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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