Comments from “A challenge to Seattle VCs: Back 100 seed-stage startups in 24 months”
This is a post from Geekwire.com
First, thanks to Marcelo for being a mentor last night at the Founder Institute Seattle, #SEFI. During the Q&A we had some discussion about the post and ongoing discussion. So giving the credit where it’s due… here’s my summary of the discussion.
The VC model doesn’t work (or is broken) for early stage deals. With a 2-2.5% management fee on committed capital and 20% carried interest a $30M fund doesn’t support a big team, and office space, given what you can make with a bigger (or overlapping) fund as a GP over the 8-10 year fund life.
What’s the solution from the capital side of things? It’s probably an individual, investing their own capital into early and seed stage deals. Their timeline isn’t as limited (consider the age of the fund, years and capital remaining) and they don’t need the same kind of returns as the potential $100M exits.
On the Entrepreneur side, it starts with the idea. Tech Stars has >500 apply and take ~15. Given the numbers there has to be more than 15 quality people? We see a similar process in FI with a small base of applicants. Founders go through a testing/screening process to screen for aptitude, and half will make it through, but you’re not required to have you idea baked at the start. For us the falloff comes by week four at the Mentor Idea review. By that point, we’ll lose 50% of the group.
Why the huge cut? The fact that your idea sucks and it’s not worth 80+ hours a week over the next eight years of your life to pursue. Good news: hopefully the cut will force you to consider a new idea, the bad news, many of you won’t.
Learning from your mistakes is key; my first startup was too early to market, and though we grew quickly our exit wasn’t positive. Knowing how and when to pivot your idea is critical, and that usually comes with experience and mistakes.
So, why do Seattle entrepreneurs fly to the valley to raise capital? There are more early stage funds investing in deals that don’t have a $100M exit expectation.
So though I hope someone will step up to Marcelo’s challenge and change the way Seattle startups are funded, like the way South Lake Union changed, I’m on a flight to the valley to talk to some VCs.
P.S. I’m the Director of the Founder Institute Seattle. FI is a pre-seed incubator launched in 2009 with the stated goal of Globalizing Silicon Valley. The program is for first time entrepreneurs that want to keep their day job as they validate their idea. Today there are nearly 400 graduated companies with programs now in 16 cities worldwide.