SoftTech’s Hudson Talks Strategy, Key Factors in Out-of-Town Deals

5/22/14Follow @bvbigelow

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$2.5 million and $3.5 million even before it gets to its Series A round. The round dynamics are different too, Hudson said, because it’s one thing to put $250,000 into a company and another to invest a million or two. The stakes are higher for everyone.

“We had companies in 2010 that come in our office, they need $500,000, they need a little bit more help on the prototype. It’s early. [In those days,] we probably would have written that check and supported that company. Now I tell them, what you really should do is get $500,000 in angel money, build that prototype, make some progress, and then come back to us when you’re looking to raise that $1.5 million to $2 million seed round.”

What’s more, Hudson said, a funding process that used to be very orderly, with discrete funding events, has become far more chaotic. Now startups are doing more intermediate seed-stage deals and the complexity has increased, so that companies are now more or less continuously fund-raising before getting to the Series A round.

“We had never factored into our [investment] model that companies would be raising $15 million Series B rounds on relatively modest revenue run rates,” Hudson says. “That’s really changing the way we think about financing, because we tend to see that our companies with a lot of momentum and enthusiasm in the market are able to raise really large rounds.”

Such changes also mean less capital for everyone else. If you’re not part of the top 1 to 5 percent of startups in the market that are fund-raising at any one point in time, Hudson said, “you have this polar-opposite experience, where it’s just very, very, very hard to get people to take the meeting and be interested.”

So how can early stage companies get investors’ attention? Hudson pointed to a couple key factors:

“One is the founder’s strength and vision,” Hudson said. “I know it sounds really fuzzy, but our founders who show well in front of VCs and who have a clear articulation of the vision and who come across as competent, strong, visionary, big plan, big idea—those folks seem to be able to raise money in spite of what I would describe as limited traction.”

The other factor that Series A investors really care about is … Next Page »

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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