Early Stage Investing

I thought I’d lead off my series of posts on “other things we look for” with a discussion of our preference for early stage investing. Most of our investment approach is built on top of our foundation as early stage investors.

But what does early stage investing really mean? It means different things to different people. For us, early stage investing means putting capital to work in a company well before it is fully formed and therefore participating in the value creation that comes with developing a new business. We are thesis driven investors who have a very specific set of business characteristics we look for. Brad outlined them very well in his series of posts last month. So if a company fits into our “sweet spot” (meaning it aligns well with our investment thesis and has the business characteristics we look for), we are more than willing to take on the risk of market development, business development, management team development, and business model development.

I’ll use a couple of examples to make this point. The first one is delicious. When we invested in delicious, it was already an existing web service that had a relatively small but passionate user base. And it had a very compelling person in Joshua Schachter behind it. But there was no company, no management team, no office, no employees, no business development relationships, and no business model. Because delicious fit perfectly into our view of where the web was going, we were comfortable making an investment at that stage. We helped Joshua put many of those missing pieces into place and were working with him on the business model when the sale opportunity came up. Had delicious remained independent, we would have continued to work with Joshua and the management team to create a business around delicious.

The second example is Oddcast. When we invested in Oddcast, it had already established itself as the leading provider of flash based avatar services to the marketing community and small and medium businesses. It was a well developed company in many respects. It had a management team, an office, a sales team, a technology team, revenues, and happy customers. But we (the management of Oddcast and Union Square Ventures) see the opportunity to deploy Oddcast’s avatar technology much more broadly into social media and mobile media services. There is a large business opportunity in front of Oddcast that was not well formed at the time we started looking at the investment. Our capital and advice has already been integrated into the company and they are using it to hire new people, enter into new business relationships, develop new technology, create new business models, and we are confident that our capital invested in Oddcast can have the same kind of impact on its business that our capital had on a “startup” company like delicious.

So it’s not a simple metric that we use to define early stage like revenues or number of employees. It’s our ability to put capital to work in the formation of a new business opportunity that is sizable and fits directly into our view of the markets we operate in that we look for.

The valuation of the business and the amount of capital that the company has already raised are also factors in our definition of early stage. I intend to address both of these issues in separate posts so I won’t go into detail on them now, but we want our capital and counsel to be significant to the company we invest in. Generally that is not an issue with a “startup” company like delicious, but often it is with a more developed company like Oddcast. And that is why we end up investing in a lot more startup situations than more developed companies.

Early stage investing encompasses seed, startup, angel, and first round investing. It’s a broad term that can be confusing. Stay tuned to my next several posts where I will address things like round size, valuation, round size, and business progress. Our approach to each of these issues further defines exactly how we approach the early stage venture capital business.

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