising a pool of capital that’s between $500K and $1M. You might have some strategic investors corporate investors interested if the value proposition is synergistic, but I’d recommend companies tread carefully at this stage as raising from strategics early can create numerous unintended consequences down the line.
What about crowdfunding platforms such as Angellist?
I think crowdfunding solutions are good and fair options but it’s not 100% clear to me that those avenues can fill an entire $1M round efficiently and effectively. Plus, if you want an active investor, then the angel list syndicates are not a good source for that. They are a good option for filling out a round where the entrepreneur has folks that are going to be active investors.
What are the pros and cons of raising money from a Micro-VC compared to a traditional larger lifecycle VC?
Well it’s not an either/or. Often times, Micro-VCs will not take up the entire seed round so there are opportunities for larger venture investors to participate in the round. That said, the commonly accepted challenge for entrepreneurs taking seed capital from larger institutional investors has been signaling risk. In other words, if that large investor does not lead or participate in the Series A (which they are set up for), it raises concerns for other prospective investors.
From my experience, I’ve noticed that most traditional VCs will not do seed rounds because they don’t have the bandwidth or time to keep track of each individual investment. There’s also ample deal flow as evidenced by the so-called Series-A crunch for these VCs to wait upstream for opportunities.
What are things that you expect an entrepreneur to know before a pitch meeting? What questions should they ask you during a meeting?
First, do your homework to determine if what you’re selling is something that I would even buy. There is tons of information out there about my background and firm strategy. If you utilize the power of your network to get a meeting with me and it’s a complete mismatch, that’s a bad use of everyone’s time and taints my perspective of the entrepreneur. Second, understand how my firm fits in the financing ecosystem. Pitching a $6MM financing round to me is waste of time if my investments typically range from $0.5MM to $1MM. Third, don’t boast about meeting with XYZ large VC in order to impress me or create a sense of urgency.
In my mind, this is a huge misfire because I may know the large VC’s better than you do and I will question whether you have thought out or understand the fundraising process.
Once you determine the right fit, the question that you should be asking me is how can I add value to your company? Can I help your company reach the next stage of value creation or beyond? Do I have the domain expertise to help you expand the business? If I can answer these questions in a convincing manner, then it is beneficial to continue the dialogue. If you’re not convinced, then I’m wasting your time.
What do you primary look for in a company when investing? How do you balance between things like team/market/traction/etc?
The three critical factors that I consider are (1) market and timing of the market (the “why now”) (2) quality of the team, and (3) product and its fit with the market opportunity. If I can solve for the first two then I may take a chance on the third.
Recently, we have seen Venture Capital firms of all sizes shift away from convertible debt and instead insist on priced rounds? What are your thoughts on this trend?
I don’t particularly care as long as I have a cap and there are certain key rights captured in the note such as information, pro-rata, and non-repayment rights. From my perspective, I’m trying to eliminate as much friction as possible so I won’t let a priced round versus a convertible note get in the way of a deal because I know that I will get preferred equity when the note converts. I suspect the shift to priced equity rounds is due primarily to the early establishment of corporate governance. A lot of young companies operate without a board but I’m not too concerned because I meet with all of the companies in which the fund invests at least once a month for multiple hours. This is built into my model and I have found that entrepreneurs appreciate the input and prefer this structure.
What advice would you give a company that is forming and looking for its first round of financing?
First of all, make sure that you have an enormous amount of passion for the underlying problem set that you’re solving and the sector that you’re operating in. If you don’t have this, you will most likely get weeded out. Second, try to amass as much intellectual horsepower (advisors, investors and out-of-the-box thinkers) around the company as possible. This will give you a massive advantage.
Lastly, I always tell entrepreneurs, and I know this is a little self-serving, to stray away from valuation as the main decision variable and really focus on getting the right value added investor(s). Many people say they do this, but when it comes down to paper, the allure of a higher valuation often wins out (and for the most part, it always back fires in the long run).
Likewise on advisors – if you have to give them equity to get them involved and become immersed in the business, then do it, but hold them accountable.