Jul 9
Fred Destin

VC Signalling Risk in Seed Rounds

 CB Insights  just published an interesting post about signalling risk i.e. the startup survival risk generated by getting a Tier I VC into the seed round who does not follow their money into the Series A.

The data suggests getting no support from a brand name on your next round decreases you overall chance of getting financed (these conditional probabilities are a bit doubtful given the clear correlation between these events).

As usual, however, statistics only tell part of the story and hide a more complex reality.

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VC's do seeds for a reason

It's worth reminding everyone that investors commit limited amount of money in seed rounds for a reason, and that is to manage their capital at risk; in other words, to have the option to not follow their initial money in a promising but fundamentally unproven project.

The arguments between VC's in this regard center around whether (non-seed focused) VC funds just want a cheap option or act with conviction when they invest at seed.  

I remember one fund blatantly telling entrepreneurs "here is $500K and we will see you in six months".  This has the benefit of being transparent but is hardly the kind of engagement and commitment you want from an investor.

Nevertheless, whichever side you are on ("option portfolio" vs. "invest with conviction") tends to depend on your own fund strategy and each investor has a tendency to preach for their own chapel, so take all pronouncements with a pinch of salt.

Understand the risk you are taking 

Getting money from a Tier I fund at any point in your life tends to maximize your chances of success (or so the industry would have you believe :-)), provided your company does well (duh).  The "branded" seed investor should be very clear with the entrepreneur when it comes to describing the social contract that is being entered into : "you can take our money and leverage our advice, brand and network, but we may not back in the future and that competitive advantage you gain today (in recruitment, closing clients or partners, getting press etc.) may become an anchor around your neck.  By taking our money, you increase your risk profile".   Founders can then decide what level of risk they are willing to live with and how confident they are in their success.

Take statistics with a pinch of salt

Following the money may not mean showing a great deal of support, and you have to be a bit savvy about the positioning exercises undertaking by VC firms.  It's for example fairly easy to say : "we will always write the second check, provided you can get an external lead we like" when that second check is small.  If I'm investing $200K in your seed round and reserving $200K as token support money, I'm still not committing a ton of capital to your business but I can say with a straight face that I was supportive in the follow-on.  

You get my drift;  your branded capital partner may be willing to show support but that support can become a token amount and not fundamentally resolve your signalling issue. The real question the new investor will be asking themselves is "but why isn't Tier I fund X leading or co-leading this next round and leaning in" so you cannot really get away from some level of signalling risk this way.  But it helps, and certainly flatters the statistics! 

Top vcs seed re investment rate v2

Without sample size and average amount reinvested, it's tough to read too much into these numbers, even though from my knowledge of the market the rate of follow-on seems to reflect the various firms' seed strategies.

Different strategies for different funds 

Some investors will do a ton of seeds and the market will understand that they cannot possibly follow across the portfolio.  They effectively dilute the signalling effect by breadth.  Some investors will back Angellist angel syndicates and follow the money automatically and avoid signalling risk by construct.  

In general it's certainly better to take money from firms who are as selective about seeds as they are about Series A.   By definition this money is harder to get.  The best thing to do is to have a very detailed and open conversation with your incoming investor about their seed strategy:

  • How many seeds do you do per fund and per year ?
  • How often do you follow your money ?
  • Do you always write the second check ?
  • How often do you end up leading the Series A ?
  • What milestones / proof points are we signing up to ?

Accel London and Seeds in Europe 

Whilst, again, I am completely non-normative about seed strategies (different methods work for different funds in different markets), Accel London definitely falls in the camp of the "highly selective" seed investors.  We do them, but extremely carefully.  

The European market is quite shallow at Series A and B and there are only very few strong brands, which in my mind amplifies the signalling effect dramatically. There is also sometimes a cultural difference at play, which is that in the US entrepreneurs who do not get follow-on money will usually say "oh well, we did not not perform well enough" whereas some European entrepreneurs will blame the bailing investor for putting the last nail in their coffin ("by not supporting me you killed me my company").  Both of these statements are partially true.  

This makes raising seed from tier I VC's a somewhat tricky but generally worthwhile exercise.  It's just important to walk into the relationship with your eyes wide open.

  

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Jun 3
Fred Destin

Pillpack: Adding $50M in funding to bring redesigned pharmacy to all

There are some people in the world that it is simply a joy to work with, and when good things happened to them you can only feel joy.  TJ Parker and Elliott Cohen are two such people and I'm delighted with the new milestone our company Pillpack has reached. 

$50 Million in New Funding 

Pillpack just announced a $50M round led by George Zachary (of Twitter and Yammer fame) and Rafael Corrales at CRV with new money from Pravin Vazirani and Tylor Sosin at Menlo Ventures (another awesome duo) and Shervin Pishevar at Sherpa Ventures (with a fashionably minimalist website :-)).  Accel Partners is also participating meaningfully to the round.

Pillpack signing Term-sheet

Yes this his how this stuff gets done - Exhausted but happy TJ and Elliott (behind camera) with George and Rafa signing the term-sheet

It's not so much that raising a big round in itself makes me happy (though clearly, it does), it's the fact that our team can now take their dream of better medication through design to a very wide audience.

Better Medication Through Design

PillPack is a full-service pharmacy designed to simplify the process of managing multiple medications through a combination of packaging, technology, and service.

Pillpack one of these companies that exists at the intersection of design, technology and health with a simple mission : to help people medicate better.

Every two weeks, PillPack ships a personalized roll of pre-sorted prescriptions, vitamins and OTC’s, in individual packs, and the company manages refills for customers by coordinating with physicians and insurance providers.

Everyone now sings the praises of good design but few understand how painful it is to truly achieve excellence.  Pillpack has always obsessed about the little details to ensure the service is "just right".  As a young company, we over-invested in design from the start, internally and externally, including taking on design-firm IDEO as an early equity partner in the company.

Design pays off in many ways (such as winning Webby Awards) but most importantly for a trust-based service such as ours, design succeeds in giving users great confidence in the product from the get-go.  Indeed, they correctly assume the front end is as well executed as the back end.

As for myself, I always think of my job as that of an architect or a designer so working with a company like Pillpack is real privilege.

Passion and Vision shared by Investors 

It's funny how serendipity plays a role in our business.  

I originally met Pillpack in the context of Techstars Boston.  I did not mentor the company but I kept asking everyone "who's the team to back?" to which most people who respond "Pillpack".  My colleague Dustin who knew Elliott organised coffee and boom! I was hooked (as you can tell from my blog post).   I joined an equally bullish and passionate investor in seed investor David Frankel of Founder Collective.

I continue to be a fan of the company and pre-empted any attempt at Series B fundraising as soon as I joined Accel.   Still have the burn scare from cooking omelettes for TJ and his wife at their East Cambridge flat to prove it :-)  We closed that round only a few days after my start date!  

Our Series C raise started with furious pace as we approached only a few investors who we thought would be a natural fit for one these "scale rounds".  I talked to my buddy Rafael (a founder of Learnboost, backed by my partner Jeff at Atlas) about the company and he and George immediately took the bull by the horns.  They had been monitoring the company, loved the vision and as I did immediately embraced the founders.  

Pillpack's board and management team were super-impressed by the vision and conviction that team CRV displayed and we are incredibly excited to have them on board.  A little personal nod to Pravin/Tyler at Menlo who displayed such a deep grasp of the space and such wonderful engagement with both company and investors. 

When we raised the Series A round (I was with Atlas Venture at the time), I made the rather bold statement to the Verge that we wanted to "the most recognized name in pharmacy with a brand and reputation that matches that of Apple".  

Cringe, me ?  Noooo:-)

I stand by that lofty goal of becoming the Apple of Pharmacy (with 100% reliable products) and raising this round with such a fabulous group of investors takes us one little step closer to achieving that vision with our fabulous new band of investors and some serious balance sheet depth to enable the wonderful team at Pillpack.

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Feb 17
Fred Destin

Developing London tech clusters beyond Shoreditch: Croydon ?

 Here in London we're all very proud of the progress made over the last few years.  Having come back from 4 years in Boston, I have been surprised by the level of maturity that we have achieved and how far we have come.  

But London is a city of 9 million and our efforts and mindshare right now are still very much focused around Mayfair, Soho, City and the City Fringes.  The question is: how do we successfully take innovation into Dalston, Hammersmith or even Croydon?

London Rising

Perhaps the fast and furious progress London has made is best highlighted by the following data in the recent trade mission led by Mayor Boris Johnson (in collaboration with London &Partners):

  • UK tech firms based in the capital attracted more than $1.4 bn in VC funding in 2014, double the amount in 2013. 
  • The UK has produced at least 11 technology companies worth more than $1bn (£590m) since 2000, including London-based firms Just Eat, ASOS, Zoopla, Shazam and Markit.
  • London attracts the best talent from all over Europe and the world;  it has 6 of the world’s top 100 universities (Imperial, LSE, King's, UCL), including 2 in the top 10 (Oxford and Cambridge).  
  • London has the largest IT sector in Europe, more than twice the size of any other city.  Today 382,000 people working in computing, gaming, telecoms, film and media, second only to fin tech.  London is now the world's largest centre for FinTech, with 44,000 people working in the sector – more than both Silicon Valley and New York.  
  • The tech giants have followed : both Google and Facebook chose London to build their largest hub outside of the Valley.

The next challenge for London is to drive innovation deeper into the natural clusters that have formed inside and around the capital.  The TechCity initiative, launched in 2010, smartly decide to espouse what was already happening on the ground by aligning itself with the burgeoning cluster of Shoreditch and Silicon Roundabout.  With proximity to the City and a high density of digital companies, funky bars and coffee shops, this was pretty much a no-brainer.  But as Cory Doctorow pointed out, the pressure to give to more and more commercial developments (witness the sad fate of the Truman Brewery) creates exciting opportunities for the likes of Peckham and, perhaps, neighbouring Croydon.

Croydon Tech City, anyone ?

I was recently approached by Francois Mazoudier, who is leading a team currently bidding for the design and management of a new Croydon Tech City initiative.  His ideas around what it would take to make such an initiative successful got me thinking too. 

Croydon is a large town about 9 miles south of Charing Cross and a populous part of Greater London, yet most people have no reason to venture there.   So if you are sitting in the shoes of the town councillors, how do you think about developing a vibrant and sustainable cluster ?   I am going to assume that the town's objective is not to create a vibrant community of makers, artists or small digital agencies but really to put Croydon on the map as a destination for the best tech companies, so that the next Transferwise or Shazam decides to build and maintain HQ down there.

The easy part 

These days setting up, running and operating a co-working space cum incubator is not the operational challenge it once was.  Technology is highly standardised, funky fire-rated furniture readily available and SaaS services to help you run your co-work space cheap and varied.  The logistics are really nothing more than table-stakes and will not set you apart.  In fact London is teeming with co-working spaces and incubators of various guises with varying degrees of success.

Adding value through space & experiences 

Most co-working spaces in London are standard issue. Rows of workstations, cell block meeting rooms, a tired ikea sofa and a ping-pong table for the lame cool factor have become the co-working norm - not exactly inspirational.   The proper design of a work environment, carefully thinking through fluid use of space, way finding, noise constraints etc. can turn a boring utility into a haven for creativity and community.  Frank Gerhy's hand in designing the Facebook's office in London reflects the hacking values of the company in the physical environment (unfinished stairway, completely unstructured communal spaces) and mentally encourage employees to continue to experiment.  At the extreme end of the spectrum, you will find next-gen co-working environments like NeueHouse  with its rotation art installations, exceptional barista and state of the art digital studio.   As designer Haley McLane would say of her Clypd offices : "I don't design offices, I design experiences.   The space and amenities serve the purposes of generating experiences that innovators will enjoy and thrive in".

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At Facebook, you can work in a VWKombi too

The message is this: A deep understanding of the unique dynamics of co-housing vibrant startups in a single well designed hive, serves to move the experience well beyond the traditional co-working space.  NeueHouse would call it (a) "giant machine for creating".

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Neuehouse's "Spanish Steps", a place for unforeseen experiences

Adding value through Community 

The best co-working and incubation spaces are distinguished by the quality and vibrancy of their home-grown community. The features list of their office environment are secondary.  

The most extreme example of this is Y-Combinator, which does not have a residential program but thrives through its exceptional network of mentors and alumni. This network has become a magnet for the world's best emerging entrepreneurs (see this infographic).  I mean, where else do you get to hang out with Dropbox founder Drew Houston ?

Facilities-based co-working spaces need to rely on both internal community (startups, exec team) and external community (mentors, investors)  to thrive.

Community is a concept easily thrown around but it has become a loaded word for me.  Because entrepreneurship has become so aspirational, it is easy to get together a large posse of wantrepreneurs, B-list mentors and assorted group of people who feed off innovation but don't actually contribute that much to it (which is why you will hear credible guys like my former partner Chris Lynch vent anger at the wannabes sometimes).

I think that if one is serious about achieving a high quality, sustainable community with startups that not only get off the ground but scale, being selective and intentful about community creation is a core requirement for success.  This means getting the top angels, the VC's, the entrepreneurs who have actually built companies from scratch engaged with your startup community.  Success breeds success.

Putting on your A-Game

So as I am sitting here thinking through how to make Croydon Tech City successful, here is the advice I would recommend to follow: 

  1. Facilities are table stakes and, frankly, commodity.  Anyone can deliver great wifi and software to book meeting rooms and organise events.  It's all in the cloud and it's all cheap.  Well-serviced desks are a requirement but not a differentiator.
  2. Push the boundaries hard on smart space design.  The physical instantiation of you co-working environment becomes your brand and drives the experience of the space.
  3. To the extent possible, be ruthlessly selective about who comes into the co-working environment.  The list of startups working inside your space should be aspirational in itself.  Great people will attract great people.
  4. Strive to get the A-Listers. If you can get the top angels, mentors and venture capitalists in the London ecosystem to engage, your virtuous circle will kick in.  Seed financing programs and business mentors are a dime a dozen, but those who have been associated with real, meaningful successes are few and far between.  Find a way to get them to engage and really put Croydon on the map.
  5.  

There is much for towns like Croydon to do.  The challenge cannot be underestimated but Rome, as they say, was not built in a day and the opportunities abound.  Perhaps the next Zoopla, Deepmind or CSR is being built right there, right now and waiting to be discovered. 

With the right ingredients, level of ambition and clarity of intent, there is no reason why London cannot continue to deliver world class innovation clusters away from Shoreditch and in areas that are at face value less obvious, just like Croydon Tech City. 

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