Fun Fact of The Week: Time from Inbox to Investment
During the last few weeks there has been a lot of commentary about what’s going on in the seed funding markets. Some say that web startups face a cash crunch. Some disagree. Some think there is a “Series A Crunch”. Others disagree.
During this same time period I saw the movie Moneyball (liked it, thought the book was better) and my fund held our Annual LP meeting. So I’m full of fresh stats about our portfolio of over 125 seed-stage companies. I thought it might be interesting to take some of the data we’ve collected, and share it to help try to shed some light on what we’re seeing in the market. So here is the first installment of a multi-part series: Fun Fact of The Week
While there has been a lot of discussion about the number of seed deals vs the number of Series A deals, I haven’t seen anyone other than Chris Dixon talk about the impact of the accelerated pace of seed-stage funding rounds. As the market for seed-stage investing has gotten more active, the average time to get a deal closed has gone down dramatically. That means that the entrepreneur and investor spend much less time to get to know each other before making a major, long-term commitment. This, as Chris Dixon put it, "is bad news for everyone."
From an investor perspective, the more time I can spend with an entrepreneur, the more I understand how they think, how they approach problems, what they are "working for", how they handle divergent views. It helps me get a better sense for their product vision. It gives me more time to do reference checks on the team. And it also lets me get educated on the market -- learning more about competitive products, etc. And if I'm going to be paying a higher price due to increasing valuations, I am more comfortable doing so after being able to spend more time with the founders. I know that there are situations when investors don't have the luxury of time -- and you have to make a quick decision. And of course I've made gut decisions that have worked out well. But, I've found that there is much more variability in the investments where we've don't have enough time to get to know the founders well...
From an entrepreneur perspective, the more time they can spend with an investor, the better they understand their investor's goals and how they view the market. They can make sure the investor shares their vision for the future. They can call other CEOs to see how the investor behaves in the board room and how they behave in good times and bad. They can get a better sense of the alignment of interests and personalities. And they can try to get some insight into how helpful the investor will be in recruiting, strategy, future fundraising, and making introductions.
So here's the data:
We took a look at the last four years of our initial investments (ie, not including follow-on investments). We then identified the time it took for an company to go from "inbox" (when we first were introduced to the opportunity) to "investment" (when the deal closed). The chart below shows the relative change in the median number of days it took us to go from inbox to investment for each year, baselined against 2008 (which was set at 100). You'll note that the chart does NOT show the actual number of days we review each investment -- just the percentage decrease from the 2008 baseline. You can see that the time we have to evaluate a prospective company has shrunk by 50 percent over the last four years. While this data just represents our experience at First Round Capital, from what I hear from my colleagues at other seed-stage funds, they are experiencing the same thing...
So the key question this raises is: Why is this occuring? It could be because of the increase in available seed capital over the last four years. It could be because of an increase in the number of great startups recently. It could be because of the growth of incubators and their "Demo Days" (where companies often leverage their unveiling to force quick decisions and raise a round within a week or two). It could be because of the growth in platforms (like Angelist and Gust) which seek to create a liquid seed funding marketplace. It could be a combination of these factors. What do you think?