Why I Love Seed Stage Investing

My friend Roger Ehrenberg had a great post recently titled ‘Building a Seed Stage Partnership‘. Roger and I have seeded companies together since 2006. Roger invested in my last two companies Wallstrip and Stocktwits and is an LP in our Social Leverage funds. I’m biased but there are few seed investors better than Roger.

Roger and I see eye to eye on the seed stage joy and keys to success:

One thing is for sure: I love very early involvement in a company’s development. Starting to work with companies at the seed stage is what I love and where I believe I can be most helpful. Being the lead investor, making a significant financial investment and taking responsibility for being the founders’ partner during these “interesting” times is what I love most about my job.

I am particularly energized by founders who are customer domain experts: the power of having deeply felt a problem and having clarity of vision and purpose for how to best solve the problem is truly intoxicating. There is a richness and texture to the discussions with founders like this that is hard to find among brilliant people who clinically find an interesting problem to solve and go about solving it. Obviously there are those who have had success starting businesses this way, but I have a harder time bridging to customer empathy versus those who have experienced the pain first-hand.

I also have found that I focus on businesses that can enjoy “software economics”, e.g., 70–80%+ gross margins, at scale. Clearly at the seed stage this can’t be observed, but there should be a thesis for why the business can and will look like this and that the seeds are being planted in earliest days. This speaks to founders who have a product orientation, where higher touch sales involving services in early days are specifically engineered away over time as services are converted to software. Make no mistake, this is not easy as customers who are willing to pay but who ask for a lot of custom stuff are hard to turn down, but the product-driven founder with unshakable conviction will do exactly this and focus on customer segments who have the greatest immediate pain, common needs and require less hands-on care.

Our experience at IA has also shown that most seed stage businesses with these characteristics can demonstrate early product/market fit with $3m or less. Capital efficiency is a powerful forcing function during the early go-to-market phase where rapid experimentation towards testing product/market fit is what it’s all about. This also solves for founders who are builders — they love to show-and-tell, can demo a product early and aren’t afraid to collide with the market and sell ahead before a product is finished. How do they do this? By having the willingness and ability to sell the vision, even when the product isn’t perfect. The most successful technical founders can do this, even as coders often get a bad rap for not being sales-y enough.

I get a lot of emails from people of all ages asking how they can learn to angel invest or enter the business and I hope Roger’s post helps.

I spend most of my time focused on markets and financial services because of my own personal pain points and vision of the world I want. Having a point of view has really made the job even more fun and fulfilling.

Last year I wrote a post titled ‘So You Want To Be An Angel Investor‘ with some links that should help further.