From the Crowd

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A different seed-stage strategy

December 13, 2012: 12:39 PM ET

bryanMoney is cheap, but time creates value.

By Bryan Roberts, contributor

Spray and pray. Try before you buy. Foot in the door.

All of these describe the dominant seed investment strategy today in Silicon Valley.  The start-up world's current angst around the "Series A crunch" is in great contrast to my seed experience, where follow-on financings are the norm and several of our seed deals are on their way to being standout successes in the Venrock portfolio.

For me, seed investing is not a low cost, little-time-required option on the A round.  It is a big investment of time and effort in order to be intimately involved in the formative stages of a company, despite the fact that the dollars-in and percentage ownership don't hit usual venture fund metrics. Since the commitment front-runs the money and ownership, it is something we only do when we are so compelled by the people and the idea that we must to jump in long before it makes "traditional" sense. Our mission is to help in whatever way we can, in hopes of increasing the company's speed, likelihood and scale of success. It also allows us to emphasize our approach as long term, supportive, performance oriented company builders.

Let's face it, money is cheap, but time and effort are really expensive – for both entrepreneurs and venture capitalists.

A "deep involvement" approach requires making far fewer commitments than most others who have embraced seed investing in recent years – whether angels or venture funds. I have done about one per year across a variety of the more capital efficient healthcare subsectors – healthcare IT, diagnostic, and services.  Castlight Health and Ariosa Diagnostics are among several recent examples that illustrate our approach.

MORE: Series A crunch: By the numbers

In mid-2008, I partnered with Todd Park (ex-Athenahealth, now CTO of the U.S.) and then Gio Colella (ex-RelayHealth), both of whom Venrock had funded previously, to explore the opportunity to create a company at the intersection of web/healthcare/consumer.  We worked for six months on the project and, in early 2008, seeded and incubated Castlight Health.

In that initial round, we invested $333,000 and proceeded to build the company brick by brick, eventually investing $17 million for nearly 20% ownership. Over the last four years, Venrock has devoted every possible resource and connection possible – countless strategy sessions, customer meetings, management recruiting, follow on investor introductions, and the board now includes a second Venrock partner (Bob Kocher) who still spends more than a day a week with the team.  Today, Castlight has the opportunity to become a pivotal participant in the creation of a functional healthcare delivery market, improving care while saving billions of dollars.

Ariosa is a similar story, but one whose roots are found in an unsuccessful Venrock seed investment.  We lost $300,000 after nine months in a diagnostic start-up when the CEO, John Stuelpnagel (ex-Illumina, a Venrock investment), came to the board with the message that we all had better things to do than continue to push that particular rock uphill. Soon thereafter,we seeded the combination of a terrific first time entrepreneur/CEO in Ken Song, then at Venrock, with John as executive chairman to tackle new approaches to prenatal molecular diagnostics.  Three years later they are leading the race to provide an entirely new and improved standard of care to expectant mothers – where they can confidently assess genetic abnormalities with no risk to the baby at ten weeks of pregnancy.

MORE: Stop with the Series A schadenfreude

Success in venture investing is really hard to come by, and with seed investing even more so. No matter what the strategy, there will be failures and even more pivots before those few that succeed become great. That said, as with Castlight and Ariosa, when it works, it is awesome.

You can assist in a company's formative stage; create close and productive relationships with entrepreneurs; as well as build your ownership over subsequent financings. Early help in the project typically leads the team to want to work with no one else but you – in essence, you have become part of the family.  This month I made my seed investment for 2012 – a stealth company, also in the healthcare IT space. I think these entrepreneurs would tell you that our track record as active participants in prior seeds, as described by those CEO's, was the over-riding factor in their decision to work with Venrock. We will do our best not to disappoint them.

In the end, every VC firm's goal is to create great returns for its limited partners. We believe that a targeted, time-intensive approach to seed investing is orthogonal to others' and increases the chance of creating great companies by affording them resources early on that they would not get in other seed models.  But it requires a leap of faith and trust between entrepreneur and VC – a leap we are eager to take.

Bryan Roberts is a Palo Alto-based partner with venture capital firm Venrock, where he focuses on healthcare investments.

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