The law firm released the results of its 2012 Seed Financing Survey today, which found that the number of startups obtaining Series A financing after a seed round declined significantly in 2012.

“Of the companies funded in 2011, 27 percent had raised a Series A financing by the end of the following year [2012], while 45 percent of the companies funded in 2010 had raised a Series A financing by the end of the following year [2011],” the report said.

The Series A crunch is a Silicon Valley urban legend of sorts. Some say it is fact, and others dismiss it as myth. The basic idea is that the number of seed-financed startups far outnumbers the amount of venture capital firms willing to invest in an institutional round. The cost of launching and operating an Internet startup is fairly low, and a strong angel investment community supports young companies as they get off the ground. However, companies that are unable to quickly establish a revenue stream or get acquired need venture capital to keep going, which is where the “crunch” comes into play. Without additional financing, they go under and turn into “zombie startups.”

A significant driver of this phenomenon is a changing scene for seed financing. There has been rapid growth in seed financing over the past few years. As opposed to 472 deals in 2009, Fenwick & West found that there were 1,749 seed deals in 2012, while the number of Series A rounds only rose from 418 to 692.

A few key trends are behind this bottleneck. First, venture capitalists are becoming increasingly involved in seed-stage deals. The percentage of seed deals that venture capitalists led increased from 27 percent in 2011 to 34 percent in 2012. Furthermore, accelerator programs are multiplying like rabbits, which adds to the number of promising startups getting attention from investors. The JOBS Act and the emergence of crowdfunding provide more flexible alternatives to traditional seed financing, and platforms like Angelist help establish a cohesive network between early companies and investors.

Basically, it is easier than ever before for a startup to nab seed funding. The challenge is creating a product strong enough to attract venture dollars (or sustain itself on its own).

“These results show a continued strong and diverse seed stage financing environment in the internet/digital media and software industries,” said Steve Levine, a partner in the Fenwick & West Startups and Venture Capital Group.  “However, the decreased percentage of seed funded companies that had received Series A investment by the end of the following year emphasizes the importance of companies demonstrating traction with the seed investment they receive, in order to obtain Series A funding.”

The survey also found that seed stage deals are beginning to look more like traditional, institutional deals. The number of deals structured around “preferred stock structures,” as opposed to convertible notes, increased, and valuation caps increased in deals based on convertible notes.

Fenwick & West drew these results from an analysis of 61 transactions in 2012 with a high concentration on Silicon Valley. It is a small sample pool that does not necessarily reflect “the larger, geographically dispersed, seed financing environment,” but like sightings of Bigfoot, the thrill is in the mystery.

Photo Credit: Ben Cumming/Flickr

Even if you’re a master coder, a good visual interface can make a world of difference when doing things like building responsive web apps.

That said, startup Divshot just raised $1.1 million in seed funding to grow its drag-and-drop visual builder. The startup’s service is described as a tool for professional web development that fuses a solid visual interface with professional code quality standards — or sort of like a Creative Suite for web developers. Divshot said it already has 40,000 users.

The seed round was led by Rincon Venture Partners with participation from 500 Startups, Daher Capital, Floodlight Ventures, Cooley LLP, Drummond Road Capital, and Eric Hammond.

“Super-smart team with kick-ass open-source cred building tools for developers? We can’t wait to see what they do next,” said 500 Startups’ Dave McClure in a statement.

Founded in April, the Los Angeles-based startup was previously a graduate of the Launchpad LA accelerator.

Money photo via Shutterstock

We are working with UK Trade & Investment to showcase the United Kingdom's thriving start-up and investment scene through a series of posts and video interviews at SXSW. Check out all of the coverage here. As always, VentureBeat is adamant about maintaining editorial objectivity.

AUSTIN, TX — WayWire, the video startup that counts super-hero Newark, New Jersey mayor Cory Booker among its founders, has confirmed to VentureBeat that LinkedIn co-founder Reid Hoffman is one of its angel investors.

WayWire is a video service that basically wants to aggregate videos from multiple source and give its users the ability to sort those videos into their own channels based on a particular topic. For example, someone could create a “wire” for entrepreneurs, linking to various broadcast news sources from major media companies (NBC, Fox, etc.), web media companies (AOL), and user-generated videos (Vimeo, YouTube, Vine). The idea is that people can curate the news better than the main stream media, which in turn will abolish the practice of news organizations telling you what’s important everyday.

Booker accidentally revealed Hoffman as an investor during a panel at SXSW yesterday, which was first spotted by Reuters editor Paul Smalera.

Hoffman isn’t the only big name to drop some money into WayWire. The startup, which was founded back in June 2012, has raised $1.75 million in funding from a long list of high-profile angel investors, including Oprah Winfrey, Google chairman Eric Schmidt, music entrepreneur Troy Carter, LinkedIn CEO Jeff Weiner, and others.

With such a star-studded cast of investors, I’d think WayWire would have more pressure to ensure that its service was useful. However, both Booker and co-founder Sarah Ross told me that this isn’t much of a concern as they push full steam ahead with a new beta version of WayWire that will improve upon the alpha version that launched back in August.

Photo by Tom Cheredar

Billing itself as the “video ad network for the modern age,” Virool has raised a whopping $6.62 million “seed” round, the largest round in Y Combinator’s history.

Considering the size of the round and the inclusion of institutional investors, calling this a “Series A,” or the first round of institutional funding, may seem more accurate. However, founder Alex Debelov said the entire round was raised in on covertible debt and Virool is not taking any members on its board. Hence, it is a seed round.

Virool offers a self-service social video advertising platform to make video content go viral. Advertisers can use it to blast their content out to multiple online publishers, who get paid for the videos they show inside their properties. Developers can also integrate Virool’s API into their apps to more easily execute wide-reaching video advertising campaigns, and companies have access to real-time analytics to track their success.

According to Debelov, many social video ad platforms require a minimum of $100,000 to promote sponsored video content, which makes it inaccessible for smaller advertisers. Using Virool, anyone can start a video campaign for as little as $10 and only pay for the ad when someone watches their content for 30 seconds or longer.

Video advertising is predicted to skyrocket in the upcoming year, a trend investors are clearly paying attention to. Since launching in March, Virool has grown from 200 to more than 30,000 customers, ranging from independent artists to large corporate clients like Intel, Samsung, K-Swiss, Sony, and Orbitz. The platform apparently reaches 750,000 people a day and more than 22 million a month.

The list of contributors include big names in venture capital and angel investing, and Virool will use the funds to meet high demand for its product. Institutional investors include Thomvest Ventures, Menlo Ventures, Draper Fisher Jurveston, Yuri Milner, Phenomenon Ventures, TMT Investments, DominateFund, and FundersClub. Individual investors include Sam Altman, Paul Buchheit, Troy Carter, Dave McClure, Farzad Nazem, Erik Moore, and Garry Tan. Virool was also the first company to officially receive investment from online investing platform FundersClub.

In October, FundersClub broke Y Combinator’s record with its $6 million round, which was subsequently broken by ZenPayroll’s $6.1 million raise in December. And let’s not forget about YC startups Pair, Ark, and SocialCam which all raised over $4 million in seed funding.

Many in the startup community advise against huge seed rounds because it involves giving away significant equity and freedom early on. Ironically, Virool investor Dave McClure spoke just last week about the importance of not taking excessive amounts of seed financing and keeping valuations in check. Often in the bubble that is Silicon Valley, people in all parts of the ecosystem focus too much on fundraising and equate large investments with validation or success.

Only time will tell if this funding lifts Virool up to the new heights, or if it gets crushed by the weight of the beanstalk.

Check out Virool’s video called “The Secret of All Viral Videos” to learn more … kind of.

So you’re trying to get your first taste of funding. You’ve got a lot of competition, and you need to not only stand out but also prove your business is worth the cash. Jeff Clavier, the outspoken managing partner of SoftTech VC, has some advice for you.

SoftTech VC is a venture firm that has funded Fab, Fitbit, and Eventbrite. The company says it has lost out on 20 percent of its investments, but it’s confident in its method of finding startups who will make it beyond the beta.

When an investor is looking to give some early money to a young startup, according to Clavier, he (like most VCs) is looking for the right founding team. A lot of companies have different team makeups — brother and sister duos; a bunch of business people with a big idea, but no one to build it; college classmates in computer science.

Clavier says, however, the best startup teams are made up of one developer, one designer, and one business person. That way, all your bases are covered: You can dream up the idea, build it, and make it look good. And believe it or not, if you’re a married couple, he has seen that work too. Just as long as your skills are complementary.

Before your early stage investor goes reaching for her checkbook, however, he’ll likely want to see some early “alpha” product. Something to prove that you’re not only getting users, but you’re also changing the product based on their recommendations. Feedback is a great and harsh tool because you are too close to your own product to see small, but problematic flaws.

Another “key” to getting that early funding is retention. Great, you’ve got 10,000 users — but will they stick around? Or will they bail after a month when they get a marketing email and are reminded that the product even exists.

And if there’s potential for future venture investment in the form of a series A round, then you might be on the road toward seed funding.

Once you’re funded, however, the judgment doesn’t stop. You’re going to need to prove that you have a direction for your product, a plan for getting users to sign up and stay, and exit goals. Forget about saying your company is going to get bought up by Google in five years, though, that raises some major red flags with investors.

Check our more of the early investor’s mindset in the infographic below:

Infographic courtesy of Founders and Funders; Seed money image via Shutterstock

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One of the biggest mistakes seed-stage entrepreneurs make is asking for too much money.

If you are an entrepreneur, you have probably heard from countless advisors and pseudo-advisors that you should raise enough money for 12-18 months of runway, have a plan for use of these proceeds, and understand what milestones are needed for profitability or another round of financing. You probably also have heard that startups almost always require more capital than called for in an original business plan. So, raising more money typically makes sense.

But just because you want to raise more money doesn’t mean you should ask for it.

Investors tend not to be as bold as entrepreneurs. If you have invested in a couple angel deals, you’ve likely been burned at least once. A classic mistake angel investors make is backing an entrepreneur early and then having him or her fail to raise the rest of a round. That’s one reason a lot of angel investors are gun-shy.

Most investors secretly love to be in an oversubscribed round.  An oversubscribed round makes an early-stage investor feel smart and validated.

So what does this mean for you? If you want to raise somewhere between $750,000 and $1 million, but think it might be hard to get to the top of that range, ask for something less and aim to be oversubscribed.

Which sounds better?  (This is not a trick question.)

1. “I am raising $1 million. The good news is that I have $250,000 committed and a little more than that soft-circled (verbally committed). I would love to have you participate for any amount you would like.”
2. “I am raising $750,000.  I have $250,000 committed and most of the rest of the round soft-circled.  I would love to have you participate and would try to make room for a small investment if you are interested.”

The first pitch isn’t bad.  But I guarantee you that many angel investors will move on as soon as they hear $250,000 committed on a $1 million target.  The second pitch creates more of a sense of urgency even though not much as changed. The second one says, “This train is leaving the station. Hop on if you want to get a seat.”

Now, here are two important caveats. First, setting a lower target is different than misleading about dollar amounts raised or other elements of the financing.  If you say you have a certain amount committed and then an investor later finds out you don’t, that’s a red flag. You can be strategic about marketing your financing without sacrificing your integrity. Second, this method works less well with venture capitalists who have large dollar amounts that they need to put to work.  In that case, having only a small amount of room may preclude an institutional VC from investing.

If you are targeting angels and super-angels, the strategy of lowering your target may enable you to raise more money, quickly.

Greg Gottesman is a managing director of Madrona Venture Group, where he has been since 1997. He loves early-stage investing and currently serves on the boards of BuddyTV, Cheezburger, Decide.com, Rover.com, ThisLife, WildTangent, Startup Weekend, and a number of others. He also pens the blog StarkRavingVC.  Greg can be followed on Twitter @greggottesman.

Seed money image via Shutterstock

VENICE, Calif. — For small businesses, order management can be a cumbersome and expensive ordeal.  Venice-based startup Lettuce hopes to simplify the process with its new automated order-and-inventory-management-system.

VentureBeat met with Lettuce chief executive Raad Mobrem during last week’s Seimer Silicon Beach Summit to discuss his company, which just raised  $2.1 million in seed funding.

CrossCut Ventures led the seed round, which included investments from 500 Startups, Launchpad LA, Baroda Ventures, Zelkova Ventures, Double M Capital and other angel investors, according to Mobrem.

Lettuce’s target clients are small wholesalers and e-commerce sites that need an efficient and inexpensive tool to manage their orders, said Mobrem.  The CEO explained the traditional way these types of businesses processed orders into their backend systems: “Once you get that order, you have to process it and input it into your accounting system, you have to put it into your CRM [customer relationship management], you have to put it into your shipping software, like UPS or FedEx or USPS, into credit card processing, and then you also have to account for inventory somehow.”

Lettuce’s CEO says that before his company, the available order-management software burdened businesses with clunky, non-intuitive designs, and the accompanying hassle of repetitive data-entry. Mobrem believes that his company has found an optimal way to streamline backend data-entry.

“What we do is integrate all those commonly-used back-end systems, like Salesforce, Printforce, UPS, USPS, we also integrate credit card processing, like Stripe or Authorize.net, and then on top of that we provide our own inventory system, that’s very simple but also very powerful,” Mobrem said. “So now, instead of you going in and typing into all of these back-end systems, you review all the orders, you click on one button and it processes it for you.”

Mobrem took a jab at the “big systems” competing for his share of the market, singling out NetSuite, saying it takes “hundreds of thousands of dollars in getting it set up,” and saddles users with high monthly costs.

Mobrem claims that Lettuce can reduce costs by 95 percent compared to NetSuite.

“Most of the time, time equals money with your employees.  So, to do that, if you have two inside sales reps, and let’s say they’re spending all their time processing orders, and we reduce that by 95 percent, that means now they actually have time to actually do more sales.”

Mobrem and his business partner and co-founder, Frank Jones, came up with the idea for Lettuce while running a small, wholesale dog-toy-company called Durable Ideas.  Mobrem and Jones encountered two problems with their pet product business: “one, getting the order back to our office in an efficient way, and second, getting that order into all of our systems.”

The solution to the entrepreneurs’ troubles came in the form of a mobile iPad app, which they developed, and which allowed them to display their products “in a really beautiful way” and “capture orders in real-time,” said Mobrem.

“We built this product literally out of a need and the funny part was, we never had any intention of doing this.  We were going to tradeshows and other companies that were exhibiting would see our product and they’d literally leave their booths, stop doing sales and come ask us “are you guys taking orders off iPad?” said Mobrem.

After realizing that their technology could solve a problem across business verticals, Mobrem and Jones decided to start Lettuce.

Lettuce launched less than two months ago and employs twelve people, said the CEO.  Mobrem says Lettuce’s software is compatible with iPads and web-enabled computers.  Lettuce has already processed $2 million worth of orders and charges businesses a fee of $29 to $119 a month to use its software, he added.

Trinity Ventures, a Silicon Valley-based venture firm that has been around for 25 years, is keeping its fund-size modest despite escalating interest from its limited partners. It’s a bubble, alright.

Rumors have been circulating about the eleventh fund for over a week, but the firm did not issue a confirmation until today. The new fund was highly oversubscribed but capped at $325 million to allow for a higher partner-to-fund ratio.

According to Ajay Chopra, a general partner at Trinity Ventures, the fund-size has been kept deliberately modest in previous years.

“We can manage our portfolio companies and stay deeply engaged with early-stage companies.” In an effort to connect with young founders, the firm runs Dolores Labs, a coworking space in San Francisco’s Mission District.

The firm specializes in early-stage startups in the digital media and e-commerce, software-as-a-service (SaaS), and cloud services. Chopra told me that the piping hot areas for the firm are SaaS solutions focused on the front office, startups that are tackling the online to offline trend, mobile e-commerce, and consumer-focused tablet applications.

Among their investments are Aruba Networks, Extreme Networks, Infoblox, Starbucks, Jamba Juice, and Wall Data, which have all gone public.

In their more recent funds, the most promising investments include BeachMint, Care.com, Kixeye, Maxpoint, New Relic, RadiumOne, ServiceMax, and TubeMogul.

The funding comes from Dave McClure’s 500 Startups and former TechCrunch editor Mike Arrington’s CrunchFund.

Also participating were UK mobile funding firm m8 Capital, Kapor Capital, and Felicis Ventures.

The iOS shop has been focusing their energies on two of the more fun and exciting disciplines available in the world as we know it: music and design. Evidently, that focus has paid off enough to attract the substantial attention of early-stage investors, too.

955 Dreams’ portfolio includes apps like the iPad interactive timelines The History of Jazz ($9.99) and On the Way to Woodstock ($4.99). Both feature scores of hours of narrative and video content.

The startup also publishes Band of the Day (pictured), a daily mobile magazine full of photos and music for iPhones. Starting today, BOTD will also be available on the iPad. Both versions are free.

“Our publishing platform has consistently produced high quality products that resonate with users all over the world, allowing us to achieve four App of the Weeks in one year,” said founder and CEO Kiran Bellubbi in a release.

“There is an absolute and unrelenting focus on maintaining a high level of quality throughout the product and ensuring that the experience for the user is not compromised in any way.”

Continuing the emphasis on design and user interface and experience, co-founder and CDO (we’re guessing that stands for “chief design officer,” although more juvenile guesses have been posited in the VentureBeat writers’ lounge) T.J. Zark said, “We were relentless in our design iterations for this publishing platform. We refined every speck of the experience, the UI, the backend, and the overall look of this product… This is the result of a thousand tiny iterative decisions.”