Are the best Seed deals moving out of the Valley?

Between Mike Arrington’s sensational AngelGate post, and Fred Wilson’s reaction to the hype I’ve come to my own conclusion. If super angels are gathering it means something’s wrong. It means they can’t find enough good deals to bet on, and that there’s too many sources of money and too high valuations for early stage companies in the Valley.

  • Great for entrepreneurs mostly. Having a down round because of too steep an early valuation is a quick way to have no equity in your own company, but not in converts (discussion by Chris Dixon)
  • not so good for angels and seed investors.

My two cents on any startup sub groups meeting:

As far as I understand, angels can work together if they want to start a bigger fund with a shared thesis. There’s nothing stopping entrepreneurs from doing the same, except keeping the lights on. Money can mean so many different things to different people.

Cash to me is a distraction, and yet it’s the ultimate signal from a potential customer/client, and the ultimate signal of trust from an investor. If I had any, I wouldn’t want to spend it unless I knew it was being burned for the health of the company I was running/helping found.

Information exchange isn’t limited to online messaging, let angels, pro investors and founders meet and discuss what’s best for the industry from their perspectives.

If seed stage investors are suffering from a social/economic shift, it’s not just YC, TechStars, or some other hot local incubator that’s driving change. There’s no amount of collusion that can stop the trend. It would be like newspapers or big book publishers colluding to try and stop epublishing at this point or Big Telcos stopping open spectrum and the growth of super wifi. Ain’t Gonna Happen. The best investment deals may be moving out of the valley, where competition isn’t as steep.

The solution: The seed investors need to get out of the building!

Steve Blank said it best “There are no facts inside the building so get the heck outside” (quote source):

Marketing is Heard From

Engineering was discussing how sophisticated the graphics portion of our computer should be, debating cost and time-to-market tradeoffs of arcane details such as double-buffering, 24 versus 32-bits of color, alpha channels, etc. I was pleased with myself that not only did I understand the issues, but I also had an opinion about what we should build. All of a sudden I decided that I hadn’t heard the sound of my own voice in a while so I piped up: “I think our customers will want 24-bits of double-buffered graphics.”

Silence descended across the conference table. The CEO turned to me and asked “What did you say?” Thinking he was impressed with my mastery of the subject as well as my brilliant observation, I repeated myself and embellished my initial observation with all the additional reasons why I thought our customers would want this feature. I was about to get an education that would last a lifetime.

Picture the scene: the entire company (all 15 of us) are present. For this startup we had assembled some of the best and brightest hardware and software engineers in the computer industry. My boss, the CEO, had just come from a string of successes at Convergent Technologies, Intel and Digital Equipment, names that at that time carried a lot of weight. Some of us had worked together in previous companies; some of us had just started working together for the first time. I thought I was bright, aggressive and could do no wrong as a marketer. I loved my job and I was convinced I was god’s gift to marketing. Now in a voice so quiet it could be barely heard across the conference table our CEO turns to me and says, “That’s what I thought you said. I just wanted to make sure I heard it correctly.” It was the last sentence I heard before my career trajectory as a marketer was permanently changed.

Get Out of My Company

At the top of his lungs he screamed, “You don’t know a damn thing about what these customers need! You’ve never talked to anyone in this market, you don’t know who they are, you don’t know what they need, and you have no right to speak in any of these planning meetings.” I was mortified with the dressing down in front of my friends as well as new employees I barely knew. Later my friends told me my face went pale. He continued yelling, “We have a technical team assembled in this room that has more knowledge of scientific customers and scientific computers than any other startup has ever had. They’ve been talking to these customers since before you were born, and they have a right to have an opinion. You are a disgrace to the marketing profession and have made a fool of yourself and will continue to do so every time you open your mouth. Get out of this conference room, get out of this building and get out of my company; you are wasting all of our time.”

I was stunned by the verbal onslaught. At that moment I felt so small I could have walked out of a room underneath the crack in a closed door.

Facts Not Opinions

The shock quickly wore off as I processed the gist of what he told me. He was right. I personally didn’t have any facts, and if we were counting opinions, there were a bunch more educated opinions in that room than I had. All I had been doing was filling the air with marketing noises.

I was convinced that I had just been humiliatingly fired – 90 days into our new company.

Get Out of the Building

As I got up to leave the room, the CEO said, “I want you out of the building talking to customers; find out who they are, how they work, and what we need to do to sell them lots of these new computers.” Motioning to our VP of Sales, he ordered: “Go with him and get him in front of customers, and both of you don’t come back until you can tell us something we don’t know.”

And he was smiling.

My career as marketer had just begun.

Early stage investors need to go where the deals are best, and if it’s not in the Valley they need to travel. Startups continually reshape the market. Successful angel returns are a function of 1) recognizing high potential teams and 2) getting a great deal on early shares.

Geeks on a plan is a great way for investors to get a peak at global opportunities. There are many hubs of innovation not only in the US at NYC, Boston, Portland, Seattle and Boulder but globally. Startups are sprouting up like wild fire in Tel Aviv, Vancouver, London, Paris, Ireland, Singapore, parts of Finland, Sweden, Netherlands, Germany and Slovenia/South Eastern Europe

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  • Peter Fleckenstein

    Great post Mark. So many start-ups are locked in closed “ivory” towers building the next big thing without ever getting out of the building.

    Start-ups (whether founders, engineers, sales/marketing) need to fire themselves, get out of the building, and come back knowing what they knew they didn’t know. The ability to do this is crucial to the growth of the individuals and the company.

    If this is not done, then the start-ups will fail…sooner rather than later.

    Thanks again for the great post.

  • Mark Essel

    You’re very welcome Peter. Everyone got excited about the whispers of collusion without thinking through what is motivating or driving that meeting.

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  • awaldstein

    Hi Mark…really good post. Personal and heart felt.

    My pushback…”Cash is a distraction.” I’m not certain I agree completely.

    Is exercise a distraction…takes a huge commitment but drives mental clarity.

    I don’t really believe in the ideal situation or the frictionless cashflow business scenario. I’m not calling for chaos….I’m just not believer that peacefulness in itself interpreted as lack of cashflow issues is that helpful.

    Not being a contrarian…just been thinking about this myself. Self fund a new business for a year…or beat myself to find value and make it pay as it goes along (to an extent). I’ve chosen the later for now.

  • Mark Essel

    Glad to hear you’ve chosen the disciplined route of market navigation through paying customers. I’m a firm believer in attention and relationship economies. If I can find the narrow side of a market and help build something that earns their attention, it opens the door to leveraging unrestricted basic usage to compliment higher value propositions.

    While the larger players of the internet continue to optimize for click and purchase actions, we see surprising value popping up in tool builders that market their personal processes into disruptive technology. Look at 37 signals and github, each famous for fulfilling their own needs.

  • awaldstein

    Thnx Mark…this is one of my favorite posts of yours.

    Tough questions to address and being fuzzy and changing our minds is certainly allowed.

    Good luck to you.