Should I take seed money from a venture capital firm or angels?

More and more entrepreneurs are asking me if they should raise seed money from VCs or angels. The honest, and perhaps surprising, answer is that I’d lean toward taking it from angels. Here’s why: • once you take venture money, the clock is ticking.

While some VCs, including ours, are patient and thoughtful, many others are not. They want to see progress immediately and daily. It’s not a good time to be having existential debates -- but that’s often a big part of what gets done right after raising seed money. There’s a bit of an inherent trap. If you make some progress but not a ton of progress, the seed VC may decline to fund the A round (trust me, they aren’t sweating losing the $250,000 they gave you). So now you have to go out and try to raise that money from another VC. But let me ask: if you were a VC, would you fund a business that a currently invested VC was saying ˜no” to? 

One of the great things about good VCs are the support, advice and connections that they give you. And while we all hate preparing for and sitting through the proctology exams that are also known as Board meetings, those exercises are actually extremely valuable brainstorming sessions. But, when a VC invests as a seed investor they typically don’t sit on the Board. And if they aren’t on the Board, they aren’t thinking about you as much. And if they aren’t thinking about you as much, you’re not getting the value you signed up for.

You might read this list and determine that your circumstances are such that it still makes sense to take your seed round from a VC. Many companies do & it’s a legitimate option. It’s also great to see VCs wading into this end of the pool after a period in the middle of the decade where early stage funds had practically dried up altogether. Let me know your thoughts.

The Conundrum of Conversion vs. Loyalty

Given the marketspace that ExpoTV occupies, we’ve been fortunate to get a bit of a birdseye view on the comparison shopping space and spent a lot of time with leaders in the space, including Smarter.com, Wize, Pronto, Shopping.com, Yahoo! Shopping, Nextag, PriceGrabber and others. They are all great businesses run by great people and no doubt the comparison shopping engine space has been one of the great internet value creation vehicles.

Part of what has enabled that value creation is the straightforward business model: acquire customers for x and ˜resell” as many of them as possible for y to interested retailers. While obviously the price of acquisition and resale matter a lot, those metrics are largely driven by the market. The critical endogenous success metric of any given engine is the conversion rate. Through rigorous testing, the engines have discovered that the faster you move people off the site, the higher the conversion rate. The only problem with the “maximize conversion rate” approach is that it is extremely hard to build recall let alone loyalty with people who spend less than 10 seconds on your site. (Here’s our “collision of commerce and media” moment -- imagine a media property focused on getting you off their site. Doesn’t even compute!) Eventually, though, someone says, “hey, our conversion is great but isn’t our cost of acquisition a lot higher than it would be if we had some loyal users?”

I wasn’t there at the merger table, but I’m sure this was an issue that the guys at ePinions and Dealtime thought they were about to solve when they came together to create Shopping.com. Unfortunately, it didn’t work out that way and we’ve heard second-hand tales about general managers who left Shopping.com completely frustrated with their inability to find the magic formula to build loyalty without crushing conversion & it may not be much of an exaggeration to say that every shopping engine since then has gone through the same painful exercise. Perhaps it’s no coincidence that the one who appears to care the least about loyalty is the one who sold for the biggest price (Nextag). But is the idea of having loyal visitors (read: returning visitors who cost nothing to acquire) and a high conversion rate a fool’s errand or just a complex issue that’s yet to be solved? There’s some evidence that it’s possible and even that dogmatically clinging to the success formulas of the past may be preventing the industry from moving forward. When we point to a DMNews article where Smarter.com associated the launching of our videos with a 20% increase in site loyalty, people with experience in the industry will laugh in derision at the idea of a 20% increase in loyalty. It’s as if a unicorn just walked in the room; it’s so outlandish that our eyes must deceive. Still, there’s no lack of innovation and effort to crack the code. Wize has their Wize ranking & Pronto has "Likes".

We were fortunate enough to sit down a couple months ago with Stephen Musikant and Daniel Keller of the successful European price comparison site, Ciao. They have famously loyal and active users. I asked them how they managed the tension between conversion and loyalty. To paraphrase their answer they essentially said, “We don’t. We focus first on loyalty.” Now that’s novel.