Reap what you sow

Betabeat has been writing about the crunch for seed stage startups looking to raise series A since August of this year. The debate over this trend is now in full flower, with VCs divided over whether or not there is a reckoning in the works.

Regardless of what position you take on the series A situation, it's clear that 2010 saw a surge in seed stage investments. Pulling data from crunch base, Alexia Tsotsis found seed investments grew substantially while A rounds stayed flat.

As Josh Koppelman of First Round Capital writes on his blog today, this is reflected in the amount of time his firm spent evaluating new deals before deciding to invest. Over the last four years, the amount of time it took for a First Round deal to go from "inbox to investment" shrank by a staggering 50 percent.

Mr. Koppelman agrees with Chris Dixon that this is a bad thing, since it means they know less about the companies going in. And this more shotgun approach changes the outcome when it is time to raise a series A.

“Increasingly we are seeing startups who had their seed stage round done by one or more name brand VCs instead of only angels,” said David Pakman of Venrock, chatting with Betabeat by phone. “When they come to us looking to raise a series A the first question we always want to know is, why is that VC not leading this round? When they don’t, which happens for companies without overwhelming traction, that is an obvious red flag.”"

The growth of incubators like YC and TechStars, which now offer sizable investment upon entry to the program, means a lot more young companies find their way to seed funding. The same goes for services like Angel List, which aggregate and accelerate early stage funding. But so far there is no finishing school or supplementary service to help companies make the big jump to series A.

Ben Lerer

Lerer Ventures is a seed stage venture capital fund based in New York. They invest in founders at the earliest stages of a startup's life. Everyone at the fund starts and runs companies for a living. Lerer Ventures is where they invest in their peers.

The firm was founded by father-and-son team Ken and Ben Lerer.

Ben Lerer is a manager of Lerer Ventures and the co-founder and CEO of Thrillist.com. Kenneth Lerer is a manager of Lerer Ventures. He was the chairman and co-founder of The Huffington Post and is currently the chairman of Betaworks, Bedrocket and Buzzfeed.

Jordan Cooper is a Venture Partner at Lerer Ventures. He currently serves as co-founder and CEO of Hyperpublic. Jordan was previously an investor at General Catalyst Partners, a $1.7 billion early stage venture capital firm in Harvard Square.

Mown down by the markets

If you've been listening closely at tech parties and events over the last month, you could begin to hear the tectonic rumblings of a reckoning. The bubble in seed stage funding that saw hundreds of start-ups raise capital during 2010 is coming to an end. And many of the companies who raised less than $1 million are now running out of cash.

This morning we got an anonymous tip, since confirmed, that flash sales aggregator MyNines, which raised $750K back in April of 2010, has shut down. The company's website is currently offline. Founder Apar Kothari has been named vice president, head of business development and strategic partnerships at private sale shopping destination site Rue La La. (Sounds like that emerging talent pool we told you was coming.)

Without a doubt there are many young companies in New York who will survive. Firms like OnSwipe, SeatGeek and Yipit which have raised significant funds or found a healthy revenue stream can continue to build their business, although a severe economic downturn, as intimated by the plummeting stock market, will hurt all companies, tech and otherwise. But for many who were not around during the dot-com days (Betabeat included), this will be the first experience with death.

"Raise your money now" is the rallying cry. We heard it last night from Movable Ink CEO Vivek Sharma, who saw his first start-up, Blue Martini Software, go from a few employees to a public company worth billions. "One day the stock was trading over $70 and the six months later it was down below $6, then eventually below $1. The smart start-ups today have already raised their series A and those who haven't need to now. At this point, they are already going to have to accept much lower valuations, because the bargaining power is back with the VCs."

As USV Albert Wenger wrote earlier this week, get your paperwork done quick and that money in the bank because investors are thinking more about sovereign default than LinkedIn's stellar first quarterly report or the fact that your start-up got a dope review on TechCrunch. Time to break out those back issue of Fucked Company and start boning up on how to build a start-up for the bear market.

The email from founder Apar Kothari is below:

Dear Friends & Colleagues,

After an incredible two years chasing my dreams as CEO/Cofounder of MyNines, I'm thrilled to continue the next phase of my techfashion career as Head of New Business Development & Strategic Partnerships at Rue La La.

While MyNines embodied the perfect  blend of my passion for fashion & entrepreneurship, I didn’t have the resources to scale it. I’m super-excited to not only leverage the assets I acquired at MyNines, but also to work with a rockstar exec team at RLL. I’ve learned a ton & my deep experience in the flash sale/fashion world provides the optimal springboard to identify game-changing opportunities for RLL.

That said, I want to express my sincerest gratitude to those of you who followed  & supported me through MyNines – my amazing Advisory Board (Steve Hafner CEO of Kayak, Mark Menell CFO of Shoprunner (the GSIC family), Nick Pahade CEO of Traffiq (also previously from the GSIC family), Jack Kennedy EVP Ops at FOX, and Suzanne Norris, former VP Commerce at Kate Spade), Friends & Family, and my loyal team at MyNines. I couldn't have done it without you guys & can’t wait to find ways to work together in the future!

Dead fund walking

Earlier this week Betabeat reported on some findings from the National Association of Venture Capital, which showed that while the number of firms raising capital was shrinking, the amount of dollars put into VC the first half of 2011 was actually up 70 percent over the same period in 2010.

More positive data was released today by local analytic firm CB insights, which found that VC dealflow and funding were at an all time high for the 9 quarters they have been tracking the numbers. Of course, that time period includes some of the darker days in American economic history. But much of the nation isn't out of the woods yet, so the fact that venture capital is exploding says something about the unique climate in the tech sector.

For those who want to cry bubble, however, there are some strong contrary indicators worth noting. As we pointed out on Monday, the fact that fewer firms are raising that capital is a sign that the herd is still being culled from the heady dot-com days, with many of those funds finally reaching the end of their 10-year life cycle. While a number of new funds have recently appeared or raised in New York--like Level Equity, which just raised $120 million--the number of firms raising funds nationally is at a 16 year low.

We also may have seen the peak for seed stage funding. CB Insights found that early stage deals had dipped to a five quarter low, and some high profile investors like Chris Sacca have publicly declared that they are sitting out the seed stage game until valuations come down a bit. Expect a reckoning in New York over the next year as a number of companies that raised seed capital exhaust their funds and try to raise a series A.

Jacob Brody—entrepreneur and former reporter for VentureBeat—is heading to boutique investment bank Mesa as the new head of Business and Community Development. That's a fancy way of saying digital A&R, which means Brody won't have to change much about his daily routine. "My job is to augment Mesa's connections in the digital world so that we can find great companies and help them build their businesses before other investment banks even know about them," said Brody.

The new position is a reflection of the boom in New York's tech scene. "There have been a wave of new seed funds and that means a lot more activity to keep an eye on," said Mark Patricof, a managing partner at Mesa. "Jacob is an entrepreneur, so he's empathetic to young companies. He can naviagte their networks and create an ongoing dialouge with founders."

Brody will offer his services free of charge to promising start-ups. "I'm out there helping these companies with biz dev, with PR, with product. If I like and believe in an entrepreneur, I'm going to help them build their business anyway I can," Brody told The Observer.

It's a similar idea to the entrepreneur in residence, a point man who can speak the start-up's language. "When these companies become more mature and start looking for banking relationships, we’ll be in a good position," said Patricof.

Brody will continue to work on his company, the non-profit Standard Start, and plans to launch a version 2.0 soon. In the meantime, he'll be getting up a little earlier in the morning and enjoying a few perks rare in the start-up world. "I love health insurance," Brody told The Observer.

bpopper [at] observer.com | @benpopper