Is LearnBoost Funding Part of a Seed-Stage Bubble?
There were a dozen venture capital deals announced yesterday, representing more than $100 million in raised capital. But this morning I’d like to focus on less than 1% of that tally: The $975,000 round for LearnBoost, which is developing a Web-based gradebook for teachers.
Not interested in online education innovation? That’s ok, because this column is more about the financing than the company itself.
Specifically, LearnBoost raised its $975k from four “big” venture capital firms: Atlas Venture, Bessemer Venture Partners, Charles River Ventures and RRE Ventures. It also had a bunch of angel participation – including from James Hong and Naval Ravikant – which means the average VC firm invested around $230k (assuming an even split and $10k per angel – all of which may be wrong).
Seems like mighty wide syndication for such a small deal, and perhaps plays into the whole “seed-stage bubble” meme.
So I spent some time on the phone with Rafael Corrales, a LearnBoost co-founder who thought up the company while at Harvard Business School. Here was his basic explanation:
“With a company like mine, you usually either take no VCs or a couple of VCs. If you take none, you’re not married to any one firm when it’s time to raise the next round. But if you raise from a couple and one or both pass on the next round, you’re dead in the water. So we’re doing the extreme – by having four, we’re removing the importance of idiosyncratic reasons why one or two VCs could pass.”
In other words, he’s (very) worried about signaling risk. He acknowledges that a similar problem could arise if three of the firms punt next time around, but adds that such a scenario probably means the company really doesn’t deserve that next round.
Now not every startup has the luxury of such excess VC fawning – other firms have offered to invest since LearnBoost closed the round last month – but Corrales seems to be proving a Chris Dixon’s recent argument that the seed-stage boom is being driven by smarter entrepreneurs. He even has established a common monthly reporting process to all investors, so as to preempt redundant questions that would otherwise distract the company from the business of its business.
But at what point to dumber entrepreneurs simply begin aping the smarter ones, leading the boom to morph into a bubble?
A bunch of bloggers suggest that we’re already there, as evidenced by an influx of new seed-stage firms, the institutionalization of super-angels and “big VC” participation in deals like LearnBoost. The data itself shows more ambiguity. For example, CB Insights just released a report showing that seed-stage valuations actually are declining in Boston and New York.
My gut on this is that the seed-stage market is still more upswing than bloated downswing. Lots of VC-backed industries remain rightly unaffected – biotech, telecom, cleantech, etc. – and no existing VC shop I know of has significantly reconfigured its investment strategy toward seed-stage deals (CRV and Atlas, for example, have had seed-stage funding programs for years). Moreover, we need to remember how large the seed-stage void was just a year or two ago. Finally, I believe that the Web savvy of many seed-stage investors — and blogosphere emphasis on seed-ready B2C tech deals — may be exaggerating their importance vis-à-vis venture capital as a whole.
That said, I’m interested in getting your thoughts: Is a deal like LearnBoost just a case of a hot startup attracting lots of VC interest, and managing to add lots of networks without too much accompanying dilution? Is it a sign of big VC desperation? Is there a bubble and, if so, who will it hurt most when it pops? And what important questions am I missing?
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Joe Omansky said on July 27, 2010
Capital historically would travel to the greatest expected return on investment. I think what we’re seeing now is a massive shift in world economic rules, and thus smart capital is diversifying its targetted investment opportunities specifically as those ops relate to technological innovation. The capital does not want to be limited by traditional investment parameters. I wouldn’t call thhis a seed bubble, primarily because the changing rules of the economy and a world economic slowdown (as represented by declining global interest rates) are attracting smart capital to help drive the changes and to spur renewed growth.
Raj said on July 27, 2010
Dan, when you say “But at what point to [sic] dumber entrepreneurs simply begin aping the smarter ones, leading the boom to morph into a bubble?” I think what you mean is at what point do dumb journalists start describing it as a bubble.
Any entrepreneur smart enough to raise the funding his/her company needs by adopting this strategy isn’t dumb. I guess you might wonder about the VCs participating however.
J said on July 27, 2010
Kudos to you for looking beyond the Learnboost financing and examining the richer and more complex dynamics around the syndicate.
I think the biggest issue isn’t the hype around a “seed bubbleâ€â€¦there was and has been such a shortage of capital in this area that the sudden “surge†still doesn’t seem to be having much effect…at least here in Boston. The main issues of big players doing seed investing are two related issues: 1) overcapitalization; and 2) ruling out <$100M exits.
Overcapitalization.
I’d be concerned that Learnboost has now nearly guaranteed it will be overcapitalized if appears to be on a path of success. Seems like the founder, in trying to avoid the signaling problem, has now embraced all the VCs “needing†to put in a lot more money if things go well, which will very likely inflate the post-money valuation and make it a less attractive, over-priced acquisition candidate. It also increases the likelihood that he’ll be replaced by the VCs with a “professional CEO†who has the background and skill set to grow the company larger to meet the VCs now inflated return expectations.
Ruling out $250M, and in Bessemer’s case, $1.5B, unless it was from their separate seed fund), their participation predetermines that the company will not seek earlier exit opportunities that may, in fact, be its only exit opportunities because the VCs need to play shoot-the-moon. So what if most of the companies die along the way? It just takes one to make the fund. As an entrepreneur, I would not want to be someone else’s call option.
Chris said on July 27, 2010
With all due respect to you and Mr. Corrales, I would suggest that you will not get a clear insight into the reason so many VC’s participated in the LearnBoost round unless you speak to one of the VC’s. Before becoming an investor myself, I raised over $200M for my own deals including about $100M in top-tier VC and institutional funding. In my early deals, I was naive enough to think that I was deciding which VC’s participated and on what terms but, later I learned that was not necessarily the case. I discovered that no VC invested unless they had a clear understanding and agreement with all of the other key investors as to terms, conditions and even procedures to follow relative to various scenarios.
While Mr. Corrales may think that HE is managing his many VC’s, he may be in for a rude awakening if those VC’s decide things aren’t going exactly the way they had planned. I am not suggesting that any number of VC’s or investors is right or wrong but, I am certain that no professional VC will co-invest in any deal without familiarity of the other players and a clear understanding with them of the rules of engagement.
I wish Mr. Corrales all the best but, if he has allowed himself to believe that he orchestrated a deal with four big VC firms then he has made his first big mistake.