[media-credit name="Snigdha Sengupta" align="alignnone" width="150"][/media-credit]Brad Feld is co-founder and managing director of Boulder, Colorado-based early stage venture capital firm Foundry Group. Before Foundry, he co-founded Mobius Venture Capital and Intensity Ventures, a company that helped launch and operate software companies in the US. Feld has been blogging since 2005 at Feld Thoughts. He also blogs at Ask the VC, which seeks to answer questions on venture capital, with Foundry colleague Jason Mendelson. In a recent post at Feld Thoughts, he outlines some ground rules for raising seed money.

Some Complexities of Venture Capital Seed Investing

By Brad Feld

Mark Suster, a partner at GRP Partners, has an outstanding post up this morning titled VC Seed Funding is Dead, Long Live VC Seed Funding. Mark started blogging recently and has quickly turned into my second favorite VC blogger (after Fred Wilson) – if you don’t subscribe to his feed, you should.

Mark just did his first seed deal, a $500k investment in a company called Ad.ly, and his post is a long essay on how he’s thinking about seed investing these days. He makes the appropriate warning (and differentiation) between VC investors who view seed investments as “options” on future rounds (e.g. they toss a little money in and then generally ignore the company until the next financing) and “active seed investors” (like First Round Capital, SoftTechVC, True Ventures, Union Square Ventures, and O’Reilly AlphaTech) who view the seed investment as their first round of several as they help get a company up and running.

I’ve been making seed investments since 1994.  I don’t know the actual number that I’ve done, but as a VC (starting in 1996) it’s probably more than 25.  In our most recent fund (Foundry Group) that we raised in 2007, we’ve made six seed investments (AdMeld, Gnip, Lijit, Next Big Sound, Standing Cloud, and Trada ) out of 17 investments in the fund to date and have one more that we expect to close this week.  Interestingly, we did only two of these by ourselves; the other four included co-investors such as First Round Capital, Spark, SoftTechVC, Boulder Ventures, and Alsop Louie.

In my world, there is no real difference between a seed investment and a “Series A investment.”  Ironically, when I started doing this, seed investments were the Series A investment; at some point in the last decade a bunch of VCs started saying “we only do Series A investments” so the seed investment became “less than the Series A” investment, although it never got relabeled so you see a lot of Series A (seed) and Series A-2 (the next round after the seed) investment rounds these days.  Regardless, in my world, a seed investment is the first round – when I make a seed investment I’m committed.

VC’s keep reinventing seed programs.  In 1994 when I was first making angel investments with my own money that I got from selling my first company I encountered several VC firms that had “seed programs.”  These firms had an accelerated way to invest $250k in an entrepreneur to help him get up and running quickly.  These investments were always convertible debt that converted into the Series A round at a discount.  The entrepreneur quickly got $250k, the VC got a seat (usually a controlling seat) at the table for the next round, and off they went.  I participated in a few of these – some that worked (e.g. a new VC came in and led the next round) and a few that didn’t (no new VC showed up, the entrepreneurs and the seed VC watched tensions escalate, and eventually there was an unhappy ending.)

Over time, I soured on the “convertible note seed funding” approach.  I’ve written about this in the past, but at the minimum I think it misaligns the entrepreneurs and the early stage VC.  More importantly, in my experience, it’s a signaling device – the seed VC isn’t as committed in a convertible note round as they are when they price a seed round and do it as a typical VC preferred financing, albeit with lighter terms.

One key thing for an entrepreneur to test with a potential seed round VC is whether or not the VC will invest in the next round by themselves.  The specific question is “Do I need an outside lead for the next round, or will you do it yourself?” While either case is fine, this sets the ground rules clearly for financings going forward.  In our case, we are perfectly happy to do the first few rounds of financing ourselves.  Some other great seed investors, especially those with smaller funds need a new investor to lead the next round.  Then there are traditional early stage VCs who have specialized seed programs where the rules of engagement are that there needs to be a new investor to lead the next round.  Knowing where you stand and what the ground rules are before you consummate the seed round is important.

With the emergence of pre-seed programs like TechStars I’ve had more visibility into VC seed investing activity from other VCs.  In Boulder, we just finished year three of TechStars and while plenty of the TechStars companies have their first round of financing include angel investors, I think six of the ten companies this year have (or will) close VC-led seed rounds.  I haven’t decided if there is actually more seed activity in 2009, or if VCs are focused on hunting for seed deals in more qualified places.  Regardless, being a great VC seed investor isn’t a no brainer and I encourage entrepreneurs to make sure they know how their VC investor is going to behave when it comes time to raise the next round.

Note: This post has been re-produced at Startupcentral with prior permission from the author, Brad Feld

At present, the EB-5-Visa is available only to investors from other countries and requires a minimum investment of $1 million ($500,000 in specific places that have a high unemployment rate) and the creation of 10 jobs. Advocates of the movement, among them Brad Feld, Paul Graham and Mark Speiser, reckon that by allowing entrepreneurs to also avail of the visa, many more US jobs can be created in the long term.

Feld, co-founder and managing director of venture capital firm Foundry Group, started pushing the cause with missionary zeal after being exposed to the experiences of two startups from the TechStars portfolio. TechStars is a mentorship-driven seed investment fund and Feld is one of the mentors there.

“I was hit squarely in the face with this over the summer.  Two of the ten TechStars Boulder teams were comprised of non-US founders – two from Canada and two from the UK.  Both lived in Boulder for the summer and want to relocate here and build their businesses in the US (and – specifically – in Boulder).  Over the summer we struggled to figure out ways to get them Visas – all of the proposed approaches were expensive, risky, and tiresome.  Both companies are still trying, but each are now seriously considering returning to their home countries to build their businesses.

I cannot come up with a single reason why this makes any sense from a US perspective.  These are young, talented entrepreneurs that have come out of a three month program with amazingly interesting startups.  They are in the final process of raising their first rounds of financing. Post financing they will be creating US based high tech jobs.  If they are successful, they will create a lot of jobs.  Plus, they are young so they will do this multiple times in their lifetime,” Feld wrote at Feld Thoughts on September 10. Read the rest of the post here.

Getting more non-US startups into the country does imply deal-flow for venture capitalists such as Feld. But more important than the volume is the quality of deal-flow. The US Silicon Valley’s legendary success with breeding some of the most iconic startups of our times owes much to immigrant entrepreneurs from developed and developing countries. Indians, for instance, can take a bow for a Sun Microsystems (Vinod Khosla) or a Sycamore Networks (Gururaj Deshpande) among many others.

Also, if the legislation does come through, it will help ease some of the tension around the protectionist rhetoric that has been emanating from US government quarters of late.

What’s most interesting about this movement is the collaboration between venture capitalists and entrepreneurs to create a powerful and united lobbying mechanism for legislative change. Makes sense because both stand to benefit immensely.

Hopefully, over time, we will see similar collaborative initiatives/movements take root in India.