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Key takeaways

Seed funds are highly selective. Seed funds do not scatter their investment and hope something takes off. On average, seed funds invest in 8-20 new companies each year, but meet with hundreds and get sent thousands of pitches. Seed funds tend to have one or more sector theses about the market driving their investment strategy.

Seed folks like to stick to seed. Why? They could move up the stack, raise a bigger fund and make more money. However, seed investors like seed because it provides an opportunity for them to see themselves making a return — provided their thesis and network is strong.

Seed funds raise like it’s 2009. Seed funds prefer to raise a new fund every 3 to 4 years, unlike more recent trends in venture with larger funds raising every other year. This time horizon for raising funds is fitting since the companies in a seed fund’s most recent portfolio will take time to prove product market fit and grow their valuation.

Fun fact: Hunter Walk on theYouTube acquisition by Google back in 2006. “It was called Google’s folly. They’re spending a billion and a half dollars for dogs on skateboards. Is this even legal? The hosting and streaming costs were high. At one of the internal TGIF versions, [Schmidt] announced the acquisition. Somebody asked Eric, ‘you paid a lot of money, how do you know that was the right amount?’ Eric paused for a second and said: ‘It’s definitely not the right amount. It’s either way too high or way too low. And we will know in 10 years.’ ”

Highlights from seed investors

7: Satya Patel and Hunter Walk, Homebrew Founders

Hunter on the market gap at venture

“I was surprised to find that the market gap at venture was returning emails, showing up for meetings [and] spending more than 51 percent of your calendar with the companies that you funded versus that next company, that next fund to raise, that next conference to speak at. We took a model that basically says we will pick up the phone, we will answer the email, we will be on the whiteboard with you.”

Satya on the three things companies have to do well

“All companies at this stage really have to do three things well: they have to build a product, distribute that product and build a team. So that’s where we spent a lot of time.”

Satya defines a Homebrew company

“A Homebrew company is one in which there is a mission-driven founder who has a firm belief about how the world should operate and a strong set of hypotheses for how to help get there. He or she has experienced the pain being addressed firsthand, has empathy for the customer and a deep appreciation for the target industry, disrupting it with love rather than contempt. The founders want to build a cap table that acts as extensions of the team, helping them increase the scale, velocity or probability of the company’s success. The company is building something that democratizes access to products, services, data or customers for constituencies and industries that haven’t had access previously. When we come across like-minded founders operating in industries in which we feel we have expertise, relationships or know-how, we think of those as Homebrew companies.”

8: Jana Messerschmidt and Katie Stanton, Founding Team #Angels

Jana on founder terms

“When you’re a founder, the terms that are set are ultimately driven by your ability to negotiate. Certain founders may only get one term sheet, so that’s the deal they have to accept because they don’t have as much negotiation leverage. But other founders might go to Sand Hill Road and get six term sheets in a week; they’re going to drive the negotiation, they’re going to have lower dilution and higher valuations, and they’re going to set the terms. That’s something we talked about a lot in our group. Do women have as many options when they go out raising? Are they able to command and demand that same sort of excitement about the companies that they’re building where they’re able to drive the negotiation process and set those terms?”

9: Katie Rae, The Engine CEO

On the second thing

“The second thing I learned is that the effort you put into this and the love you show for the entrepreneurs is so fundamental to great outcomes. You really learn to trust each other, because without that trust people just block each other off and stop telling the truth or stop revealing what’s actually happening. It was so shockingly apparent to me that you have to be genuine in these relationships. It’s not a transactional business, and certainly not in the seed stage. These are early companies where a hundred things could go wrong, but only one needs to go really right to win. If you’re focused on all the wrong, you will kill these companies. That’s what I learned.

“It’s a lesson that gets replayed in almost every piece of life, whether it’s your relationship with a spouse or your children. It’s always the same lesson.”

On the time frame for patient capital

“Whatever the biggest technical risk is, you want to take that out in the first four years. That’s what opens all kinds of capital to the company, whether it’s venture capital, non-dilutive capital or project finance capital. Most funds are 10 years, which means you must be in the market truly deeply within the first four years. Otherwise, you’re not going to get to exit within 10 years. We like to have a slightly longer time frame than that, ours is up to 18 years. And that allows us to take a different set of risks in technologies that we think are really important.”

10: Vas Natarajan, Partner at Accel

On the Rise of Cloud and APX

“The cloud is redefining how end users are working together and collaborating with one another. We spend a lot of time thinking about the future of work [and] the rise of new collaboration productivity systems, and how the cloud has been a major enabler for that.

“Part and parcel with the cloud is the rise of the API economy we call APX: the X means everything. What APIs do is actually integrate multiple different subsystems, so data is no longer siloed and workflows are no longer siloed. You can actually stitch together work across multiple different things. It has allowed entrepreneurs to create new cloud categories that are almost super-sets of individual pieces of workflow.

“The rise of cloud and, in particular, the rise of APIs, are big themes for us right now. We think the combination of those two is going to create a next set of cloud companies, both at the application tier, but also the APIs themselves will become interesting businesses.”

11: Shuly Galili, Co-founder of UpWest

On the challenges of building distributed teams

“It takes specific founders. Ultimately the sacrifice is on the CEO who has to be very communicative. He needs to create a cohesive environment, even though the team is distributed, ultimately live on an airplane, and not say ‘We’re a U.S. company, and you over there are some sort of an offshore.’ It’s actually the other way around; our goal is for our CEOs to share best practices with each other.”

12: Beezer Clarkson, Managing Director, Sapphire Partners

On returns for early-stage funds

“We look to�� underwrite Series A funds with 3x net, and a seed fund [with] 5x net. We have to believe that’s possible. We will look at when you’ve made investments, how many of them have become a 5x or 10x return and how many of those need to be true. And who’s in the team? How big is the team and what are the team dynamics?

“Nothing guarantees you returns. We have yet to find a fund that has had a significant return, call it 5x, that has not had either a decacorn type exit or multiple billion-dollar exits. If you’re a $50 [million] or a $75 million size fund, you still need to have multiple billion-dollar exits.”

On fast in Venture

“The feeling of fast in venture is actually the growth of the companies, and not the management of the funds.”

Main photo courtesy of Frank Vessia via Unsplash.

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To quickly recap, we talked with Accel, #Angels, BBG Ventures, Cowboy Ventures, The Engine, Floodgate, Homebrew, Lerer Hippeau, NFX, UnCork Capital and UpWest.��Here is the customized Crunchbase Pro list of organized by last equity funding amount from smallest to largest.��

Vas Natarajan: Partner, Accel

Natarajan pointed to , a site reliability engineering platform that addresses those instances when a company’s site goes down, potentially costing millions of dollars in lost revenue.

led the seed in 2018. Blameless raised a in March 2019 led by Accel and .

“What Blameless is building is a command and control for engineers, DevOps leaders, product leaders to be able to collaborate by Slack, pull in all the relevant metrics that they’re seeing from different infrastructure monitoring problems, and then push fixes as quickly as possible.”�� said Natarajan.

Secondly is , a data privacy technology company that raised a in April 2019 from Accel.

Every technology company needs to know where their users are logging in from around the globe, and the laws of that country. “That is a whole set of infrastructure solutions, and front end consumer facing tools that Transcend will build and sell for any company,” said Natarajan. “If you go to privacy.trulia.com or privacy.hoteltonight.com, I as an end user can see your privacy policy, I can log in and see what data you’ve collected on me and then I can hit delete. Transcend powers all that.”

Jana Messerschmidt and Katie Stanton: Founding Team #Angels

The #Angels founders have their eyes on , a marketplace that matches celebrities with consumers for personalized video shoutouts. Cameo raised a $50 million Series B in June 2019 led by .

“The consumer will script what they want the celebrity to say. So it could be a happy birthday message. It could be an engagement message. It could be congratulations on your job promotion. Whatever you want it to be. And then the celebrity decides whether they want to fulfill it. The celebrity also sets their price. You have everything from cameos for $25 all the way up to slots charging a few thousand dollars,” said Stanton.

Next is that helps women track their fertility at a fraction of the cost. Modern Fertility raised ain June 2019 led by of . “They’ve helped demystify fertility, and giving you more power towards understanding how fertile am I right now?” said Stanton.

Susan Lyne: Co-founder, BBG Ventures

“ is a marketplace for very large farms to sell the 30 percent of produce that gets ploughed under, because it doesn’t meet cosmetic standards for grocery,” said Lyne who invested in its seed round. Full Harvest connects large farms to food businesses. led its in August 2018.

Then there is .

“GoTenna allows you to send a text message and your location when there is no wireless coverage, no cell coverage, nothing. It was really developed initially for rock and roll concerts, and off-grid sports,” said Lyne. Since its early days it has been adapted for more critical use. “It’s just a great communications protocol that allows anyone to communicate in a disaster.”

Lyne invested in GoTenna’s seed round back in 2013. Most recently it has raised a in June 2019 led by .

Ted Wang: Partner, Cowboy Ventures

is an AI platform for accounting firms to automate routine tasks.

“What you’re really stopping humans from doing is reading and typing. This makes people more effective in their jobs. I can’t imagine anyone is going to be unhappy about not having to do that,” said Wang.

Vic.ai raised an in September 2019 led by .

“ is a company that currently has a product that looks at your job postings, and is able to analyze the text of the job postings and help you to write them in a way that they’ll be more effective,” said Wang. “You can send a posting through the Textio system, and it will send you an augmented version of the same text with suggested changes or highlights.”

Textio raised a in June 2017 led by .

Katie Rae: CEO, The Engine

“ is miniaturising a fusion plant with an invention that allows them to get to net positive energy,” said Rae of this fusion energy company built on top of decades of research. “We believe what they’ve invented will allow you to get there. If that’s true, you basically have endless clean energy. This is a team that has already proven out a bunch of the most significant milestones, and will continue to do that over the next two to three years.”

Commonwealth Fusion raised a in June 2019 led by , with , , and along with other investors.

Next up is , a company that develops technologies to engineer human primary cells and iPSC’s for both discovery and clinical manufacturing of advanced therapies. According to Rae, “They looked at the biotech industry and asked, ‘Why are there PhDs basically injecting things into cells?’ Would there be a way to speed this up in the biotech industry by ten thousand X?”

Kytopen raised a in May 2019 led by and .

Iris Choi: Partner, FloodGate

has built software for simulation testing of autonomous vehicles. Applied Intuition raised its Series B of $40 million led by in September 2019.

“Instead of physically having to run autonomous vehicles in Arizona in a quarantined off area, you can do billions of test runs, in various scenarios, using software. There is a benefit to having a mutual third party, instead of everyone building it in-house whether you are an OEM or a rideshare provider. This is only going to become increasingly necessary in the future,” said Choi.

Another company worth watching is , which offers business owners a simple procurement app for their daily supplies, reducing time spent on managing their inventory, and helping lower waste. Cheetah last raised its in October 2018 led by and .

Satya Patel and Hunter Walk: Homebrew Founders

“�� was started by two brothers, one who was a Navy Seal and the other who was an engineer at MIT. And the brother who was a Navy Seal came back for his tour of duty in Iraq and Afghanistan, and he came to the realization that none of his colleagues, fellow soldiers died in battle,” said Patel.

“They died when they were doing reconnaissance into areas where there was no information about the building or the terrain that they were going into. And it seemed crazy to him that that can’t be solved in some different way. And so he got together with his brother, and they decided to build a company called Shield AI, which is developing fully autonomous drones for the public sector. These drones can by themselves navigate into buildings and caves. Collect intelligence about what’s going on inside through thermal cameras, regular cameras and then communicate that back to people who can do analysis on it,” said Patel.

“Shield AI is a company that has such a powerful mission around ensuring the safety of civilian and military lives.”

Shield AI raised a $25 million Series B in August 2019 led by .

Also on his radar is , which�� creates software infrastructure for any software company to become a payments company. Finix raised a in July 2019 led by .

“We think of it as democratizing access to a financial services infrastructure, helping a whole generation of software companies create more value for themselves and their employees and their customers,” said Patel.

Eric Hippeau: Co-founder, Lerer Hippeau

is an AI powered app for personalized health information

“They can answer pretty precisely all your health questions. If you use the app then you have the choice of very quickly getting on in a telemedicine way talking to an experienced doctor,” said Hippeau.

“It’s also a B2B business where you’ll see it appear at the front end to a number of different kinds of service providers, who would rather have something like this, as the first point of contact. It might be a hospital or it might be a clinic so that they can better direct the patient to the right service,” said Hippeau.

K Health last raised ain December 2018 led by , and .

Also up is , which automates retirement plans for small to medium sized companies. “They basically offer a very easy, low cost for SMBs. It’s really low cost,” said Hippeau. “They do all this hard work for about $8 per employee per month. And so they now originate a huge percentage of all new 401K plans in the United States.”

Guideline raised their in December 2018 led by .

James Currier: Co-founder, NFX

New York-based centers on financial products in the real estate sector.

“They allow people to buy residential houses for cash,” said Currier. “Ribbon gives the cash for two to eight weeks for the transition to take place and then the home buyer gets a mortgage. It really helps when you want to buy a home before you sell your other one.”

Ribbon raised a led by �� in October 2019.

is the largest repository of in the world, for disease detection. “They’ve created a platform play, and then they’re working with pharma and agricultural companies to develop diagnostics and therapies to edit change in a responsible way,” said Currier.

Mammoth Biosciences raised its in June 2018 led by the .

Jeff Clavier: Founder, Uncork Capital

“ is a hardware company that makes air purification technology for allergy, asthma or respiratory disease,” said Clavier. “It has a huge potential market. When you think about pollution in India and China this is a big market.”

Molekule raised their in November 2018 led by .

Another on the watchlist is , a chat inbox for teams. “Companies can aggregate a bunch of email, text accounts and any communication into one single chat inbox where teams can collaborate and have way more efficient customer support,” said Clavier.�� Front raised a led by in 2018.

Shuly Galili: Co-Founder, UpWest

is a company automating accounts payable to decrease time spent chasing invoice approval. Stampli raised a in October 2019 led by .

“They’re dealing with customers who have thousands and thousands of invoices, are inundated with paperwork, with a paper trail, with not knowing where the invoice started, and when is it going to be paid,” said Galili. Customers include retailers through to companies that have many outsourced vendors.

Also up is , a cybersecurity startup that addresses the risks in a company’s IT systems. CyCognito recently raised an funding in Nov 2019 led by .

“The attack surface has changed because it’s no longer just the technology that is on your laptop. There are many ways that servers, mobile technologies, customer lists and credit cards are being exposed today,” said Galili. CyCognito monitors these shadow risks an IT team might not be aware of to minimize exposure to attack.

Pro Tip. Crunchbase Pro subscribers can save this to their account to track changes over time, and get alerts.��

To Note: Some of the investors mentioned in this article are ��

Illustration: .

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Gené: Welcome to Katie Rae, CEO and Managing Partner of The Engine. How did you get into this role of an operator in tech, and then switch to investing?

Katie: I ended up at business school where I met my first set of engineers who wanted to start a company. I was so naive that I thought maybe I could help them do it. We just started a company. It was that simple. It’s where I learned what a venture capitalist was, what an angel investor was, and from there I joined Elon Musk’s first startup called . I learned how to be a general manager, how to run things, and build technology companies.

I had helped so many people start companies over the years, I wanted to learn how to be an investor. I met at . He was one of the first people I called and said, ‘Brad, you’ve been doing this for a long time. How should I think about this?’ He’s such an open wonderful person that he very earnestly sat down with me and started to talk about it. He said, we’re just kicking off . You want to learn how to run a fund? He and hired me to run the Boston program of Techstars. This is late 2010. It all kind of went from there. Then I decided to leave Techstars and raise my own fund. I started a firm called .

Gené: What did you learn through running Techstars in Boston?

Katie: There’s almost no shortcut in venture. You have to see your first two to three thousand companies before you can start to judge teams fairly. Do they meet the bar or not? Everyone gave the same number, two to three thousand companies. For most people that takes five to seven years. But when you run Techstars, in the first year I met two thousand companies.

The second thing I learned is that the effort you put into this, and the love you show for the entrepreneurs, is so fundamental to great outcomes. You really learn to trust each other. Because without that trust people just block each other off, and they stop telling the truth or they stop revealing what’s actually happening. It was so shockingly apparent to me that you have to be genuine in these relationships. It’s not a transactional business, and certainly not in the seed stage. These are early companies where a hundred things could go wrong, but only one needs to go really right to win. If you’re focused on all the wrong, you will kill these companies. That’s what I learned.

It’s a lesson that gets replayed in almost every piece of life, whether it’s your relationship with a spouse, or your children. It’s always that same lesson.

Gené: The Engine was founded fairly recently in 2016. I think you joined in 2017?

Katie: It was formed as an entity at the end of 2016. We closed the funded in 2017.

Gené: The Engine is part of MIT, is that correct?

Katie: It’s a spin out of MIT. It’s a for profit spin out, an independent entity. We have a board of directors in which two members are from MIT. Then we have six members outside MIT.1

Gené: What is different about The Engine?

Katie: I’ll tell you what’s the same and what’s different. We are a public benefit corp at the very top, and some other funds are that as well. But we’re on a mission to create, enormous impactful tough tech companies. We start within the Boston region. We are targeted on solving really big problems with technology. That’s why you see us in things like clean energy, or how to cure disease, or feed the world’s people. At the top, we have a true mission, and our board holds us accountable to that mission.

MIT’s mission is also impact, and not only through technology. Our missions are aligned. We have access to things that are very unusual. This deep rich history of incredible technology development, and people, but also facilities. MIT opened all their facilities to the startups. They helped us build out this first space. We’re thinking about how to 10X everything we’re doing. It’s why the breakthroughs matter because they actually have to impact the world. It’s not for knowledge only, it’s both for knowledge and to impact the world.

Gené: What is the connection with MIT Media lab?

Katie: The is part of the institute, and it’s funded quite differently. The way we work across MIT is we work with all the different professors, postdocs, and PhDs and some of the undergrads, on the companies they’re thinking of creating. We try to work with the ones that we believe are in this kind of tough tech zone and are ready to spin out of the university. We will nurture very early, and try to help those companies along and then fund them when we think they’re ready to spin out.

Gené: How do you plan to invest the $205 million fund?

Katie: We’ve made 19 investments to date. It’ll probably be about 30 companies to 35 companies in this portfolio. We fund the gap between the lab and other venture capital. We do the first four years of a company. So pre-seed to Series A. If we were willing to invest into technical risk, the returns could be extraordinary. We spend the majority of our time in true technical risk with massive opportunity, if they get through that technical risk.

Gené: How many partners on the team?

Katie: There are three partners , , and myself.

Gené: How much do you typically invest? And how much equity do you like to get for that investment?

Katie: We like to get 10 to 20 percent of the company and the investment varies. Our first checks are from one to five million dollars. Sometimes we do experimental checks that are less than that because there’s something to prove out, or we’ve got to develop the team.

Gené: What is the time frame for patient capital?

Katie: Whatever the biggest technical risk is, you want to take that out in the first four years. That’s what opens all kinds of capital to the company, whether it’s venture capital, or non dilutive capital, or project finance capital. Most funds are 10 years, which means that you must be in market truly deeply within the first four years. Otherwise, you’re not going to get to exit within 10 years. We like to have a slightly longer time frame than that. Ours is up to 18 years. And that allows us to take a different set of risks in technology that we think are really important. For , if this is the first commercialized fusion company, it will be very valuable. But it will take a number of years, more than most venture capital is willing to take to get there. Maybe four or five years longer. If they get there, the win is enormous. You’ll see those across the tough tech space, whether it’s in biology, or chemistry, or physics.

Gené: Are there a couple of companies that you’re excited by and why?

Katie: is doing something really extraordinary. It’s an almost perfect Engine story. It’s built off of 50 years of research, in the plasma fusion center, and billions of dollars of U.S. government funding. An incredible team of postdocs launched the company out of MIT. What they’re doing is miniaturising a fusion plant, with an invention that allows them to get to net positive energy. The problem is that it hasn’t generated net energy, because it takes so much energy to run the power plant. We believe what they’ve invented will allow you to get there. If that’s true, you basically have endless clean energy. This is a team that has already proven out a bunch of the most significant milestones, and will continue to do that over the next two to three years. They are a year old as a company.

Another one that that’s probably more accessible. There’s a company here called . It’s built by a mechanical engineer out of MIT and a research biologist. They looked at the biotech industry and said, ‘Why are there PhDs basically injecting things into cells?’ Would there be a way to speed this up in the biotech industry by ten thousand X. It’s a platform. It affects almost every biotech company. They are 18 months old. We did the seed round.

Gené: Is there anyone else doing what you’re trying to do around the world?

Katie: I’ve talked to probably 150 universities in the last two years. I think there are some gating factors for some of the universities, but I think you’re gonna see more of these partnerships. They have so much physical infrastructure that tough tech companies need. There is discipline that is important to company development by getting capital in, which formalizes a board and formalizes a process of focusing on things that could be enormous.

One of the things we love to do is help others. Teach others what we’ve learned already, in collaboration, so that we can learn together. There are some venture funds like and that do look at these big breakthrough technologies. We do a lot of work with on the clean energy side. These are funds that have the same longer time frame, big technology focus.

Gené: Are pockets around the U.S. that are focused on deep tech outside of Boston Cambridge?

Katie: You could look at Berkeley or places in the Bay Area, Stanford, and LA. There are pockets, certainly at the big universities like , , any of the big research universities. The concentration of startups really does end up mattering. When you’re one of three startups in an ecosystem versus one of three hundred, it makes a big difference. Concentrating these tough tech startups is very much on purpose. All the research will tell you that it is good for all of them, whether it’s talent or capital or infrastructure that clustering does matter. We think this is one of the best places in the country to do companies like this.

Gené: Is there anything we didn’t cover?

Katie: Sometimes people get confused between impact and returns. I don’t think you have to sacrifice return to go after really big impactful companies.

The second is that we really bet on scientists and engineers growing into the leadership of the company. We think it is fundamental that you have inventors that understand this technology, but then also want to grow into great business people. If you nurture them in growing into business leaders, they catch on super-quickly, and have the total package for running a company.

Gené: And these are people who haven’t gone through business school?

Katie: Most have gotten a PhD and probably done a postdoc. We don’t want people to think, you can’t be the CEO unless you have an MBA. Lots of great MBAs are great CEOs. But if you’re running a fusion company, you better know a lot about fusion or if you’re doing a biology company, you better know a lot about that. We like to build the business expertise around someone.

Gené: Well, thank you Katie.

Illustration: .