fundraising

A love letter to micro funds, the backbone and future of venture capital

By zebethcontrolPosted on November 19, 2022Posted in EC venture capital, fundraising, micro funds, PitchBook Data, Startups, Venture, venture capitalNo Comments

While the Sequoias and the Andreessen Horowitzes of the world continue to swell in size, their influence on venture capital may be heading in the opposite direction as micro funds increase their impact on the industry. Whether you define micro funds as below $50 million or sub-$25 million, these are truly the funds that power the future of the industry. They help venture hubs take off, bring expertise and specialization to the market, and fill a role in the venture capital ecosystem that larger firms simply can’t. They also can be credited with getting a lot of the large unicorn and public companies we know today off the ground, as many of them received some of their first dollars from a micro fund: Robinhood (Elefund), Coinbase (Initialized Capital, which was investing out of a $7 million fund at the time) and Flexport (Anorak Ventures). I’ve written about the rise of micro funds in the U.S. before, but when Sweetwood Ventures reached out to me a month ago about its new fund-of-funds strategy to back nano — sub-$15 million — funds in Israel, I was intrigued. I hadn’t realized that the explosion of micro funds extended beyond the U.S. market, but Sweetwood general partner Amit Kurz told me it was one he had been tracking for a few years now.

Fund of funds Sweetwood Ventures bets big on VC’s smallest funds

By zebethcontrolPosted on November 18, 2022Posted in fund of funds, fundraising, Israel, Startups, Sweetwood Ventures, Venture, venture capitalNo Comments

Despite legacy venture capital firms continuing to raise bigger and bigger funds, LPs may have more luck focusing on the small stuff. Amit Kurz, a general partner at Israel-based fund of funds Sweetwood Ventures, thinks so. He told ZebethMedia that last year he started to notice more and more tiny funds he wasn’t familiar with getting on the cap tables of competitive deals. While these “nano” funds wouldn’t fit the thesis for Sweetwood’s $70 million flagship fund, he thought it was worth figuring out a way to back them. “I got really intrigued as to how can we gain exposure to that space,” Kurz relayed to ZebethMedia. “They really generate this access to the most oversubscribed rounds and they invest a small amount, which is a classic win-win situation. You aren’t competing with the main VCs, yet everyone wants you because you are bringing a ton of value.” So, Sweetwood decided to raise a fund dedicated to these investors. Now, the firm is announcing that it raised $20 million for a separate fund to cut checks of up to $2 million into funds that are $15 million in size or smaller, with a focus on funds based in Israel. Sweetwood has backed seven funds thus far. It’s also looking to essentially create nano funds by working with angel investors. For this side of the fund, Sweetwood will work with angels to match their investment into a company while also giving them carry on the money that the firm puts in. While this would mean a hit to the firm’s potential returns compared to just investing directly, they don’t take that type of stake to begin with. They’ve closed on two such deals so far. “It’s a no-brainer for these guys,” Kurz said about approaching angel investors. “[They are] doing these deals anyway and there is this external partner that doesn’t look to be a tech scout but pays them as tech scouts.” The firm started raising the nano-focused fund in the peak of 2021’s craziness and is now looking to deploy into very different market conditions where smaller and less established firms are really struggling to raise. Kurz said that while they were initially apprehensive when the market conditions started to sour, they quickly got over that fear because they realized that the funds they back will now be writing checks to companies at more reasonable valuations and will actually have time to spend on due diligence. Kurz said when evaluating these potential investments the big question they ask, since neither the angel investor nor nano funds are big enough to lead any of the rounds they are in, is, why do startups want to take their money? He said that the firm is looking for funds and individuals that fall under two categories of answers: expertise and access. For some, especially on the angel investor side, access is king. If you are a notable former tech entrepreneur that is well connected, the thinking is that you are just going to hear about more notable deals and be invited to participate over other angels just due to your background. Kurz said this can include angels that were successful or well-known former founders. On the other side, Sweetwood is looking for funds and individuals with expertise and specialization that are going to be sought out by companies to fill out rounds because they bring an outsized value add to the table compared to their check size. “Why are people giving you access? Why are people wanting you on the cap table?” he said. “It’s very much focused about the value add and ability to gain access to the deals more so than your ability to distinguish the deals or do selections on the deal.” While this nano fund is separate from the firm’s flagship series, Kurz anticipated that some of these funds will grow up to be good candidates for the flagship fund down the line. It will also help them get into companies earlier that might end up in the flagship’s fund portfolios as well. “The very small funds tend to outperform,” he said. “The smaller you are the more probable you are to generate outsized returns. I thought, this is really interesting, how do we build something for this?”

October funding plateaus with valuations likely to blame

By zebethcontrolPosted on November 15, 2022Posted in EC News Analysis, EC venture capital, funding, fundraising, Startups, VentureNo Comments

After a particularly slow summer, the mood in venture capital seemed to change with the season come Labor Day. By the end of September, it felt that maybe the worst had already come in terms of this year’s falling venture funding numbers. Investment volume had stopped declining and was starting to make up ground. Investors said that anecdotally it felt like the market was really starting to gain momentum again — especially at the early stages. But October funding data showed that the venture capital market still has a long way to go.

Nearly 80% of venture funds raised in just two states as US LPs retreat to the coasts

By zebethcontrolPosted on November 12, 2022Posted in EC News Analysis, EC venture capital, fundraising, limited partners, Venture, venture capitalNo Comments

Venture capital funds in the United States raised more dry powder in the first three quarters of this year than they did in all of 2021, but it’s not equally distributed: The big funds keep getting bigger while fundraising has gotten harder for the majority of other players. And Q3 data shows that where a firm is based appears to be playing an increasing role. Through the third quarter of 2022, U.S. venture firms raised $150.9 billion across 593 funds, according to data compiled by PitchBook. While this represents a boost from the $147.2 billion raised in 2021, it marks a staggering drop from the 1,139 funds closed last year. A lot of these dollars went into legacy or well-established firms, which have the clout to raise mega-funds, though some firms drew in dollars by garnering hype. Consequently, LPs are not as interested in backing firms outside of the established venture hubs this year, marking an unfortunate reversal to the COVID-induced trend of more venture money making its way to emerging ecosystems.

Amid record dry powder, VCs are determined to fund anything but you

By zebethcontrolPosted on November 11, 2022Posted in EC News Analysis, EC venture capital, fundraising, Startups, Venture, venture capitalNo Comments

Seriously, anything If you had to sum up the 2022 venture capital market in one word, that word could be contradictions. Venture funds have record dry powder — deployable capital on hand — and yet funding continues to steadily decline. There is seemingly more talk of backing women and people of color in the industry than ever, and yet the numbers are headed in the opposite direction. VCs said publicly that they were focusing on companies on the path to profitability, but that wasn’t true for even a minute. So while many venture firms said they are largely sitting out investing this year as they wait for valuations to fall, it is, again, largely untrue. What does seem to be true, though, is that some VCs are using this year’s uncertainty as an excuse to avoid doing the work it takes to discuss valuations and assess TAM on potential investments into companies with real customer bases. Because they aren’t backing no one — they’re just backing everyone but you.

Peloton co-founder John Foley is a rug guy now

By zebethcontrolPosted on November 8, 2022Posted in EC venture capital, fundraising, john foley, Peloton, startup, Startups, VentureNo Comments

What Ernesta’s round tells us about today’s VC market John Foley clearly didn’t take (ahem) a brake after leaving Peloton. The former co-founder and CEO of the connected fitness company — who stepped down as CEO in February and left the company altogether in September — is back with a new startup. Ernesta, which aims to launch in spring 2023, will sell custom rugs through a direct-to-consumer strategy. It has already raised a $25 million Series A round from a slate of investors that also backed Peloton, including True Ventures and Lee Fixel, through his current firm Addition. It’s not surprising to see Foley getting back into the startup game by any means — venture capital both embraces failure and loves a good comeback story. Plus, there are plenty of previous examples of this happening involving folks who left companies on much worse terms than Foley did. But this deal is particularly interesting — even when you look past the seeming randomness of it. For one thing, comeback stories in venture don’t generally start in the same calendar year that the previous tale ended in. And Foley’s ability to quickly raise such a sizable round before the company’s launch actually tells us quite a bit about where the market is at right now.

I reviewed 1,000+ pitch decks. These are the most common mistakes • ZebethMedia

By zebethcontrolPosted on November 3, 2022Posted in EC Pitch Deck Teardowns, fundraising, Pitch Deck Teardown, startup fundraising, Startups, VentureNo Comments

Over the last six months, I’ve written up 25 Pitch Deck Teardowns — the popular series of articles where I review a pitch deck in detail, celebrating the wins and gently (and sometimes not-so-gently) suggesting improvements. We’ve seen 74-slide decks (yes, really), decks that are riddled with spelling mistakes and bogged down by hideous design (but still work incredibly well), and decks where the founders don’t fully seem to understand what market they are in. For every deck I reviewed for my ZebethMedia series, I saw dozens of other decks as well. Don’t tell my bosses, but I have a side hustle as a pitch coach, and through that, I see a lot of decks. I also am friends with a bunch of lovely VCs and accelerators who often forward decks for me to take a look at. I have a folder with hundreds and hundreds of pitch decks, ranging from $10,000 angel rounds to multibillion-dollar deals in progress. People on occasion send me screenshots of slides, too (I like to think of those as “unsolicited deck pics.” Ahem.) In any case, I have long since lost count, but I’ve probably seen a few thousand pitch decks over the past few years. Suffice it to say: I have opinions about ’em. In this post, I want to break down the top 11 (yes, it had to be 11) most common mistakes I see in pitch decks, along with a bunch of examples of how these mistakes show up. Oh, and if you want to submit your own deck for a potential pitch deck teardown, you’re in luck: Instructions are here. Let’s gooooo. Not knowing your audience A pitch is a story, and stories have audiences. You wouldn’t put a child in front of Arnold Schwarzenegger hacking and slashing his way through various parts of the Predator. Similarly, the story you use to sell to your customers is not the same story that you need to get across to your would-be investor audience. You need to understand how VC works; that’s non-negotiable. If you don’t, it means that you have no way of knowing how to tell your story, and you don’t truly understand what they are buying. Get that resolved for yourself! Examples of decks that get this right: Examples of decks that get this wrong: Not fully understanding your market sizing It’s painful to read a pitch deck and realize that the founders have no idea how to size their own market. At the earliest stage, your company needs to prove exactly two things: Can you build a venture-scale business in this market? Is this the right team to build that business? The way you answer the first question is by having sensible things to say about the market you operate in, and how you see the size and trajectory of that market. If you fail to do that, guess what — you’re proving that you’re not a good founder, and you’re probably not the right team to build the business. Yes, calculating the TAM, SAM and SOM for your market can be really hard, and sometimes it involves assumptions and guesswork, but that’s OK — you’re not getting graded on how accurate your numbers are but on how you view and think about the market you are in. If the numbers are “wrong,” but you can defend why you thought about them this way, it tells your potential investors a lot about your quality as a founder. Examples of decks that get this right: Examples of decks that get this wrong:

3 founders discuss how to navigate the nuances of early-stage fundraising • ZebethMedia

By zebethcontrolPosted on October 30, 2022Posted in Alloy Automation, EC TechCrunch Disrupt 2022, EC venture capital, fiveable, fundraising, Parthean, Startups, TechCrunch Disrupt 2022, Venture, venture capitalNo Comments

Fundraising isn’t a monolithic event but rather a series of meetings and pleasantries, each with their own vibe and nuance. Yet many pieces of fundraising advice to founders paint the process with a broad brush. We heard from three founders at ZebethMedia Disrupt last week: Amanda DoAmaral, co-founder and CEO of Fiveable; Arman Hezarkhani, founder of Parthean; and Sarah Du, co-founder of Alloy Automation, each of whom has raised in the extreme highs and lows of last 18 months. They spoke about navigating the process, what worked (and what didn’t) and how to customize your pitch to navigate the many subtleties of fundraising. For DoAmaral, it was important to spend time researching which investors may actually back her company. She said she’s had investors take meetings with her due to a warm intro despite having no actual intention to invest. “My co-founder and I got in a car and drove down to Tennessee thinking we’re gonna get this check. And this guy didn’t even trust me to like, be an attendee at this event. They’re not writing the check,” DoAmaral recalled. “People are not going to take me seriously if they’re not going to see me as someone that is their equal at all.” Du added that performing due diligence on potential backers beforehand is helpful, not only to find out whether they might actually invest in the company, but also if they will be good to work with. This is especially true for founders raising at the early stages who are looking at a long relationship ahead.

5 ways biotech startups can mitigate risk to grow sustainably in the long run • ZebethMedia

By zebethcontrolPosted on October 28, 2022Posted in Biotech & Health, biotech startups, Column, EC Column, EC Digital Biotech, EC How To, fundraising, Startups, VentureNo Comments

Omar Khalil is a partner at Santé Ventures, where he focuses primarily on biotechnology and medical technology companies. The unprecedented explosion of investment in life sciences over the past decade has resulted in incredible new therapies for patients, strong financial returns for companies and an overall increase in translational research, which is critical to advancing the next generation of therapies. It has also led to eye-popping levels of capital raised by early-stage companies, some of which were years away from entering the clinic with their first product. Naturally, a generous flow of financing generates excitement for everyone involved. Capital is the fuel that advances scientific and technological innovation, and it means a life science startup can create products that benefit the world at large. But what happens when the funding suddenly dries up? In the world of biotech, for example, it’s extremely capital intensive to develop multiple products that are all going through clinical trials simultaneously. The infrastructure needed to maintain these different programs can be too unwieldy to weather a financial drought. A better approach would be to focus on a lead program — a single product that they can take through various stages of development, ultimately leading to FDA approval. In fact, lead programs validate the value of an underlying platform, enabling companies to raise capital through licensing and partnerships. Founders shouldn’t let peer pressure or investor check size mandates dictate their financing strategy. There will always be ebbs and flows in funding, so here are five ways life science startups can optimize for success regardless of the economic climate. Don’t confuse successful fundraising with a successful company At the end of the day, fundraising is a means to an end. The mission for most life science startups is to improve patient outcomes. However, science is hard, and cash in the bank does not overcome the complexities of human biology. Plenty of companies have successfully raised significant amounts of capital but were never successful in developing a beneficial product, therapy or technology. While not a perfect proxy, the value at which a venture-backed company exits (through M&A or IPO) can be an indication of its success in developing a new product. However, there is practically no correlation between the amount of capital a company raises and its ultimate exit value. Since 2010, the R-squared between exit value and total invested capital — a measure of how correlated the two variables are — for all healthcare exits is a paltry 0.34. When you drill down to a correlation between the exit value and the amount of capital raised in a company’s Series A financing, it drops to a practically negligible value of 0.05, according to PitchBook. These statistics support the notion that just because a company raises significant amounts of capital (especially early on), there is no guarantee of a successful investment outcome. Founders shouldn’t let peer pressure or investor check size mandates dictate their financing strategy. Instead, focus on advancing your program through the key stages of technical and clinical development.

How to raise funds when you aren’t in the Bay Area • ZebethMedia

By zebethcontrolPosted on October 27, 2022Posted in EC TechCrunch Disrupt 2022, EC venture capital, fundraising, remote work, Startups, TechCrunch Disrupt 2022, VentureNo Comments

Perhaps sitting perched somewhere in sunny Miami, Florida, is a founder wondering the best ways to fundraise for a company when situated outside a traditional tech hub like the Bay Area. They need not worry. Last week, Mike Asem from M25, Elizabeth Yin of Hustle Fund and Accel’s Rich Wong answered that question at ZebethMedia Disrupt. The consensus of the venture capitalists was that remote work accelerated the trend of VCs looking at emerging markets, founders and companies throughout the nation. That and social media — specifically Twitter — have made it easier to connect with people. To some, sliding into an investor’s DMs can be just as legitimate as diving into one’s network for a warm intro. “We noticed a couple of years ago, in looking at our own analytics, that most of our deals were coming through Twitter,” Yin said at Disrupt. “If I look at my portfolio, my companies who are active on Twitter actually do have an easier time raising money because investors feel like they know them.”