The Shitake Hits the Fan

There has been over the past 18 months a Cambrian explosion of startup life, many incubated by angels and seed funds. And now the process of natural selection is beginning again.

I got back from the Valley Thursday and what I gathered from the people there is the same as what I’ve heard here: that many seed companies are having a hard time raising money.

Yes, second rounds are always hard, after you’ve built the product but before it has made much money. The difference is that today’s first-round investors are angels and seed funds, which sometimes aren’t even set up to participate in many follow-on rounds.

What’s made that worse is the market is becoming more cautious around post-seed deals. Everyone criticized the Wall Street Journal’s Pui-Wing Tam for being the first to notice a cash-crunch for seed-stage companies seeking follow-on rounds, but I think she nailed it.

Some early-stage entrepreneurs are now clawing at the walls, begging supporters for money and time. Many investors never promised more money or much time. The premise of some seed investments, especially from larger funds, is “optionality.”

Rather than making a serious commitment to a handful of seed-stage companies, larger funds are buying the right from many startups to lead a later round in the hope that one or two of them catches on with consumers.

One reason for this is that consumer internet investing has become a hit-driven business. Who could pick the next Twitter? When the question is one of tickling consumers’ fickle fancy, rather than a rational process of evaluating technology, it’s a crapshoot. So some investors play at the dollar tables, and roll the dice all night long.

This approach has led to the creation of more new businesses over the past 24 months than the Valley has likely ever seen. It has given entrepreneurs a shot at success many never would have otherwise gotten.

And some don’t need any more capital or advice beyond a seed round of financing. But I did, especially when I was first starting out.

I co-founded a company, Plumtree, that raised seed capital from Sequoia. Kirill, Joe and I closed the round, walked out to an ATM to check our balance, and began laughing hysterically.

Things went downhill from there. A co-founder left. Nobody bought the product. And we ran out of money. I felt like I was digging deeper and deeper into a hopelessly dark mine, looking for gold.

Then Pierre Lamond, the Sequoia partner on the deal, began working out of our office, acting as the virtual CEO.  Pierre made a point of being there the day one of his other companies went public. We looked at a news photo of all the smiling people, who seemed to be living in a gated community, on a planet I would never visit. Then Pierre said “that company was once even more screwed up than you are.”

I clung to that statement through Plumtree’s early days, and returned to it again when Dave and I were working out of an apartment trying to figure out how to make Redfin work .

To find a new lead investor to join Sequoia on Plumtree’s board, Pierre drove me all over Palo Alto and Menlo Park in his car. It was the first time I’d visited the Promised Land of the Valley itself, and it was nice to see it through his windshield.

I cherished the conversations we had on those trips: about how Pierre founded National Semiconductor, or built the Cray supercomputer. He asked me what I enjoyed doing outside of Plumtree and I said “reading.” He saw what a little stress-monkey I was and said I should spend a few minutes reading a book every night; it’s advice I still try to follow.

At each stop, Pierre promised he would work closely with the new investor on Plumtree, and possibly on other deals too. I was then released by my nervous handler to perform in the conference room like a zoo animal on The Tonight Show.

You may think it wasn’t really a fiasco, but one detail should suffice to convince you it was: at one point, I lugged a full-sized server around because we couldn’t get the product to work on a laptop, or over the web. I tried to get the server going under the table before the partner came into the room but sooner or later he  always asked, “What is that humming?” It was the sound of a thousand memory leaks spinning up the disk drive and every other internal gizmo into a panic.

That anyone gave us money was a miracle. But once we get the money, we prospered, eventually becoming one of only two technology companies to go public in 2002. I wondered why Sequoia went to such great lengths to get Plumtree funded when it would have been easier to write off the few hundred thousand dollars invested in our company.

And the simple answer was that Sequoia cared about its reputation and stood by its companies. Someone later told me that a Sequoia partner liked to say, “We don’t want you staggering around, with your fly down and a drink in your hand, telling the whole world ‘We’re a Sequoia company.’”

If Sequoia hadn’t saved us, I would have decided that my startup fling was folly. Plumtree would have just disappeared, and everyone would have thought it was a terrible idea. Redfin wouldn’t have the executives it has now, and neither would AdMob, Xoom, Atlassian, Zendesk, Piazza, The Climate Corporation or any of the other companies now being led, in part or in total, by Plumtree people.

It seems a shame to me that few of today’s seed-stage entrepreneurs will get the same support we did. I promise you, we were even more screwed up than you are.


  • donalddesantis

    It seems that the challenge is traditional firms aren't resourced to “show the love” in the way you've described. The “spray and pray” nature of seed stage typically means small deals in high volume. It reminds me of planting a bunch of bulbs in the garden behind my childhood house, and returning to see which had sprouted into a small green shoot from the ground. It was all I could do to keep those fragile shoots alive.

    It's a shame since it means many new Plumtrees of the world will die before maturity. But we shouldn't let the founders off the hook. With access to funding (at unprecedented valuations), it's very much their responsibility make it through the soil and become one of those green shoots. The challenges and solitude of starting a company are very real, but they're also the one constant across a portfolio of young companies.

  • Savan Kong

    Great post, G. 

    It's funny how many parallels there are with young Redfin and Plumtree: The digging deeper and deeper into a darkness, hoping to somehow spontaneously hit gold, questioning whether we were actually spending our time wisely, tinkering with many versions of and wondering if people would actually use. I recall many of the same days when Dave and I hauled around a huge rack server to several of the prominent real estate companies, hoping that they'd get as excited as we were about Redfin. 

    Many years have passed since then and I'm really glad you are “swing for the fence” and making Redfin something bigger than any one of us could have ever imagined. Not many companies can take on multiple rounds of funding to do something huge; I'm glad we're one of them.

  • Jeffrey Lu

    Environments change but good entrepreneurs still find a way… “Just win baby”

    There were lots of Plumtrees waiting to happen in the late 90's – early 2000's but didn't because they didn't get early seed funding. There are Plumtrees waiting to happen now but won't because they can't cross the seed to Series A chasm. It's the reality of being an entrepreneur.

    Again, great post. More people should read your posts but selfishly, I'm glad they don't.

  • fredwilson

    love it. gonna reblog parts of this

  • Alan Warms

    Fantastic post

  • Fred Destin

    Great post.  I can only aspire to having entrepreneurs say this about me someday.  Ha, maybe Zoopla's founder :-) Thanks for sharing.

    • parkparadigm

      Zoopla? Home run from Day 1. ;-)

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  • Katie

    Great post! I've certainly changed my feelings about what happened to my company in the years that have followed my departure. We weren't even all that screwed up. If we'd had our own Pierre things might have been quite a lot different today!

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  • Seed Capital

    Love this. I'm gonna create something out from this and will also credit this blog too. Thanks

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