The Future of Seed Capital

I’ve seen the future of Seed Capital…and it’s Project 11.

Project 11: Mentor Capitalists

I spent an afternoon last week at DogPatch Labs in Cambridge, an incubator backed by Polaris Ventures. Like many incubators, there are a lot of promising startups there, like MassChallenge finalists Neuroscouting and Energesis Pharmaceuticals; TechStars Boston alumni like Social Sci, Localytics, etc.  But the most interesting people I talked with are the people behind Project 11, a seed capital fund run by Katie Rae and Reed Sturtevant. They are successful tech startup veterans, and Scott Kirsner did a good piece about their philosophy, and he writes about them better than I can. Full disclosure—I’m happy, like other angels such as Bill Warner, to commit to investing in Project 11’s first fund.

What makes Project 11 special? It’s where they fit in the curve relative to venture capitalists and angels. The first image that comes to mind of venture capitalists is some well-appointed building, either on Sand Hill Road or perhaps with a view of Boston Harbor, with a table full of partners taking meetings. Elsewhere, hungry entrepreneurs building something in their garage, or perhaps in an incubator such as DogPatch or in the Cambridge Innovation Center. Put these two different people together, and even sprinkling in some angels, and most of the resulting angel- and/or VC-backed companies still will fail.  The doomed companies have great ideas, but die of self-inflicted wounds poor in a critical (and perhaps even over-looked) area.   The failure comes from lack of breadth within the management team.  A great coder will be naïve in business development, and a terrific salesman more likely than not is illiterate on legal and financial matters. VCs use their great business, financial, and legal networks to help their portfolio companies at the 30,000 foot level, but the entrepreneurs still are not likely to get extensive coaching, a lot of peer interaction, and in-the-trenches advice at the ground level. Which is what Project 11 offers. They fill the gap of what happens after a company exits TechStars or Y-Combinator.  They are closer to entrepreneurs than VCs or angels, in that their contribution to their portfolio companies is at least as much sweat equity as it is money.

By bringing to their portfolio companies the most precious commodity, their time, these earliest stage “mentor-capitalists” should be able to greatly increase the survivorship odds of those companies. While I think more of risk-minimization, Katie and Reed like instead to stress the ability of customized coaching to turbo-charge the good up to the great…hence the name play on Spinal Tap’s great bit on turning an amp “up to 11”.  This latter attribute makes them a natural complement to the VCs, who are looking for that 20x megahit.

Most VCs’ contribution (and I know the great ones are the exceptions) combines money and connections, and many don’t have the time to get their hands dirty.  (If you had to allocate $50-100mm per partner, sit on the boards of 8-10 companies, schmooze the big LPs in anticipation of the next fund and do the conference circuit, you wouldn’t be able to sit down and coach young entrepreneurs on how to improve SEO or interview potential new hires. And that 23-year old Ivy Leaguer VC firm analyst with no startup experience isn’t the one to be entrusted with that job either.) Out of self-interest, those busy VCs should want a boutique seed capital firm like Project 11 to participate in a little slice of their first rounds. Similarly, the hottest startup companies should want to make sure some hands-on seed specialist firms get allocated a slice for the same reason—for these mentors to be there to sweat the details and the small stuff, which the big VC partners, frankly, don’t have time to do.

Project 11 doesn’t have this niche entirely to itself. Who are the super early stage startup companies that actually nurture companies? Dave McClure’s 500 Startups has  UX pros and designers on its payroll, and it assembles teams of mentors as well.  But while I’m sure that Dave works very hard for his companies, it brings to mind the role of a parent and child. It’s possible a parent could love all (500?) of his children equally, but my guess is that the kids would be starved for quality time, and they wouldn’t get a lot of personalized parental instruction. And while mentors are all well-intentioned, I’ll opt for the one with proper incentives to work hardest for the success of the mentees.

The exciting role that I see for the Project 11s is akin to serving as a rotating minor league hitting and pitching instructor. When companies graduate to rolling in $20mm EBITDA per annum, they are getting to the major leagues, and perhaps stardom. At that point they obviously are doing things right and will get all of the VC or PE attention they need. But before you can get out of the minor leagues, you need to get going: it’s prior to the first $5mm in revenue where there is the need for the best coaching.  Continuing the analogy further, perhaps Project 11 expands its competencies and staffing to not just coach pitching and hitting, but base running, fielding groundballs, fielding fly balls, etc., but for the sake of everyone I hope they be choosy about which companies (and VCs) they choose to work with. Their clients benefit not just from improved survivorship ratios, but hopefully bigger outcomes. To achieve that, the “mentor-capitalist” training firms like Project 11 need to be able to invest alongside to get a piece of the upside, to align interests. Retainers and/or consulting fees just don’t return the same results.

Someone recently blogged that entrepreneurship is as much a learned skill as a personality trait.  You might be born a natural entrepreneur, but you weren’t born with knowledge how to scale from 10 employees to 1000.  So if we angels are the first baby sitters, and VCs teach grade school, let’s acknowledge that important role of nursery school and kindergarten teacher. Which I think is the role that the best seed capital funds need to fill. Let’s hope for many more Project 11s.  No ecosystem hums without them.

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5 thoughts on “The Future of Seed Capital

  1. Editor’s note: This post was sent out prior to Katy Rae (half of the dynamic duo of Project 11) was named new head of TechStars Boston. Not sure how it will effect things at P11 (certainly won’t hurt visibility on up and coming N.E. companies), but my guess is that P11 will still be focusing on filling the gap post TechStars and before A round, which still seems to me the most fragile period for startups to get it right.

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