We pay so much homage, we make such a splash, over a successful capital raise. It seems to me, although my opinion may be tainted by market events circa 2008, that we celebrate in reverse. The closing dinner is usually to celebrate a new investment, a new loan, or a new acquisition. Presumably it would be unbecoming for the departing party in this zero-sum game to cheer, and there is something symbolic of growth and continuity and life-preserving in the act of celebrating a purchase rather than a sale. There is also something reassuring for the buyer, or group of buyers, to gather around with like-minded others, at the beginning of what could be a wild adventure. Depending on this gathering’s proportions, we may begin to see a bubble form.
I bring this up because there are events unfolding and dynamics happening in the early stage finance world, which seem vaguely reminiscent of a buyer’s closing party and, for lack of a better term, a bubble. Take for instance the recent financing completed for the New York based start-up, Hot Potato. This particular service – which will attempt to bring to live events the real-time micro-blogging feature for which the world has been waiting ever since [cough] Twitter and Facebook proved inadequate (“but this one goes to eleven”), and which before the time of closing boasted as many as 3,000 monthly uniques according to some estimates – was able to complete a financing of approximately $1.4 million. The valuation was not publicized, but we are free to imagine… and the roster of investors is not only prominent but extensive.
Pause.
This was supposed to be seed financing.
This was supposed to capitalize an unproven product, which moreover proposes to address a “need” already addressed by none other than the world’s most social networking platforms. We’re not talking about opening up a new market or introducing a new craze – such as FourSquare is trying to do – but merely slicing up the same pie with a slightly different knife. Now, it could very well work – the pie could increase somehow or taste better, as it were, as a result of this new tool – who can really know at this stage. But why should the cost of finding out be so high? In a sense, Hot Potato’s concept of a social networking sub-culture is not dissimilar to what StockTwits has embarked upon with good success… but StockTwits arrived at its $3 million round after first raising angel money, then $800,000, and then another $800,000.
Perhaps this isn’t a bubble, it couldn’t be, we’ve just started to emerge from the worst market collapse ever, so it couldn’t be a bubble so soon again. The collective sophistication and clout of investors involved, moreover, suggests that there is a strategic rationale and value proposition that would exceed the social network feature in its strictest sense. But in the meantime, the challenge of procuring, say, $300,000, in true seed financing for other viable start-ups does not diminish when all the $300,000 investors huddle en masse to embark upon $1.4 million adventures. The valuation requirement of future rounds on this trip, and of the eventual exit, when the seed stage alone is so voluminous, will be interesting to follow.
