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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 Shuly Galili, founding partner of UpWest based here in Silicon Valley investing in pre-seed stage Israeli companies. What is UpWest’s charter?

Shuly: looked at what was the gap for Israeli founders at the very early stages. We started eight years ago in 2012. There wasn’t a seed environment established in Israel then. Startups were trying to bootstrap with very little money. However the number one pain for Israeli founders, was never money. Israel as an ecosystem is cash rich, market access poor. The number one pain that we identified very early was speed to market, understanding the customer, and who you are selling to at the seed stage. How do I validate my technology with the first US customer. It’s really hard to do it when you are far away. Many of my conversations with founders over the years before starting UpWest was, why are you testing it in Israel? Why are you not trying to do it immediately in your target market.

Our thesis from the beginning was, can we take these founders who are super-focused on the US market, give them a little bit of money and then mostly work with them on validation in the early days of the company, and then help them scale their business in the US. And that’s how we started in 2012 with a $2 million fund that we bootstrapped with friends, colleagues, angels and investors who are still involved to this day.

It wasn’t, ‘let’s build a VC’. We’re passionate about helping Israeli founders. The model of building a fund was the most aligned model that we could find. We do invest in primarily Israeli founders at the pre-seed, and seed stage, very early, pre-product market fit, who are anxiously looking to meet new customers, to validate their technology and then to build a bigger business here in the US. It means that they’re leaving their engineering in Israel. They are hiring the business know-how here in the Midwest, Silicon Valley, New York, or Boston depending on where the customer is.

Gené: Your most recent fund III was $18.5 million. How much do you invest at the pre-seed stage and how much equity do you seek to get?

Shuly: Today our average check size is between $250-400k pre-seed. We typically get around 8 percent. Then we deploy more capital at the seed and series A as well.

Gené: Do you co-invest for the first check in?

Shuly: We do our own checks. We may have added a few angel investors and people from our network, who are value-add, to act for the company in the early days — the CEO of Waze , and a unique angel investor that comes in at the early stage and plays a role at the board level.

We look at the category of seed and we see a lot of players. But few people understand the trials and tribulations that are going on between when a company starts and then to raise institutional Series A. And for us it’s important to have people that can really help the founders through those turbulent times.

Gené: After your initial investment are there firms that you like to work with?

Shuly: What we’ve created for Israeli founders is expanded capital. Within the Israel ecosystem there is a robust VC system. We just tripled that by having the relationships that are happening here. We co-invest with , , , people that understand both the type of technology that comes out of UpWest, as well as the founders’ mentality.

Gené: Is there a particular sector that you invest in?

Shuly: We’re sector agnostic. We’re the first check in a company. So if you look at the common denominator, it’s the character of these founders, and the fact that they are eager to take risk, in going to market without the cushy ‘we raised $10 million.’ We know it’s going to be challenging. You’re going to a place where nobody knows who you are, your background, or expertise.

In terms of sectors, we’re dividing it into three buckets. Sixty percent of our portfolio are typical for Israel in terms of domain expertise. Cyber-security, analytics, marketing tech, SaaS, B2B, and enterprise cloud infrastructure. Twenty percent would be emerging technologies, related to IoT,�� healthcare IT, agriculture technology, drones and robotics, that come out of either military or academia. Another twenty percent are companies who are innovative in the business model that they have. So companies in the future of work, like that are doing business software for small businesses. We lean a lot towards technical founders, and enterprise B2B.

Gené: You are meeting companies here or in Israel?

Shuly: We source out of Israel, mostly. Ten percent of our investments are US, 90 percent we source in Israel. We look at around a thousand startups a year, and we invest in about six to eight companies.

Our involvement is for the long term. How do you run distributed teams? Silicon Valley is really looking at that. We’ve been doing it for a long time. When we started one of the VCs was saying ‘we can’t invest in your companies because they are not all sitting in one place.’ For us that’s capital efficiency, when they’re hiring tech somewhere else. They’re getting the best of both worlds. How do you build a company that has two offices from day one? How do you really continue to grow these two offices, both hiring technology, as well as building the business here?

Gené: What are the challenges of building a distributed team that you’ve seen?

Shuly: It takes specific founders. Ultimately the sacrifice is on the CEO. It has to be a very communicative CEO. He needs to create a cohesive environment, even though the team is distributed. And ultimately live on an airplane. And not say we’re a US 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.

Gené: What is the stage that these companies start hiring here?

Shuly: The series A round is when they are seriously ramping up hiring here. Until then, a lot of the focus is on building tech, hiring a lot of great engineers in Israel. Some CEOs feel compelled to move earlier than others. Some CEOs have moved here immediately after we invested. Some CEOs after the series A. We really see the difference in that the longer you wait, the more difficult it becomes.

Gené: Finally, tell us about a couple of companies that you’re excited by and why?

Shuly: One of them announced funding last week (their Series B) a company called . They’re based here in Mountain View. There are industries that demand new technologies to automate and make it more productive. So Stampli is doing that for invoice processing. They are an accounts payable technology company. They’re dealing with customers who have thousands and thousands of invoices, are inundated with paperwork, with paper trail, with not knowing where the invoice started, and when is it going to be paid. Stampli improves with digitization and AI. They’re in the fintech space

Gené: Who is the target customer?

Shuly: Anyone from retailers to companies that have a lot of outsourced vendors. They raised a Series B from . Two brothers are the founders, one is the CEO and the other the CTO. The CEO is here building the team, the CTO in Tel Aviv.

Gené: And another portfolio company to watch?

Shuly: It’s a company called . Really incredible team in cyber that comes from the offensive side. They view customers from the hacker perspective. What is vulnerable? How do you really map the attack surface of Marriott? 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. We have been working with early validation, customers, and helping them get the funding.

Gené: Who are the customers are they talking to?

Shuly: Banks, hospitality, and enterprises.

Gené: Thank you Shuly

Illustration: .