In talking to a few folks since my post Thursday on the nuances of Series B financings another analogy for Series A, B, and C financings came to mind.
You can look at investing in startups like selecting who among a classroom of kids will get into Harvard; if you don’t take this (completely dangerous) analogy too seriously, there are some interesting relevant analogies. So just for a moment, enter a playful state of mind and let’s look at the landscape.
Series A investments are like evaluating a kindergarten class and trying to select the child you think would make it into Harvard. You could look at a whole lot of characteristics about their classroom participation and capabilities and then try and figure out who would be likely to get be accepted twelve years down the road. But it’s very much about taking a bunch of early, early data and trying to make a long range prediction.
[If any of you have had kids in kindergarten, the sad thing is in real life there seem to be parents doing this math for their own children.]
But to play this out, with whoever you picked you’d have enough time and resources so that if circumstances develop along the way that take the kid you’ve “funded” off-track, you’d be able to help address these.
Series C investments are like evaluating a high school junior or senior class and trying to select the child destined for Harvard. Now you’ve got substantive and relevant historical data about performance, capabilities, and aspirations. You have a much richer data set, and a much shorter time horizon – one to two years.
With Series A, anything seems to be possible when you make the investment, and you have plenty of time to deal with surprises along the way. With Series C, you can see and evaluate a lot of the substantive date, and have a reasonably clear sense of the prospects and risks.
Series B are like evaluating a middle school seventh grader’s class, and trying to pick who’s going to be Harvard-bound. There is a trajectory that’s been established, but you don’t have the SAT scores, the high school GPA, or the extra-curricular activities that are going to factor so heavily in the outcome. And, it’s hard to know who will blossom in high school and who won’t. That the sullen introspective kid in the corner may deceive you as he or she may develop the confidence and leadership to become the head of the class in two to three years. That popular kid vying for attention may end up having more social skills than discipline, and could flame out academically in 10th grade.
This is an entertaining thought exercise precisely because it is so ridiculous.
By the way, I have nothing against middle schoolers (I have two myself, and think the world of them, and their friends), but it’s an awkward stage. Taking this back to our investment stage analogy, Series B is hard because you are between the “anything is possible” world and the “we have some relevant historical data and a shorter horizon”.
I’m not saying Series B investments are bad, it’s just that they’re their own unique animal that are particularly vulnerable in the current economic climate. Fortunately, middle schoolers, regardless of the economic climate, will be just fine.