New Investment Strategy At Sequoia?

Sequoia Capital is said to be getting aggressive about using new ways to invest very early in young companies, in an attempt to bridge the gap between small angel investments and institutional Series A rounds.

The firm isn’t talking about its plans — which haven’t been put into action, according to a source — and did not return calls seeking comment.

For what it’s worth, Sequoia already advertises itself as doing seed-stage rounds, investing between $100,000 and $1 million in startups in energy, financial services, healthcare services, Internet, mobile and outsourcing services.

The firm’s website lists 20 seed investments made from its U.S. arm, two from China, five from Israel and none from India.

Seed rounds can be tough for VCs because they can suck up time and deliver small returns. Charles Moldow at Foundation Capital says he loves doing them because they’re interesting. But his time doesn’t scale, he says, and the return when you’re investing $1 million out of a $500 million fund “is not something where we feel like it’s a win.” Still, he’s done half a dozen or so seed investments in his four years at Foundation and says that sometimes it’s the only way for a VC to get into an early stage company.

CMEA Capital also does seed rounds — it’s completed seven in the last 18 months from its Fund 7 and will do at least one more from this fund, says Faysal Sohail, a managing director. He’s seeing more startups that used to get funding from angels but don’t now because of the economy, also more startups from returning entrepreneurs.

Still, VCs are missing out on thousands of early stage companies, says Doug Renert, who last year co-founded Tandem Entrepreneurs, which he considers a cross between an angel and a VC. (Tandem makes small investments in startups– around $800,000 — and adds sweat equity.)

In the time it takes an entrepreneur to prepare a pitch for a VC, he can pitch to all the various Demo Days and startup bootcamps that have sprung up recently and then decide which ones fit. He may never have to go to a VC. “If my time is critical, do I want to raise money I have a 1% chance of getting or should I use most of my time to build my business?” Renert said.

The opportunity for VCs to invest in early stage startups is there. What, if anything, is Sequoia doing?

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3 Comments

  • Good post. It seems that every day (since we finally stopped talking about the world ending) more great opportunities are being seized by a new crop of early stage investors. These new entrants seem willing to move quickly, and to support their entrepreneurs in ways that add value to the first in a series of ‘startup sprints’. So indeed, the classic VC’s may be missing out on some great values.

    As I mentioned here (http://blog.channelstrength.com/2009/09/angels-new-early-stage-vcs.html), the Bay Area already has a good crop of this breed. What would be even more exciting would be to see ideas in less visible markets getting access to this form of early stage investment. Even more so than here, $500k is plenty of make or break.

  • No doubt Sequoia will figure out a profitable way to fill the gap within its own sphere. However, the best way to fill the capital gap is to welcome a large and rapid new influx of angel group members from nonconsumers.

    Who are these nonconsumers? These are predominantly baby boomers who qualify as accredited investors, but who are not MBA’s, not serial entrepreneurs, and not familiar with VC generally. This group must be educated, accepted, and integrated into angel groups around the country in order for the capital gap to truly be filled adequately.

    In the meantime, Sequoia will surely do well in what right now is a cavernously large space.

  • Suckoya can not play in this space because they want to invest big dollar. No way jose. You can’t shrink to greatness!!!!!!!!

    Suckoya is focused on large deals like cafe coffee day.

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