The Shitake Hits the Fan

There has been over the past 18 months a Cambrian explosion of startup life, many incubated by angels and seed funds. And now the process of natural selection is beginning again.
I got back from the Valley Thursday and what I gathered from the people there is the same as what I’ve heard here: that many seed companies are having a hard time raising money.
Yes, second rounds are always hard, after you’ve built the product but before it has made much money. The difference is that today’s first-round investors are angels and seed funds, which sometimes aren’t even set up to participate in many follow-on rounds.
What’s made that worse is the market is becoming more cautious around post-seed deals. Everyone criticized the Wall Street Journal’s Pui-Wing Tam for being the first to notice a cash-crunch for seed-stage companies seeking follow-on rounds, but I think she nailed it.
Some early-stage entrepreneurs are now clawing at the walls, begging supporters for money and time. Many investors never promised more money or much time. The premise of some seed investments, especially from larger funds, is “optionality.”
Rather than making a serious commitment to a handful of seed-stage companies, larger funds are buying the right from many startups to lead a later round in the hope that one or two of them catches on with consumers.
One reason for this is that consumer internet investing has become a hit-driven business. Who could pick the next Twitter? When the question is one of tickling consumers’ fickle fancy, rather than a rational process of evaluating technology, it’s a crapshoot. So some investors play at the dollar tables, and roll the dice all night long.
This approach has led to the creation of more new businesses over the past 24 months than the Valley has likely ever seen. It has given entrepreneurs a shot at success many never would have otherwise gotten.
And some don’t need any more capital or advice beyond a seed round of financing. But I did, especially when I was first starting out.
I co-founded a company, Plumtree, that raised seed capital from Sequoia. Kirill, Joe and I closed the round, walked out to an ATM to check our balance, and began laughing hysterically.
Things went downhill from there. A co-founder left. Nobody bought the product. And we ran out of money. I felt like I was digging deeper and deeper into a hopelessly dark mine, looking for gold.
Then Pierre Lamond, the Sequoia partner on the deal, began working out of our office, acting as the virtual CEO.  Pierre made a point of being there the day one of his other companies went public. We looked at a news photo of all the smiling people, who seemed to be living in a gated community, on a planet I would never visit. Then Pierre said “that company was once even more screwed up than you are.”
I clung to that statement through Plumtree’s early days, and returned to it again when Dave and I were working out of an apartment trying to figure out how to make Redfin work .
To find a new lead investor to join Sequoia on Plumtree’s board, Pierre drove me all over Palo Alto and Menlo Park in his car. It was the first time I’d visited the Promised Land of the Valley itself, and it was nice to see it through his windshield.
I cherished the conversations we had on those trips: about how Pierre founded National Semiconductor, or built the Cray supercomputer. He asked me what I enjoyed doing outside of Plumtree and I said “reading.” He saw what a little stress-monkey I was and said I should spend a few minutes reading a book every night; it’s advice I still try to follow.
At each stop, Pierre promised he would work closely with the new investor on Plumtree, and possibly on other deals too. I was then released by my nervous handler to perform in the conference room like a zoo animal on The Tonight Show.
You may think it wasn’t really a fiasco, but one detail should suffice to convince you it was: at one point, I lugged a full-sized server around because we couldn’t get the product to work on a laptop, or over the web. I tried to get the server going under the table before the partner came into the room but sooner or later he  always asked, “What is that humming?” It was the sound of a thousand memory leaks spinning up the disk drive and every other internal gizmo into a panic.
That anyone gave us money was a miracle. But once we get the money, we prospered, eventually becoming one of only two technology companies to go public in 2002. I wondered why Sequoia went to such great lengths to get Plumtree funded when it would have been easier to write off the few hundred thousand dollars invested in our company.
And the simple answer was that Sequoia cared about its reputation and stood by its companies. Someone later told me that a Sequoia partner liked to say, “We don’t want you staggering around, with your fly down and a drink in your hand, telling the whole world ‘We’re a Sequoia company.’”
If Sequoia hadn’t saved us, I would have decided that my startup fling was folly. Plumtree would have just disappeared, and everyone would have thought it was a terrible idea. Redfin wouldn’t have the executives it has now, and neither would AdMob, Xoom, Atlassian, Zendesk, Piazza, The Climate Corporation or any of the other companies now being led, in part or in total, by Plumtree people.
It seems a shame to me that few of today’s seed-stage entrepreneurs will get the same support we did. I promise you, we were even more screwed up than you are.