The Transformation of Seed-Stage Investment
Arthur Rock, a 31-year-old Harvard Business School MBA graduate, and Wall Street investment banker, might not have imagined that his 1957 investment in Fairchild Semiconductor would be the starting point of Silicon Valley’s history. His subsequent investments in Intel and Apple earned him the title of a pioneer angel investor in Silicon Valley.
Seed-stage funding, which refers to capital provided during a startup’s initial development phase, has traditionally been associated with angel investors—often characterized as the “3Fs”: Family, Friends, and Fools, implying that only these people are willing to bear the high risks of investing in such an early and uncertain stage.
In recent years, the seed-stage landscape has bloomed and innovations such as Startup Accelerators, Venture Scouts, and Angel Syndicates have emerged. These innovations not only bring more capital to the game but also professionalize and institutionalize seed-stage investments. It’s not just about the money either. More resources are thrown into helping startups grow.
Welcome to GPV
GPV (Good People Ventures) is an unique seed-stage venture capital model characterized by lean fund operations and decentralized investment decision-making. The model combines the best parts of Venture Scouts, Angel Syndicates, and Startup Accelerators. Next, I will walk you through how GPV works.
Deal Sourcing
From my venture capital experience, my entrepreneur friends often bring the most promising investment opportunities. The startup teams they referred to me always catch my eye. Top founders are like talent magnets, pulling in the best of the best to work with them. Whenever their friends consider starting a business, these top founders are the first they turn to for advice. Conventional venture capital funds often struggle to access these high-potential startups, especially since these startups haven’t started fundraising or even established the company yet! This explains why venture capital firms are launching their venture scout programs, hoping to discover the stars of tomorrow through their founder networks. GPV employs this approach to source prospects as well. The distinction lies in the dual role of the venture scouts within GPV: they are not only scouts but also fund investors, ensuring alignment with the fund’s interests and reducing potential conflicts of interest.
When it comes to seed-stage startups, given their lack of traction for investment evaluation, the focus often lies on the ‘team’ – assessing whether the team can actually make their plan happen. Getting to know a founder takes time. That is why GPV focuses on investing in startups where scouts share a bond of trust with the founders.
Investment Decision
People aspiring to get into the venture investment game generally have two paths to choose from. One option is to be an angel investor and go solo. The problem is, an angel investor needs a deep pocket to construct a venture investment portfolio, and not everyone’s got that. The other route is to invest in a venture capital fund and let the professionals handle the investments for you. Investing in a venture capital fund attains professional management and diversification of risks through an investment portfolio. But, there’s a trade-off: a fund investor might not have the chance to build direct relationships with founders as an angel investor would.
GPV’s investment process allows scouts to serve as lead investors when identifying opportunities, much like one from an Angel Syndicate, with the fund and other partners participating at their discretion. This mechanism combines the advantages of both being a solo angel and investing in a venture capital fund, allowing angel investors to make smaller indirect investments through a fund while also having the choice to increase their personal stake. Flexibility is the name of the game here.
Post-investment Support
Once startups successfully complete their seed round of fundraising, their immediate focus shifts to validate the product-market fit, usually with a timeframe of one to two years before raising the next funding round. Any small missteps can delay the next round of funding, jeopardizing the startup’s survival, which is pretty much make-or-break time for startups. Seed-stage startups can really use some guidance from experienced founders who have been there and done that. This is why, although Startup Accelerators offer all sorts of help, mentorship is one of the biggest things they do.
Having served as a mentor in a couple of incubators and accelerators, I always share my experiences and resources as much as possible, whether it’s pro bono or not. However, without an actual stake in the startup, it’s like I’m cheering from the sidelines but not really playing the game. GPV partners, being experienced founders, not only offer guidance and networking opportunities, but are also more committed to helping the startup succeed because they also invest in the startup directly or indirectly through the GPV fund.
Fundraising
You might assume the primary task of a venture capital firm is all about investing, but in reality, fundraising is what really matters. When the current fund is about to dry up, a venture capital firm risks closing the shop. So it’s a bit like startups, always chasing the next round of funding. But for fund managers, it’s even trickier because they don’t have flashy products and tangible metrics to show off as startup founders do. Because of all that fundraising pressure and limited fund lives, VCs often feel a push to pump up their portfolio values, sometimes by making the portfolios raise more money at higher valuations or even pushing for early exits, which might not be what’s best for the startups.
So, when I launched GPV, I knew I had to get creative with the fundraising game. Luckily, my years in venture capital have introduced me to some awesome founders. As their own startups grew, many began entertaining the idea of angel investing, making them potential backers for GPV. Unlike the conventional VC fund, GPV puts the fund investors in the driver’s seat and empowers them. It clicked with these founder friends. Plus, the collaborative ethos creates a domino effect, with existing members often introducing new, credible founders to join, further simplifying the fundraising process.
At its core, GPV is all about the investors, not the fund managers. This investor-centric approach ensures that as long as there’s a steady stream of GPV partners passionate about angel investing, GPV can keep on running for the long haul, without being limited by a predetermined fund lifespan.
“I invest in people, not ideas.”
Arthur Rock once said, “I invest in people, not ideas”. Looking back at the history of Fairchild Semiconductor, this Silicon Valley star of the 60s assembled some of the US’s most brilliant scientists of the time. Yet, due to the lack of equity incentives and excessive intervention from the investor, core members left rapidly, leading to a loss of technological advantage. Despite several restructures and M&A, the company never fully recovered. The Silicon Valley legend ended when Onsemi acquired it in 2016. Lesson learned: it’s all about the people.
GPV’s game plan is all about ‘people’ and ‘trust’. It will work as a lean seed-stage investment machine when everyone involved in GPV – fund investors, scouts, and entrepreneurs – trusts each other.