Month: May 2016

Follow me @samirkaji for my always random, sometimes relevant thoughts on the world of venture investing and startups The escalating difficulty of raising Series A capital in recent years has forced many companies to have to raise multiple seed rounds. Terms like pre-seed, seed, post-seed, and seed extensions are commonplace lexicon in early stage financing. Fortunately for companies going through the multiple seed round path, this phenomenon has coincided with a dramatic increase in small seed stage venture funds entering the market. The success of first generation micro-VC firms like Lowercase Capital, Felicis Ventures, and Baseline Ventures has helped pave the way for growth we’ve seen in the sector. We count roughly 300 US micro-VC firms today — a 2x+ increase from September 2014. As is the case with companies that must navigate through the seed ecosystem prior to getting traditional A round financing, most micro-VC funds follow a similar path. Absent a long institutional investing track record or an objectively apparent revolutionary model, the road map for new micro-VC funds has been fairly consistent: Raise a small proof of concept fund of $5MM-$20MM through individuals and family offices and then hope to show enough portfolio traction to enable a larger institutional investor backed fund 2–3 years later — the micro-VC version of a Series A round. Institutional backers are almost always necessary for scale and sustainability of venture firm. To note, the proof of concept fund moving to institutional fund process in micro-VC isn’t new. Jeff Clavier’s (SoftTech) first fund was under $1MM and Chris Sacca’s first Lowercase fund was under $10MM (congrats to all those fortunate enough to have invested in that fund as it remains the best performing fund of all time). From 2010–2015, the proof of concept to institutional backed fund exercise was fairly straightforward. Managers that had demonstrated strong early performance through mark-ups and had built decent relationships with institutional investors had little to moderate difficulty attracting institutional backers for their sophomore funds. However, the market today is decidedly differed and most institutional investors have slammed on their handbrakes with respect to allocating to new micro-VC funds. A few primary reasons exist for this: – The glut of funds in the market has driven the bar for institutional allocations much higher and the amount of portfolio traction/differentiation needed to get capital from a fund of funds or endowment is very high. – Many institutional limited partners have made their bets within the micro-VC sector and are content in letting performance play out with existing managers. – Limited proof points. After 2 years, managers have little more than a few markups and anecdotes to show as proof of concept. With the reset of venture...

As I’ve written about in the past, entrepreneurs can significantly increase their chances of getting funded by mastering skills as rudimentary as writing emails to potential investors. In hindsight, I failed to highlight the importance of entrepreneurs being able to effectively narrate what their company actually does. While admittedly this falls into the category of “duh, obviously”, I’m still seeing too many talented founders fall into buzzword purgatory when describing their company. Here’s an example of an email I recently saw from a founder soliciting investment (For confidentiality, I’ve changed the name/business model, but left in the buzzwords):  “Healthchat is a disruptive multi-dimensional cloud based platform that provides a transformational offline and online experience via highly curated social communities within the healthcare, wellness, and medical sectors, while providing enterprises with access to valuable, granular level big data analytics.  Led by (Insert name) and advised by top healthcare expert (some brand name), our innovative technology promises to deliver a best of breed solution to the multi-billion dollar healthcare vertical.” These types of descriptions drive investors crazy and do a massive disservice to the entrepreneur and business. The most common reaction investors have to emails like this is, “Hmm. I have no fricking idea what you do”. And instead of replying with clarifying questions or a request for a meeting, investors often ignore or delete these emails altogether. The rationale is if you can’t easily describe your business and mission to me, how can you possibly sell it to prospective customers and employees? Fortunately, this is something that’s easy to remedy. Here are a few ways: Eradicate common buzzwards from your vocabulary We tend to rely on them too much (myself included), but they end up serving as meaningless fillers, distract from the message, and are discounted anyway. Here are some of the words that you should do your best to avoid: – Disruptive – Viral – Big Data – Next generation – Best in breed – Differentiated – Platform – Transformational – Innovative – Unicorn (please, please never use this). Write the email as if the investor is dumb While of course this isn’t (usually) true, you must assume that he or she knows nothing about the business and needs a “your company for dummies” version. Keep the company description simple and short with the following structure: -Team: Who you are (1 sentence) -Problem: The problem you are solving, and why (1-2 sentences) -Product: What your solution is (1 sentence) -Market: Who would use it or who is using it, and who will pay for it (1 sentence) Here’s an example of this using the fictitious company described above:  “With a founding team comprised of...

Please follow me @samirkaji for my random, sometimes relevant musings on venture capital. “If one of my companies is taking on venture debt from a bank in today’s market, will they f*ck me by not letting me borrow the money when I need it?” It’s a question that a investor recently posed to me.  While blunt, it’s wasn’t an unreasonable question to ask when the private markets have started to see a marked reset. To be clear, in conjunction with a fresh equity raise, venture debt remains an incredibly cheap, non-dilutive way to extend runway and/or support growth. Over the last few years, the price of bank issued venture debt has dropped dramatically, leading to a surge of companies taking on bank debt financing shortly after an equity raise. Now going back to my friend’s question. For reference, most venture debt deals allow for some period of time (6–18 months) during which a company can draw capital. Traditionally, companies opt to draw down capital close to the end of the draw period to reduce paying interest on cash they don’t yet need. However bank issued venture debt often comes with what is referred to as a “contingency funding clause”, which allows banks to reject a draw down request subjectively in its own sole discretion. In the past, companies and investors haven’t worried too much about this clause, but many boards have recently begun to instruct portfolio companies to draw down capital immediately after the venture debt deal is inked to avoid a catastrophic situation of not having access to debt capital when it’s most needed. While banks haven’t historically activated this clause, boards are right to have some consternation. Nearly all venture debt banks are publicly traded and highly regulated, and it’s possible that if things get really messy, we may see more aggressive bank behavior, especially in situations where: – The company has missed any significant milestones. – The company doesn’t have a “name brand” investor syndicate (banks will go to great lengths to avoid relationship and reputation risk with the top VC firms). – The draw request comes at a time where the company has < 6 months of runway, inclusive of the debt draw, without a defined path to further funding. While the counsel of an immediate draw has some merits, there are some inherent flaws to this line of thinking: 1/ It results in paying interest on cash that you already have on the balance sheet from your equity round. 2/ The utility of the debt is significantly reduced if you have to pay back 25%-33% of the line before you would theoretically need it. If this happens, the cost of...