Pando

Why Jeff Clavier insists there's no Series A Crunch

By Sarah Lacy , written on April 3, 2015

From The News Desk

I've literally been having a debate about the "series A crunch" with seed investor Jeff Clavier since 2012. It started months before I wrote this piece-- and back then he was legitimately concerned for the same reason we all were.

It wasn't that VCs were going to do fewer Series A deals than they have in the past. It was because there was a limit to how many more Series A deals the industry could do in a given year, since most VCs only do one to two deals per year. The explosion of incubators, angels, and seed funds meant there would be thousands more companies vying for those one or two yeses per partner per year.

Like a lot of "super angels" Clavier was battening down the hatches in his portfolio, telling the dogs to find a home at Facebook, Yahoo, Google and hustling to make sure the good ones had a next round.

But a year or so ago, he told me the great feared crunch just never materialized. Sure some of his companies went under, but smaller than the percentage they assumed-- crunch or no. The good ones raised rounds and the marginal ones mostly still raised rounds, he says.

Well here we are again and the fears of a Series A crunch are ramping up again, with posts like these by an equally esteemed seed investor Josh Kopelman. (Disclosure: Kopelman is personal investor in Pando.) And I ran into Clavier last week and asked him if he was seeing it now. He remains unworried. "Series A or B crunch has just not shown up yet," he wrote in a follow up over email.

And he gave me some stats to back it up: In 2014, 23 of their companies raised some $300 million in follow ons. Normally, they assume that 20% of their companies won't make it to Series A, and that 10% will fail after Series A. That has nothing to do with any crunch-- it's just seed portfolio logic. Clavier says the firm is below even those thresholds now-- despite having several active companies that they've written down to zero value for accounting purposes.

His confidence is a little befuddling. Kopelman is right that raising a Series A is an utterly different ballgame than raising a seed deal. And the math is the math: There aren't a surge of VCs doing more As and there are a surge of seed companies out there.

So what gives?

All due respect to Clavier, but it's not that he's picking better companies than all his peers. After a good grilling, here's what I came up with: He's heading off a Series A Crunch by already doing the things VCs like Kopelman advise startups to do to avoid it.

It strikes me he's not seeing a pronounced crunch not because it isn't happening, but because he's already adjusted the way he invests to guard against it.

For instance:

  • He doesn't invest quite as widely as some other super angel shops, like, say, 500 Startups
  • Clavier pushes his companies to raise ginormous seed rounds-- way more than they think they want. He'll routinely talk an entrepreneur who just wants to raise $750k into more than doubling that.  Cynics could say this pushes an entrepreneur to give away more ownership at a higher early price and have less control, but the logic is that seeds are the only place where there's a glut of money and you don't have to prove a lot to get it. Load up while you can. That gives the company enough room that it can hit momentum and make a stronger case for the A than other peers
  • He aggressively hustles early to help good-- and even some marginally good-- companies raise their A. Everyone says this, but a lot of spray and pray shops hop in and out of party rounds and don't spend their time helping companies raise the next round.
  • He says he will not ever ask another VC to invest in a dog.  Otherwise, it'd kill his credibility when he asks a VC to invest in a company that may not have quite hit an inflection point but is still promising.A lot of the guys who do hustle to help companies raise, do so indiscriminately. That gives them a bad rap with VCs.
  • He isn't afraid to just wholesale give up on promising categories where they can't seem to win. Like, ahem, ecommerce after the Fab blow up, and similar disappointments all over the ecommerce landscape. If the best case scenario is Zulily-- he's passing.
  • They have enough capital, they'll do a bridge if they need to. A lot of spray and pray seed shops don't and won't unless a company is a huge winner, in which case they probably don't need it.
I don't know enough about the ins and outs of Clavier's portfolio to know if he really truly always adheres to these rules. We should always assume when a VC's mouth is open, he's marketing particularly in these hyper competitive times. But the seed round is when entrepreneurs will have the most options of investors-- and these are some good questions to ask about how these firms work and how they can help protect you.