Betaworks builds, invests in, and acquires companies. Each of these activities is a different tool we use to work with the most talented entrepreneurs and most interesting companies, all the time building out a network of people and products — some loosely connected, some more tightly.
While our focus is building products, we have been active seed investors since our inception in 2007. In that time, we’ve invested in 81 companies, all of which we consider an important part of our network. From the seed capital we have invested (on average $150,000 per company), we have seen 6× appreciation, realized and unrealized. This estimate is based on conservative valuation estimates of our seed investment portfolio and includes all of our recent investments (which are valued at cost). Although it’s more difficult to quantify the second-order effects of our seed investing activity, we think there are significant non-economic advantages; we believe as fellow builders and makers, we’ve been extremely helpful to the entrepreneurs we’ve worked with over the years.
Thus far in 2013, we’ve made seven new seed investments. This is a slower pace than we saw in 2012, when we invested in 21 new companies over course of the full year. At the outset of the year, John, Josh and I agreed that we’d make a smaller number of investments this year but deploy the same amount of capital, and dig in deeper with each company. In short, we want to focus on what we know, mainly network-oriented, social, data-driven products, and we only want to invest when the company and founders become an obsession, when we can’t sleep at night thinking about the product and its possibilities. We believe we’re executing well on this strategy and we believe it will provide outsized economic returns and value for our network of companies.
This year, four of our seed investment companies have exited, including Tumblr, Summly, Clipboard, and gdgt. Tumblr, in particular, was special for us as it was our very first seed investment at betaworks. David and his team built something very special and we’ve been lucky to be part of it. We believe Yahoo! will be a good home for the company and that Tumblr offers an incredible opportunity for Marissa Mayer to transform Yahoo!’s business.
Two of our seed investment companies failed. Failure is a natural part of starting and building companies, and it’s a part of investing in companies that think big and take large risks to get there. Both founders of these companies are now building new things in the betaworks network. In fact, they’re working together on this new thing, and we couldn’t be more excited to work with them again.
Eight of our companies raised additional rounds of financing. By no means do we believe raising more money is the best indication of ultimate success, but in an environment in which many are talking about a Series A “crunch,” many of our companies are prospering. We believe that’s a good early indication of how they might fare longer-term.
In regards to valuation, we have seen seed-stage valuations decrease through the first half of 2013, but only slightly. However, it’s worth mentioning, although possibly anecdotal, that 5 of our 7 investments have been structured as preferred stock rather than convertible notes, a significantly higher percentage than in past years. This may be a sign that the environment is becoming just slightly more investor friendly, depending on your view of convertible notes v. preferred stock.
Overall, we’re thrilled — in fact obsessed — with the seed companies in which we’ve invested during the first half of this year. We have a few we’re working on closely that we can’t wait to tell you about. You can follow along with us by signing up for Openbeta.