High Conviction Investors Are Your Best Ally in Beating the Series A Crunch

While it is likely that 2013 will be a year of reckoning for many seed funded companies, I think the most important point about the so-called “Series A Crunch” was recently made by Fred Wilson of USV:

“At the stage where you are past hopes and dreams, where you have customers, revenue, and a real business, but have not yet reached “true success”, there just aren’t many investors to choose from.”

He goes on to affirm their willingness and interest in leading inside rounds and seeing companies through the “in between phase”.

This approach of being a high conviction investor and supporting companies throughout their life cycle is one that we have embraced as a firm for over 10 years. It is especially relevant for us at the moment as we consider one of our very successful portfolio companies, GetWellNetwork that was just acquired.  This company has certainly achieved “true success” in terms of team, market leadership, operations, and customers.  Like all startups, however, this was not always the case.

We co-led the Series A round for this company and then 18 months later we led an inside round for the company.   We led this inside round, because the company was “in-between”.  It had a finished product, customers, and it was growing, but no outside investors wanted to fund it because it wasn’t growing fast enough and the sales model / sales cycle was too challenging.  Not only did we do an inside round, but the CEO and Founder, Mike O’Neil, invested his own money in the round, as well.  After another 18 months the company landed some really big hospital deals and attracted investment from a number of great investors including Valhalla, J&J Development and Industry Ventures.  Our convictions that the Founder and CEO of this company was truly exceptional, that the market was enormous and exciting and that the company’s product was world class and would eventually win has paid off with a fund making exit for us, but it has also reaffirmed our view that the “in-between” can often be an opportunity where high conviction investors can win big if they are as tenacious as the founders they back.