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What a Seed Investor Looks For with Mike Miller (Liquid 2 Ventures)


    Mike Miller is a Partner at Liquid 2 Ventures, a seed-stage firm started by hall of fame quarterback Joe Montana. They specialize in early-stage investments. Mike explains what he looks for in a company, how he decides to invest, and what you can do to maximize your odds of raising a seed round.

    Tim Anglade, Executive in Residence at Scale Venture Partners: Just came in town for like, YC demo day, right?

    Mike Miller, Partner at Liquid 2 Ventures: For Demo Day. That’s a big part of our fund, and actually the Alumni Demo Day, this was the first year they led. It’s a fuzzy line between founders and investors now.

    Tim: Oh, yeah.

    Mike: This was the first year they said, “You know what, let’s just throw it open “and let anybody that’s an alumni come.”

    Tim: Oh, nice.

    Mike: The Alumni Day is a lot more fun, you get a lot more sincerity.

    Tim: Right, because it’s also like the rehearsal in a way, right, for a lot of the YC company.

    Mike: It is, people are interactive, people clap, people laugh at all the jokes, and everybody’s heads are up and watching, which is pretty cool.

    Tim: Yeah, otherwise … Yeah, Demo Day’s such a big thing. It’s like two days actually now, right?

    Mike: It is.

    Tim: It’s been two days for a little while, but you work for L2 and you guys really specialize in this early-stage, seed stage deals, right?

    Mike: Yeah, we’re a seed stage fund, and a big part of why we started the fund was, we looked around and if you look at what some of the resources you need to build great companies, one of the things, and I hate to use the phrase but, is network.

    Tim: Right.

    Mike: Just you know, creates opportunities in a way that other things don’t and, if you look at the valley, historically, there’s a series of networks that are really influential, latest probably being the PayPal.

    Tim: Mm-hmm.

    Mike: Network people drive from there. Our hedge is that why common areas already eclipsed that in terms of number value and just opportunity.

    Tim: Yeah, it’s very tight-knit, yeah.

    Mike: Yeah, you know, all these founders, a lot of them had success and they’re pointing their resources, knowledge, and capital back into that network and it just creates a lot of opportunity.

    Tim: You went through YC too, right? I mean, it’s like we worked together.

    Mike: A while ago, a while ago.

    Tim: Yeah, it was fun. But for people who don’t know, so that people talk about seed stage, is that roughly the same thing as early stage, and how is that different than other stages of funding and looking for funding?

    Mike: Yeah, it is early stage funding. Things have really gotten hyper-stratified.

    Tim: Mm-hmm.

    Mike: You know, especially since I started a company in 2008, right, Which is infinity ago.

    Tim: It used to be you just take money from anybody, right?

    Mike: Yeah, but you know this well, right? You’ve really helped create a lot of this opportunity, but you know, 30 years ago when you started a company, it cost a lot of money.

    Tim: Right.

    Mike: You had to buy a lot of things that you just don’t have to do anymore.

    Tim: Right.

    Mike: Cloudant was all about 50 years ago you had to write your own database.

    Tim: Right.

    Mike: You don’t do that anymore.

    Tim: Right.

    Mike: Everything from Cloud services to just the way products get launched, it’s just faster and more, er less expensive. Because of that, one of the things you see is there’s a big change in the funding, the stages that companies go through. Instead of raising a huge slug of money and running for four years, right, then it’s like, well let’s be a little more incremental. Get the smallest amount of money that you need, get the idea off the ground, and then go in different stages.

    Tim: Right.

    Mike: It’s like you hear people say, friends and family, then you do pre-seed, then you do seed, then you do seed plus, then you do series A, right?

    Tim: Right.

    Mike: What happens then, there’s a whole bunch of new funds that are kind of built specifically and tailored to those different stages.

    Tim: Yeah, it seems like it is really different, right? So, you have… Seed is the first organized money you’re getting, just maybe like, sometimes I even see boards happening around, although that seems to be rare, right?

    Mike: Seems to be more

    Tim: Sometimes

    Mike: the exception than the rule. This is like you moved on from incubators, you moved on from friends and family, maybe helping you get off the ground, maybe some angels putting in some money, and seed is that phase where you’re meeting both organized investors, such as yourself to firms that specialize in that, as well as maybe some angels, some people piling on round them.

    Tim: Definitely, we tend to see a lot of seed rounds where you have one to three firms, and there are some obviously really established names in seed funding now like SoftTech, FLOODGATE, First Round that are old pros at it, and then a hundred now firms in the last couple years. You generally see two or three funds like that, that are a little more institutionalized and also have some platform and a bigger network, and then strategic angels who bring a lot of value for that specific –

    Mike: And then even some of the later stage firms where you see UC Andreessen and a bunch of others still piling in some of the early rounds and the seed rounds even though they’re more famous for the series A, series B, Series C type of plays.

    Tim: Yeah, you still see a lot of that. Also, sometimes it’s investing out of the same core fund. Sometimes it’s actually a separate fund with separate individuals and partners that run that early stage. It’s firm by firm, you have to understand what the relationship is between a seed check.

    Mike: Just to explain that, people think about those big firms, you think about Andreessen where it says the name of the building, but inside of that there’s multiple companies, like funds that are allocated towards different goals. You could have a biotech fund that’s running parallel to a clean energy fund. You can have an early stage fund in the same firm that’s allocated towards certain type of companies, certain type of place, maybe checks versus the more established investments, and they’re really sold as different instruments to the external investors of the firm, and they go towards different people, right?

    Tim: Yeah, no, it’s pretty complex actually. We live in the world of I guess what would be called micro VC, and one of the things, I guess as a founder I didn’t quite realize at the time, or I’d think about the brand or the impacts of the success of a firm, but what you really want to look into is what’s the specific part of that firm and who’s the partner you’re actually dealing with to see. That’s the biggest indicator of success and support.

    Mike: Maybe we can focus on that a little bit. There’s so many different people that you can go to for seeding, and not just a number, but also the types. You can talk about from specializing that, there’s a big firm that can do all the stages, there’s the strategic angels, there’s all kinds of different money. What do you think, going back to your days as entrepreneur, going back to the other side, what do you think people should look for at a seed stage?

    Tim: That’s a good question. You have some options. At the seed stage I think, I’ll tell you my very personal opinion. The reason I find the seed stage interesting is I think that a lot of the culture and actually, trajectory of a company is imprinted in that very formative stage, before you get to a Series A. Series A is actually fairly, what do I want to say? There are clear targets. If you’re an Enterprise Ask company, you want to be doing 150-250 in MRR, nine months trailing data, 15% month over month, and it’s like okay, somebody is going to invest in this company, because you can fuel it with capital and grow it aggressively. Getting to that stage though, that’s where I think that it’s okay, who are we, what do we believe in, can we convince people to use a product, can we convince people to come work for us? That’s where a lot of the great group mentality translates into magic.

    Mike: This totally though, despite maybe that not being a silly ideal, it’s totally an intense amount of pivot and just serendipity, and who you connect with, and you your first customers are, and so it does feel like, for lack of a better word, more of a cultural type of phase where you want to get to your point about network with people that can help you explore that area and find yourself, even though you feel like you’re out of the woods already. I find so many companies still reinventing themselves before the Series A. It’s crazy.

    Tim: Yeah, to talk, I hate the word pivot even though it’s used all the time. Show me a company that doesn’t adapt to their surroundings. That’s market, early customers, like you said, can have a pretty strong impact on where you descend to in your path, but yeah, I personally think that you want to surround yourself with very patient investors, and we try to focus really on that stage from first dollars to Series A, and then you can hand off to somebody that specializes in that A, to B, to C transition, and then late stage investors. Yeah, that’s the part where I think you need to find people that are patient, can give you the right opportunities. I personally think that investors can never make a company. They can certainly hurt it, but I think it’s really up to the founders to carry your own water through the desert. Most start ups go through a big grind actually, at that stage between first dollars and Series A, that’s the toughest part.

    Mike: It is really hard, and so what do you look for? If you’re Series A, Series B, et cetera investor, there’s more data to look at. There’s more of a trajectory. Ideally there’s revenue which is a good through line to look at, but when you’re at the seed stage, you have very little time, very little data, external validation of what you’re doing, so what do you look for in a deal like this?

    Tim: That’s the challenging part. I look at, I compare to how when I was in science, how I would recruit people to my group, and Cloudant in how we would hire in network if possible, somebody that you’ve worked with before in one relationship or another can really do risks things. That’s just trailing data, right? Really, we look for great teams in big, strategic markets, and I can talk more about that if you want to, and what’s the last thing that I would say? We also try to make sure it projects onto a mission that we really agree with. That’s been a really cool thing. If you use YC as a bellwether, so many fewer consumer apps and so many more aerospace companies and AI and deep learning. There’s a real return on mission, which I get excited about.

    Mike: It does seem to drive off of passion at that stage. As an investor, you need to be invested and have the network to help the company. I see that selection, quote, unquote, bias, of, not in a negative way, but of going toward stuff that you know, stuff that you like, stuff that you’re excited about, because that does seem to be a big part of why you can help something work and grow.

    Tim: I think as a founder or an investor or even an employee, if you don’t really dig the thing you’re working on, and we’ve had a lot of conversations and lots and lots. If you don’t really dig it, then why are you doing it, and are you going to be that good at what you’re doing?

    Mike: That makes sense. To go back to the other two points, you’re saying that that personal connection, that’s some way to expand the data available on the company and the people, and have they done things that are interesting, do you know them from awhile back before they did this, and I guess that makes sense, the one about the size of the market, and it’s interesting why I say this is one that a lot of people don’t understand, especially I do start a validation at that stage of saying, what you do is a part of, I’m sure, every investment decision even at that stage, but sometimes it really is more about just the opportunity, and sizing that way, way up, in my experience, to get a good seed level deal.

    Tim: Absolutely, what’s the strategic market right now? Autonomous driving of any type. It’s hard to miss that, and the cool thing is that overlaps completely with something that’s really interesting from a problem set. That’s an example of a market that I think is really strategic right now, like auto, or AI machine learning is the same thing if you look at DeepMind and a few other companies like that, that are almost pure research plays. It’s a really fun time when markets like that are taking off. There are other ones that are a little bit different, like basically the space market right now is a little bit different, because now you can hop on a website and choose when you want something launched, and launching is commoditized and now it’s like, okay suppose it’s negligible cost to put something in space. What can happen then with commodity components? There’s an explosion of space companies too.

    Mike: There’s maybe two factors here. One of them is that there does seem to be, right now, this summer, and who knows how long it will last, more of an appetite for bigger, hardware play. That used to be really frowned upon, but there’s also this general trend of people think you’re maybe going to maybe pivot or readjust or find a different market than what you think, so they really just look at what you’re going after, like the cone of what you’re going after, as opposed to the exact sliver that you’re going to deliver on.

    Tim: Some investors are very numbers driven from the beginning. I tend not to work that way. I think you just have to be very patient in the beginning until you find something that really clicks. That’s where as a founder, if you’re raising money, you really have to just make sure that how you function and how you want to grow the company meshes with the investors that you’re working with, but just to go back to some things that we do look for, when we look for team, we look for people that have known each other for a long time, because the number one reason that companies fail is not market or execution, it’s just founder breakup. When you’re going through the desert, you got to really trust each other. My cofounders in Cloudant were my best friends. We were colleagues. We stood up in each others’ weddings, and when it was a grind, we kept each other going, and then when there’s real money on the table, you have to really trust each other, because you’re making really life changing decisions with a high frequency, so we do look for people that go back to grade school or if you’re talking about space, they started the Rocket Club some place, or the Drone Team, and have built real things together before it was a business.

    Mike: That makes sense. Cool. That’s a good summary. Good personal relationships, great market, and then everything else is based on your passion, both the founders’ passion and the investors’ passion.

    Tim: Yeah.

    Mike: Yeah.

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