Why Nuzzel Raised A Second Seed Round
Why We Did It
On March 18, Nuzzel officially launched out of beta. At this milestone, we still had half of our original seed funding in the bank, but it seemed like a good time to reevaluate our runway, plans, and funding situation. After our original seed round had become oversubscribed, we had turned away some potential investors, and during the interim, as we worked on building our team, rewriting our algorithms to be more efficient, and setting up monitoring and configuration management systems to help us scale, we had been approached by other investors who were interested in Nuzzel.
We also noticed there were some cool investors who were active Nuzzel users, but not participants in our original seed round. All of these things made us suspect that we could quickly raise some additional capital from great investors if we chose to raise another round. Ultimately, we decided that it would be good to have some extra cash in the bank, and be able to focus on product, technology, and growth, without being in a hurry to raise a large VC round. We wanted to focus on launching our iPhone app, and then iPad and Android apps, plus new features, and new integrations with services like Buffer, LinkedIn, and Google+. If we could quickly raise another million or a bit more from great investors, and then continue to execute on our plans, that sounded like a good move for Nuzzel.
Our original seed investors included a really amazing group: Andreessen Horowitz, Charles River Ventures, 500 Startups, IDG Ventures, Morado Venture Partners, SoftTech, and angels like Eric Ries, Gil Penchina, James Currier, James Hong, Jim Young, Max Levchin, Michael Birch, Naval Ravikant, Philip Kaplan, Raymond Tonsing, Rick Marini, Ron Palmeri, Stan Chudnovsky, and Zachary Bogue.
It was hard to imagine ever topping such a great group of original investors. But we quickly identified some really exciting targets to approach about the new Nuzzel investment opportunity.
The Missed Connections
After Nuzzel’s original seed round became oversubscribed, a few reputable investors had indicated interest to us slightly too late to participate. So for the new round, we decided to reconnect with some of those investors. Dharmesh Shah, founder of HubSpot, had been appropriately busy with a large funding round for his own company the first time, but quickly joined the new round. Ullas Naik of Streamlined Ventures had contacted us through AngelList during our first round, and been recommended to us by Naval Ravikant (a Nuzzel investor and co-founder of AngelList) and Paul Martino (co-founder of Bullpen Capital, a Founders Den sponsor). The timing had not been right with Ullas the first time, but after a new meeting, he became a new investor.
In 2013, I met Matt Mazzeo at YC Demo Day. Matt was a former CAA executive who joined Chris Sacca’s Lowercase Capital just after the close of Nuzzel’s original seed round. Matt was an instant Nuzzel fan, and we noticed he was using it very actively. Just before we started talking to people about the new Nuzzel funding, we also noticed that Chris Sacca had Tweeted about Nuzzel to Evan Williams. Chris of course was famous as an early and enthusiastic Twitter investor. He had actually previously Tweeted “I lovez my Nuzzel. No, seriously. I love it.” So reaching out to Matt & Chris about the new Nuzzel investment opportunity was a “no-brainer”. After some great discussions, they quickly became one of Nuzzel’s largest investors. Matt also gave us some great introductions to other potential investors.
— Chris Sacca (@sacca)October 26, 2012
Also in 2013, Google/YouTube exec Hunter Walk and former Twitter Product VP Satya Patel started a new seed fund called Homebrew. Hunter and Satya were both fans and active users of Nuzzel, and Homebrew had not even existed when Nuzzel had raised our original seed round. Hunter had Tweeted about liking Nuzzel in January, two months before we even decided to raise more capital. So I emailed Hunter and Satya about the new round, and they quickly confirmed that they would like to participate.
Homebrew recently published a post on their blog about their investment in Nuzzel, “News From Your Friends Means News That Matters”:
Here at Homebrew, we were big users of the Nuzzel product before we ever became investors. When Jonathan had the opportunity to raise additional funding, we were appreciative of the chance to participate. Besides our love for the product, we enjoyed seeing Jonathan do “slow tech” - that is, keeping a small team, avoiding the hype, and letting the product win over users.
Overall, recruiting investors from active Nuzzel users was a great way to go. We asked investors who were Nuzzel fans how many other apps or services they used several times per week, that were not yet worth at least $1 Billion, and the answer was always a very short list.
The Investors From Asia
Prior to joining the team, Nuzzel COO Kent Lindstrom had helped build a global lean startup consultancy called Neo Innovation, alongside Eric Ries (an original Nuzzel seed investor) and fellow Friendster-alum Ian McFarland. Neo is a division of Digital Garage, the Japanese technology company co-founded by Joi Ito which was an early investor in Twitter. After the successful global launch of Neo, Kent also worked with Digital Garage on venture investments. After Kent shared information about Nuzzel with his former colleagues, Digital Garage participated in the new Nuzzel funding, along with two other Digital Garage alumnae, Mikihiro Yasuda with the Japanese Internet company DeNA, and Aki Koto with the Japanese fund WiL (World Innovation Lab). They were also joined by MOL Ventures, one of South East Asia’s largest Internet companies.
The New Angels
In addition to new capital from Lowercase Capital, Homebrew, Streamlined Ventures, Digital Garage, DeNA, WiL, and MOL, the new round was an opportunity to add some exciting new angel investors to an already amazing list of Nuzzel angels. These new angel investors included:
- Jon Boutelle - Jon was co-founder & CTO of SlideShare, acquired by LinkedIn in 2012 for over $100 million (I was a happy angel investor). Jon was an early and enthusiastic Nuzzel beta user who had posted “Nuzzel is f*@king awesome” on Facebook when Nuzzel originally launched in beta. In March, Jon emailed me to congratulate me on launching out of beta, and to share another angel investment opportunity. I mentioned that we were about to raise another round for Nuzzel, and Jon asked to participate.
- Chris Michel - Chris is an experienced entrepreneur and angel investor, who founded Military.com and Affinity Labs, both acquired by Monster Worldwide. His investments include companies like BranchOut, Palantir, Goodreads, and Castlight Health. Chris is friends with many of Nuzzel’s previous investors, including Rick Marini, James Currier, and Stan Chudnovsky. When Nuzzel COO Kent Lindstrom reached out to Chris Michel about the new opportunity, he quickly joined the round.
- Nicolas Heyman - Nick was an early employee at both Friendster and Facebook, and the head of ops at Facebook for two years, helping them scale. Already an advisor to Nuzzel, Nick asked to participate in the new round.
- Russ Fradin - Russ is an experienced entrepreneur and angel investor. Russ is the founder of Dynamic Signal and Adify, and an investor in companies like Udemy, Playdom, and Sprig.
- Othman Laraki - I’ve known Othman a long time, because over 10 years ago, he was an intern at HotLinks, the social bookmarking startup that I founded before Friendster. He recently left Twitter, where he was VP of Product for Growth. Othman had joined Twitter when Twitter acquired Mixer Labs, a startup that Othman co-founded with Elad Gil, a member of the Founders Den advisory board. Both Othman and Elad are active Nuzzel users. Othman is also an investor in startups like Pinterest, 9GAG, and Medium.
- Daniel Lurie - Daniel is the CEO of Tipping Point Community, a wonderful non-profit fighting poverty in the Bay Area. Tipping Point’s efforts are supported by many entrepreneurs and executives in the tech industry, and the Tipping Board members include friends like Nuzzel angel investor Zachary Bogue, who is also co-founder of Founders Den.
- Gordon Crawford - Gordy is a legendary media industry investor who retired from Capital Research and Management in 2012. We met Gordy through Nuzzel advisor Michael Downing, CEO of Tout.
- Ryan Spoon - Ryan is SVP of Product at ESPN.com, and was previously known for running Dogpatch Labs, one of the first co-working spaces in San Francisco. Ryan, a very active Nuzzel user, reached out to us through Hunter Walk, interested in investing in Nuzzel as an angel. Ryan told us “I love, love Nuzzel. In a very short time you’ve created habit for me and landed on the vaunted home screen :)” We were thrilled to add Ryan’s perspective from ESPN.com to our team.
- Narendra Rocherolle - Narendra is the founder of Webshots, and was an early Twitter advisor. After seeing Narendra Tweet “I ❤ ️@nuzzel”, we asked him to meet up in San Francisco and share his Nuzzel feedback with us. He asked to invest, which we were not expecting, but we were very happy have him as a Nuzzel angel.
- Matt Ocko - Matt is an experienced entrepreneur and investor. He made early investments in companies like Facebook, Metamarkets, D-Wave and Uber. Matt is currently co-managing partner of Data Collective, with Zachary Bogue.
We are honored to be welcoming this amazing group of investors to the Nuzzel family. We also had some participation in this round from previous investors.
The purpose of this new funding will be to hire a few more engineers to our team. For example, we recently launched our iPhone app, and have received many requests for an Android app, so we are looking for an Android engineer to lead this project. The full-time team at Nuzzel is only 4 people so far, and we are looking for new engineers who love social media and want to help Internet users organize the chaos of the social web.
More info about Nuzzel’s engineering openings is available at: http://nuzzel.com/passion
Is It Crazy To Do Two Seed Rounds?
The short answer is “no!” In a 2010 VentureHacks post, a funding model that was more incremental was predicted: “Paul Graham says ’The future [of funding] is no fixed amount, no fixed closing date, and no lead.’ In other words, the future of financing is continuous, not discrete.”
Recent posts by Paul Martino and Duncan Davidson of Bullpen Capital note the same thing:
"The seed “round” as a singular event appears to be dying. What used to be a discrete funding round is now more of a rolling, continuous financing process."
— Paul Martino, “Seed is a Process" (TechCrunch)
“‘Seed’ is more of a process than an event — a process of raising money from friends, family, coworkers, super-angels, accelerators, seed funds, etc. Seed financings today often have multiple rounds, many of them capped convertible notes with stepped-up values.”
— Duncan Davidson, “The Supersized Series A”
Mike Collet of Promus Ventures has also written about this, in both 2013 and 2014:
"The answer lies in (gasp) more financing rounds at smaller chunks at valuations that account for progress between rounds" — "Frictionless Financings”
"More and more these days, we see teams that are executing well and choosing to raise a seed extension round." — "The Beauty of Seed Extensions”
And Marc Andreesen recently tweeted “now you see more startups raising $2-3-4M or even more in ‘seed’ financing, often in multiple tranches. … In effect, a $3-5M seed round or a $3-5M ‘New Series A’ is a recreation of the original conception of an A round from historical VC.”
Not everyone likes these trends. VC Fred Wilson recently wrote a post titled “What Seed Financing Is For”, where he admits to being “old school” and recommending that startups approach funding like “walking up a flight of stairs.” Fred writes: “I feel very strongly that seeds should not be as large as they are these days and they should not be used to fund anything other than building product and finding product market fit.”
Some investors have a vested interest in preserving the old model of monolithic funding rounds rather than incremental fundraising. Some VCs would probably like to turn back the clock to an era before AngelList, Y Combinator, and super-angel/micro-VCs, where funding options are more limited and rigid.
As Duncan, Manu Kumar of K9 Ventures, Jeff Jordan at Andreessen Horowitz, and others have pointed out, the funding landscape has changed a lot over the last few years, and “A” rounds (or whatever you call the first priced, non-seed, major institutional round) have increased in size to often over $10 million. As Nikhil Basu Trivedi from Shasta has pointed out in “What’s up with the Series A?”, “There are countless examples of the ‘standard’ $2-6M Series A from 2007-2011 even for companies with significant usage or sales traction,” but “there were 102 Series A rounds between $10-25M in size in 2013, up from 35 rounds of such size in 2009”.
Nuzzel has raised over $3m at a reasonable valuation, from amazing investors, with probably less legal fees, negotiation, and time spent, than doing a traditional Sand Hill Road VC round. We have the capital we need to continue to focus on product and growth, and when we have serious traction and are ready to raise a large round, the Sand Hill Road VC firms will be there, along with newer options.
I’ve also participated as an angel in second seed rounds, for example in HelloSign. Whether you called these rounds “seed plus” or “seed prime” or “seed extensions” (some people are even using the oxymoronic term pre-seed for the first seed rounds), second seed rounds are a great opportunity for angel and seed investors to invest in companies they like after they missed the original seed round.
One last point is from a CB Insights report “Companies That Receive Party Rounds More Likely to Raise Follow-on Funding”:
The conventional wisdom (which is 100% anecdote-driven) is that party rounds are bad for entrepreneurs because no investor is committed enough to care about the company. The argument goes that party rounds make receiving advice and raising follow-on financing more difficult because investors are less “invested” in the company (not enough “skin in the game”, etc etc). But the data doesn’t support these claims. … In fact, follow-on financing rates are higher for companies whose seed rounds were party rounds than the overall rate.
Every startup’s path to success is different. There is no funding source, size, or structure that will guarantee a startup’s success. But raising a second seed round from investors like Lowercase and Homebrew was a great move for Nuzzel, and we look forward to using this new capital to hire more great engineers, and launch more great apps and features during the next six months. Stay tuned!