Quick takeaways:

1. The relationship between LPs and angels is mutually beneficial - angels can increase the size of their investments and LPs get access to company deal flow and/or expand their emerging manager database

2. Some LPs now have their own due diligence process and direct investing practice that is not necessarily connected to the emerging managers they have backed

3. Trust is a large part of evaluating an emerging manager; many emerging managers through a ‘courting period’ with LPs

These are just some of the helpful points we took away.

Coming up is our fourth and final episode all about founders. All good things must come to an end. Please feel free to share your feedback with us via email or on socials.

We will see you in two weeks,

DB & FB

Today we’re releasing episode two - a playbook for decentralised investing. By that we mean investing without an institutional fund in a non FTE, or full time employee, capacity. Joining us is Associated Syndicate Member and friend David Ola to share his playbook for doing so. Francesca and I chime in on what has worked well for us too.

Four quick takeaways:

1. Know your why before you start; it saves you time and money

2. Keep an open mind on the structure of how you will invest

3. Be clear about how you’ll support a founder BEFORE you invest and relay that to them

4. Be open minded about how you may find the right structural fit

   1. For example. David and Marcel have a partnership with an institutional fund where both sides benefit from each other’s expertise

There is so much more in there. We cannot wait to hear from you about episode two.

DB & FB

At the beginning we were not sure it was going to work. It started as just an idea. Could we create something so that we could always be in relation to entrepreneurship? One cloudy fall day we decided to get to work - researching jurisdictions, legal requirements, interviewing special purpose vehicle platforms and aggregators. Then we presented our findings to our friends - those also in VC, who had anti-portfolios, wanted to invest outside of their current remit and/or seed their fund with their angel investments. To our surprise - no one has turned us down. Now, 15 plus investments and over 30 members later - we hope to share some of our lessons learned thus far.

Here is episode one. Setting the stage.

Thanks for your support!

DB & FB

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Recently, I linked two experiences together that highlighted how (mostly subconsciously) my brain pigeonholes me into a certain way of thinking or assessing a situation. Although this is perhaps stating the obvious, more interestingly, these experiences spurred me to question ‘why’ my brain does this. Not least because I might be missing an opportunity to learn or be unconsciously holding myself back. Additionally, I might not be thinking enough about how my perception may differ to others.

The first ‘lightbulb-inducing’ experience, was a conversation with a friend who also has experience working in Venture Capital (VC). It was about how often we draw tangential parallels between day-to-day life and our work, and it got us wondering, does everyone do this?

The conversation’s catalyst was sparked after watching a modern dance performance. What was thrumming through my mind was how an emotionally charged scene between two dancers resembled a rambunctious battle between a VC and a founder when negotiating a term sheet (yes, please feel free to eye roll here). That thought snowballed into another: I wondered if, in an engineer’s subconscious, when watching the same performance, they might be calculating the mathematics behind the physical angles the dancers were contorting into at speed. My friend replied, without missing a beat, “They must do.”

It got me thinking about these ‘this reminds me of that’ thought-bubbles and why they happen. Exposing your brain to certain tasks/jobs/activities engages specific parts of the brain, and over time, that shapes the way we see the world. The lens we use at work inevitably starts to tint how we interpret everything else. That way of thinking seeps in—quietly, persistently—until it becomes part of our perspective.

The second thing I’ve been ruminating on came after undergoing a treatment, which required self-administered injections. When I mentioned this procedure to friends and family, the reactions were usually a mix of admiration and mild horror, peppered with remarks like, “I’m terrified of needles; I could never do that,” or, “You’re so brave.” I’ll admit, the first time was far from pleasant, but what surprised me most was how quickly I acclimated to the process — it became routine far sooner than I’d expected.

Society clearly has created certain taboos — or at the very least, expectations — around what’s considered difficult, acceptable, or off-limits. There seems to be an unspoken formula at play: if you do X, then the “appropriate” reaction or emotion should be Y. Deviate from that, and people are often surprised, confused, or even uncomfortable.

Even more interestingly, the “Y” — the expected emotional response — varies significantly depending on the culture you grew up in and the kind of work you do. What one group finds daunting, another might see as entirely routine. It made me realise that these perceptions are often shaped by how we assess the risk or difficulty of “X,” and more subtly, by what has been normalised within our social or professional environments.

For example, in the medical world, I doubt a doctor would applaud another for injecting herself repeatedly as years of exposure have stripped needles of their emotional charge. Or take the grandfather who spent 25 years at the same company, now baulking as his grandchild announces their third job switch in as many months. To him, stability was the ultimate luxury—something deeply ingrained in a very different time.

Chewing on this further, it struck me that society’s tendency to assign fixed emotional responses — this “Y” to every “X”—can lead to a kind of herd mentality. While this is perhaps natural, even necessary at times, it can also have unintended consequences: reinforcing outdated norms, stifling adaptability, and in some cases, producing outcomes that are far from optimal for a changing world.

So, how much is conformist thinking holding us back as we cling to outdated perceptions of risk?

Given my exposure to so many entrepreneurs, I have certainly ended up living in a bubble where starting my own company is perceived as risky but also doable. If I had joined a corporate, would I have found the idea of starting a business too daunting and having never even realised that this path was even a feasibility?

How much of my decisions come down to instinct shaped by my brain’s wiring, honed by my work, the cultures I’ve experienced, and the people around me? It’s the classic nature versus nurture question.

I’m mindful that not everyone has the desire or the freedom to start a business, and many have responsibilities that make exploring certain paths difficult, if not impossible. But a key lesson from my latest thinking is to challenge my own perceptions of risk — and question what society has told me to fear. Obviously, some risks are black and white — i.e. don’t walk in front of a bus — but for everything in between, it’s important not to default to the “societal Y.” Instead, I will endeavour to push back on my own ‘default’ thinking and draw my own conclusions.

Perhaps then like Nemo, it could unlock an adventure of a lifetime…

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This list is not an exhaustive one, but here are the grants that I explored over the course of the last year. As mentioned in my last post, it is important to read the fine print to see if you are eligible! Bonne Chance!

BSS

• BSS - The State of Berlin, with support from the European Social Fund Plus (ESF+), offers a dedicated incubator program to assist technology-oriented founders. The program is designed to support innovators in developing their products to market maturity and establishing them sustainably in the marketplace.

Key Details:

• Scholarship amount: Up to €2,500 per month per founder.

• Funding duration: Between 6 and 36 months.

Eligibility Criteria:
To qualify for the program, applicants must meet the following conditions:

• Be planning to develop an innovative, technology-oriented product or solution.

• Demonstrate a clear potential for bringing the product to market maturity.

• Be based in Berlin or willing to relocate to Berlin for the duration of the program.

• Commit to working full-time on the business project during the funding period.

• Have not yet commercially launched the product.

• Be eligible under ESF+ guidelines, including residency or legal working status in the EU.

• Your company must not have been incorporated (i.e. logged within the commercial register) longer than six months from the point of applying in Berlin.

The funding is provided as a grant and passed directly to selected scholarship recipients which can be found here.

EXIST

EXIST is a nationwide program in Germany that supports university graduates, students, and researchers in launching innovative startups. Funded by the Federal Ministry for Economic Affairs and Climate Action and the European Social Fund (ESF+), this program aims to foster entrepreneurship in academia.

Key Features of the Grant:

• Monthly stipend: €1,000 to €3,000, depending on qualifications and family status.

• Additional funding: Up to €30,000 for materials, equipment, and other startup-related costs.

• Duration: 12 months of funding.

• Training and coaching: Entrepreneurs receive support in the form of mentoring and business training.

The grant is ideal for individuals in the early stages of transforming innovative ideas into viable business ventures.

Eligibility Criteria:

• Applicants must be graduates, students, or academic staff with a business idea.

• The business concept should focus on innovation and technology-oriented solutions.

• The company must not have been incorporated - not ideal for Expats who need a self-employed visa tied to a German-incorporated company…

GründungsBONUS

The GründungsBONUS is a funding program provided by the Investitionsbank Berlin (IBB) to support innovative startups in Berlin. The program aims to help young companies in the early stages of development by providing financial support to accelerate their growth and market entry.

• Grant amount: Up to €50,000 per startup.

• Funding rate: Up to 50% of eligible project costs can be reimbursed.

• Purpose: To support activities such as product development, market-entry, and operational scaling.

• Funding period: Typically up to 12 months.

Eligibility Criteria:

To qualify for the GründungsBONUS, startups must meet the following conditions:

1. Location: The startup must be based in Berlin or planning to establish its headquarters in Berlin.

2. Business age: The company must be less than 12 months old at the time of application.

3. Innovation focus: The startup should demonstrate a strong focus on innovation, whether in technology, business models, or services.

4. Legal entity: The business must be registered as a legal entity (e.g., GmbH, UG, or other recognized forms). Sole proprietorships are typically not eligible.

5. Job creation: The project should aim to create new jobs or contribute to the economic development of Berlin.

6. Business concept: A viable business plan or concept must be submitted, detailing the innovation, market potential, and use of funds.

Considerations:

• Startup Age Restriction: Businesses older than 12 months are not eligible, so it’s critical to apply within the first year of registration.

• Funding Coverage: The grant covers up to 50% of eligible project costs, so startups must secure additional funding or have capital to cover the remaining 50%.

• Accountability: Recipients must use the funds as outlined in their business plan and may need to provide proof of expenditures or project progress.

• Combination with Other Grants: The GründungsBONUS can often be combined with other programs, but overlapping funding for the same costs is not allowed.

• Local Focus: The program strongly emphasizes the economic impact on Berlin, including job creation and innovation within the region.

Top tip: If you have a consultant to support you on your application, you can get 50% off their fee (make sure it is success-based) if you:

1. Have a call with IHK - email them with the subject title ‘Förderung für Unternehmensberatungen für KMU’ and get a letter to say you have done so

2. Choose a consultant that is BAFA certified, they will then submit their consulting job to the BAFA body for approval and once you receive confirmation they will reimburse 50% of consulting fees to the consultant

SPRIND

The Federal Agency for Disruptive Innovation (SPRIND) was established by the German government to support groundbreaking, high-risk innovations with the potential to solve major societal challenges or significantly transform industries. The program focuses on fostering bold, transformative ideas that may not yet be commercially viable.

• Type of funding: Grants, investments, or tailored financial support specific to the project’s needs.

• Equity-free funding: SPRIND offers equity-free grants for early exploration and prototype development phases. However, for larger-scale or advanced-stage projects, SPRIND may negotiate equity or other returns, depending on the nature of the funding agreement.

• Focus areas: Disruptive technologies, sustainability, health innovations, digitalization, energy transformation, and other forward-thinking fields.

• Duration: Project-based, with timelines defined by project milestones.

• Funding amount:

  • Up to €1 million for initial exploration phases.

  • Larger-scale projects may receive funding in the range of €5 million to €20 million or more, depending on their potential and societal impact.

Eligibility Criteria:

To qualify for SPRIND funding, applicants must meet the following conditions:

1. Innovative potential: The project must demonstrate a significant departure from existing solutions, offering the potential for disruptive change.

2. High risk and uncertainty: The idea should involve risks that make it unattractive for conventional investors at the current stage.

3. Societal impact: The innovation should address societal challenges or present opportunities to improve economic, environmental, or health outcomes.

4. Geographic focus: The applicant or project must have a strong connection to Germany, either by location or collaboration.

5. Development stage: Proposals can range from early research concepts to advanced prototypes, provided they align with SPRIND’s mission.

Considerations:

• High Risk, High Reward: SPRIND focuses on ideas that carry high risks of failure but also have the potential for significant breakthroughs if successful.

• Flexible Support: Funding is highly adaptable, and SPRIND may collaborate with innovators to customize the funding structure for each project.

• Equity-Free for Early Phases: Initial exploration and prototype development funding are equity-free, making it highly attractive for innovators. However, equity or other forms of returns may apply for larger, long-term investments.

• Multidisciplinary Collaboration: SPRIND encourages partnerships between researchers, startups, and established companies to leverage diverse expertise.

• Public-Private Synergy: Projects often aim to bridge the gap between public-sector goals and private-sector scalability.

Unemployment Benefits and Entrepreneurial Support

Germany also offers generous support for individuals transitioning from employment to self-employment. If you’ve been employed in Germany for at least two years, you may qualify for unemployment benefits, and these can be leveraged to support your entrepreneurial journey.

Standard Unemployment Benefits (Arbeitslosengeld):

• Duration: Up to 12 months.

• Payment: 60% of your last salary.

• Additional benefits: State contributions to health insurance and pension.

Considerations:

• Regular unemployment benefits prohibit you from earning additional income.

Gründungszuschuss (Startup Grant):

If you wish to start your own business, you can transition from unemployment benefits to a startup grant by submitting a comprehensive business plan to the unemployment agency.

• Support duration: Six months of unemployment benefits, converted into a grant.

• Additional support: An extra €300 per month to cover your health insurance.

• Earning potential: You can generate additional revenue during this period.

Considerations:

• As a self-employed individual, you’ll need to cover the full cost of health insurance and pension contributions, which can be higher than when employed.

• You need to submit an application to apply for this grant funding which is quite laborious, you can get a start-up coach to help you and the unemployment agency will cover the costs.

• It needs to be clear that you did not quit your job to start a company but rather, during your unemployment journey, you discovered that you wanted to start a business.

Not finding what you are looking for?

Here is a website that outlines all the potential grant funding available in Germany, only in German but Google Translate will work wonders for you…

Attractive debt funding

I have not explored this option in too much detail but as your business matures, there are some attractive debt-based options that the German Government provides, such as ERP Special Fund and KfW Capital but ​​both require you to have some form of recurring income.

Similarly, there are private debt providers you can explore such as re:cap, float, and fulfin.

Visa tips

Excitingly, last year, Germany released an attractive visa scheme whereby if you successfully show that you are on an accelerator or grant programme, they will give you a visa for up to 18 months. See section ‘investors/self-employed, founders and freelancers when you click on the link above.

A lot of equity-free grant programmes are contingent on you having not actually registered a company yet, this can be challenging for expats who, if they want to apply for a ‘self-employed’ visa must have a registered company in Germany… I hope to encourage more expats to start companies in Germany so that this ‘check-box’ requirement will be revised!

Some useful folks to know

• Berlin Partner - Super helpful for supporting you on which is the best grant funding for you as well as fast-track your visa application process

• Funded - Alex and the team have successfully helped individuals acquire millions in equity-free funding

• Unternehmenswerk - Pavel was great with my unemployment start-up grant

• Other advisors include:

• https://meryt.eu/, https://www.linkedin.com/in/julianhernichel, https://www.linkedin.com/in/marius-l%C3%B6we-14514a81/

I hope this helps and please feel free to ping me if I have missed any key snippets of information that/people who can support founders on their journey.

I have recently gone on the weird and wonderful journey of equity-free grant application with my start-up (more to come soon!) and it has certainly been interesting to compare it to the world of Venture Capital (VC).

Why did I go for equity-free grants over VC funding?

After spending some time in the “game”, I have hopefully come to the healthy conclusion that VC funding is a fantastic source of capital only for the very few.

Namely, those who want to exit their company at a multi-billion dollar valuation. I won’t go into the long-winded rationale behind this statement, but in short, it is because the Venture Capital industry is based on balancing risk with extreme outliers.

Very few companies ever reach these heady valuations, yet this has generated a warped view of what it means to be a “successful company”.

Personally, I have no interest in being a unicorn founder. I have seen many founders grind away with the ambition to reach this goal while selling off vast amounts of their company to fund their heady expenditures, and it does not appeal to me. But don’t get me wrong—I have the utmost respect for those who do.

A path rarely discussed within the VC realm is the “bootstrapping” strategy, i.e. to surround yourself with a small but brilliant team that can build a product that can sustain itself (i.e. reach profitability) sooner rather than later. However, this approach still comes with significant risk; namely financial risk, as until revenue comes in, you can burn through your savings in no time. In many ways, raising a significant chunk of VC capital significantly reduces the risk of going bankrupt before your company reaches product/market fit but of course, at the cost of VCs expecting significant returns in the future.

Although as with any country (!) Germany has its flaws (!), but what I have discovered in the last few months (as a Brit living in Germany) is that there are many brilliant programs in place to help people start a company, not only with capital but with a myriad of other perks such as office space, visa sponsorship and access to industry experts. Regardless of whether you want to raise Venture Capital funding or not, I would encourage those founding a company in Germany to explore equity-free funding as well, these programmes can easily keep you (personally) financially afloat as long as you don’t have significant outgoings. If you are fortunate enough to live in a country that has set up policies and budgets to support SMEs, I urge you to explore this route – after all, what is better than getting an equity-free grant to pursue your dream business?

I have given a lot of thought to how best to raise funds for my company and I devised a comparison of VC fundraising versus equity-free fundraising. So without further ado in addition to the obvious fact that VC requires equity and the other does not, here are the nuances I have deciphered regarding these two options:

The Similarities

1. The basic premise of pitching to both types of funding is very similar. Namely, both want to understand why you, your product, your financial projections, your assumptions, the size of your market, how you differ from competitors, etc. It's all pretty similar stuff.

2. Both require the ability to research “who you are pitching to” well so that you can custom your pitch according to what you think will be their preference (e.g. an impact VC will want to see impact metrics) and you must be able to present your vision brilliantly. A top tip that applies to both is to try to build relationships with the decision-makers or champions (often juniors who really like your idea) of these respective institutions. Often it is much easier to get a grasp of what style or emphasis you should put on your presentation or submission if you have spoken to someone in person. Sometimes you get absolute nuggets of information from a single conversation that has not been explicitly outlined e.g. a grant has an ‘unspoken’ quota to invest in female founders or this VC partner has a strong preference for products that have a bottom-up GTM approach. At the end of the day, as is the case with almost everything (see previous blog), it always comes down to convincing others of your vision.

3. Thankfully for me (!), most pitches are encouraged to take place in English to demonstrate an ability to internationalise and see your markets overseas.

4. Both types of funding require that you report your progress to someone. The cadence of this reporting very much depends on the grant and the VC, but if you are someone who likes to be completely free to do as they choose, be sure to ask what the expectations are of the organisation that is giving you funds.

The Differences

And now for the differences:

Difference 1: The Way in Which you Apply

Equity Free Funding - Tick the Boxes in the Application

The German Government allocates a pot of capital for either state, trade departments, or third parties to deploy as grant funding, in fact, this number is in the billions and segregated into thousands of different pots.

There are often very strict criteria put in place as to who can apply for specific grants. For example, only founders based in a certain area of Germany, and/or have not founded a company before, and/or are building something in a certain sector. Be sure to read the fine print as if you do not fit the criteria, you may have wasted a lot of time.

Applying for Grants requires a MOUNTAIN of paperwork to complete in order for the Government to ensure that funding is being placed into the right hands. This paperwork can be very laborious (particularly as a non-German speaker) and to then get rejected seems like a lot of work going to waste. There is often a requirement of reams of words for the sake of it, and a lot of contextual explaining. This is understandable, as often assessors of grants do not come from an investment background or have industry knowledge.

The good news is that once you have done one grant application, the rest are not drastically different and therefore some recycling is doable, but it still requires you to fill in PAPER-BASED forms all over again.

Often the final round involves you pitching to a number of panellists, from my experience, they expect that you can communicate your idea well but not have all the answers.

VC Funding - Don’t Apply Directly Via Their Website

One of the biggest differentiators between grant and VC funding is how you first interact with the respective institution. Many VCs only take founder calls via warm introductions or via a LinkedIn message. If you apply via an application form on their website, you are most likely at the bottom of a review pile, and ironically, the harder you are to get hold of, the better.

Additionally, although as a pre-seed/seed stage start up there is often some wriggle room to not give the slickest pitch in the world (at Series A it is not the case), you really do have to be a very strong presenter and give off a level of confidence that you are unflappable and have understood every single aspect of your business.

From a paperwork perspective, there is also an expectation that you have to create a deck and eventually, a dataroom so that VCs can flock to you to view it, so little extra effort is needed once you have completed it (saying that some VCs will request extra documentation in order for them to better understand aspects of your business).

Difference 2: Perceptions of Realism

Equity-free Funding: Talk about weaknesses and impact

One thing I like about grant funding is that, in a way, it is more realistic than VC. Germany is one of the very few countries (and probably the richest) that has the majority of their GDP generated by SMEs. In essence, the country’s success is off the back of companies that make 10s of millions in Euros annually. Therefore, it comes as no surprise that Germany is keen to foster more of these types of business and that would be deemed as a success to them.

Subsequently, applications encourage you to state clearly your weaknesses and where you need support so be realistic with your business model. Additionally, there is in general a big emphasis on what kind of ESG-related impact you are going to make. These are important metrics for the German Government and they are very focused on aspects like how many people you are planning on hiring and how you are going to contribute positively to the German economy in the future. Although this is just a ‘guestimate’, I imagine the principle is giving a slice of taxpayers' money to start-ups will equate to these companies growing and the Government being able to tax both the business and employees in the future whilst promoting innovation = a win-win.

VC Funding: Talk about strengths and a massive market opportunity

Although VCs like to ask the question “what areas do you need support in”, in most cases they want to see a completely polished and unflappable founder who has an unnerving drive to succeed and succeed fast. They would like to see seven zeros plus in your Serviceable Addressable Market or they are not interested! There are of course some funds that care about impact, but Venture Capitalism (as the name suggests) will always and forever come down to returns for investors and that means the objective is to grow as quickly as possible regardless of the toll this might take on the bottom line and/or employee welfare.

Difference 3: The Size of the Cheque

Grant Funding: Gives you time to prepare

Particularly at the beginning, these grant funding programmes do not offer a lot of money, but it can be an ideal place to start building up your company whilst keeping the wolf from the door and not digging too much into your savings. Many founders are new to the start-up world, and so being part of grant programs where in addition to covering your living expenses, the programme can also provide you with guidance on how to prepare to start pitching to VCs and of course community. Founding a company can be a lonely journey and so doing it with others can also help build a support system around you, often a critical requirement to maintain your mental health.

Venture Capital: Gives you the firepower to hire fast

Venture Capital can often be seen as the perfect way to start a business, having to potential to have an injection of millions of euros can help hire exceptional talent, spend more money on marketing costs and boost your reputation in the market. You also have investors who can support you and be part of a community of the fund’s other portfolio companies. All this for a percentage of a business ‘on paper’ seems like an excellent ROI.

Friends and Family and Angels: The middle ground

An option that I won’t dive into too deeply into this topic but a happy medium between the above is raising from angels. These are individual investors who are willing to put their own dime into your business. This can be a great option as their return expectations of a private individual are typically much lower than that of a VC and they would tend to be on the more patient side (i.e. they would not want you to exit so quickly), plus they often own a much smaller stake in your business so have less influence over the decisions of running your company. However, finding and building relationships with angels is not easy - it is often down to pre-existing relationships that have been built over time through the circles you were born into or worked your way into - in short if you have any wealthy friends/family/colleagues - be nice to them ;).

Closing Remarks

At the end of the day, decisions over what type of funding to take could be broken down into an equation: Time to Value

Or more specifically (final equation is at the bottom of page):

(Time x Likelihood of getting $) / Amount of $

I think it is important to consider having a blend of different types of funding but also the order of how you go about doing it. Why not have up to a two-year runway of equity-free funding, to then have enough of a product to pitch to VCs once you have managed to raise private capital, you can also raise additional grants that match private funding and then move into debt. This pathway really helps keep your dilution low, and if this is a priority for you and your exit strategy then well worth the effort of pitching to different types of institutions.

Big thanks to the brilliant Malte Berresheim founder of Heuris for these wise words:

The way to calculate this ratio can be determined by asking yourself the following questions:

• Do you want to create a billion-dollar company?

  • Yes - VC funding or Combo

  • No - Just Grant funding

• Do you have enough savings to give you a year’s runway and either the skillset alone or those who will join on this journey in the same financial situation?

  • Yes - Start with grant funding and see how you get on

  • No - VC funding

• What kind of business are you building?

  • Rapidly scalable but busy market so needs financing for rapid growth - VC funding

  • Rapidly scalable and has the potential to become profitable within a year - Grant funding

  • Not rapidly scalable but has the potential to become profitable within a year? - Grant funding and then debt

  • Not rapidly scalable and does not have the potential to become profitable within a year? - Grant funding first then VC funding

• Do you think it is VC backable/are Governments looking for solutions like yours?

One last thing to consider

Something I have touched on lightly in this post is that it is worth weighing up not just the impact of giving your equity away on the end outcome i.e. exit, but also how it plays into the journey.

It is important to think about what you want the end outcome of your business to be.

Giving equity away is a double-edged sword: it can help keep you on track to hitting your milestones and be supported by investors who can open new doors of capital for you plus help guide you into unicorn status, but it also limits you in regards to decision-making, paying out dividends, early exits, etc.

In short, I urge you to truly think about what does success look like for you with your business and work backwards from there.

So as such, my final equation would look like this:

(Time x Likelihood of getting $) - (Amount of expected dilution + Governance levels) + Level of value-add / Amount of $

The higher the value the better and, depending on how much you weigh each variable, you can tailor this equation to your preferences.

I hope this helps and please feel free to ping me if you think I have missed any key considerations. Stay tuned for part two where I share some key rockstar contacts/grant allocators that have helped me navigate my fundraising path to date.

Ciao for now.

During last month’s WVC:E conference, I had the honour of speaking on the topic of Analysing Founding Teams. As a psychologist by background (seemingly and surprisingly rare in VC), it’s a topic I haven’t been able to shut up about. Thankfully Sophie and the WVC:E team gave me a platform and, on the back of the phenomenal turnout, this piece will unpack some of the ideas shared in that session.

More importantly, on the back of the voracious appetite to dive deeper into this subject (yay), I’m delighted to launch Team Talks! A series to share & dissect the cutting edge of what commonality truly exists among outlier founders, to better understand how we test and predict for success.

At Form, we invest at the earliest stages – where team analysis is touted as critical. VCs often talk about pattern-matching or “gut feel”. But in the face of transformational shifts in tech, how confident are we that the traits of unicorn founders of the past remain a template for the outlier performers of the future? More broadly, given outcomes are so specific to any given market, at any given time, can unicorn potential truly be systematically identified in early founding teams, or is it obvious only in hindsight?

During the WVC:E session, investors shared the traits, tests and tools they use to tease out outlier potential. I shared research from our work at Form including a synthesis of interviews with top tier funds about the characteristics they value and methods we deploy. To kick off the session, I shared three controversial provocations from the research to stimulate discussion and find the edges of our shared understanding. The three provocations were:

1. Investing in great teams is no better than investing in bad teams, if we aren't capturing that outlier performer.

I say this to up the ante of the true aim of team analysis. One of the biggest challenges of VC is that we meet so many high-quality founders capable of building successful businesses. Nonetheless, the power law suggests that a great founder – who will create value, scale modestly, and generate a great-but-not-outlier outcome – is almost as inconsequential to fund value as a “bad founder” who delivers no lasting value.

Our job therefore exists in the finest of margins – in understanding the difference between great and outlier. This means we may not (always) be looking for intelligent, competent, coachable people. We need the founders who will turn good into great, and great into unreasonable. People who will say no to the opportunity to retire their entire family after a few years of work, in search of something more. The proposal is that team analysis should be thought of as a commitment to the outlier – seeing beyond obvious skills or accolades in pursuit of rare potential to outperform. It’s this relentless pursuit of the outlier that defines our approach and challenges us to rethink what truly matters in team analysis.

2. Self-Awareness, Ambition, and Trauma: The Ingredients of Outliers

We talk a lot about ambition – considered table stakes in any fund’s team analysis. A founder has to be able to compellingly describe themselves as a leader of a huge enterprise (not necessarily by size of team), as well as demonstrate the depth of thinking that justifies that self-perception. I.e., They must explicitly state huge ambition and also convince investors that they have already and will continue to optimise decision-making to achieve this world-changing vision.

The latter – the need to convince investors – speaks to the difficulty of assessing ambition without bias and standardisation across cases. Many funds seek out founders who have been top performers in previous environments, or repeat founders who “know what it takes” & are less encumbered by financial temptation as a shorthand of assessing the composite factors and manifestations of a founder’s ambition.

Here we can get into the data a little more. It’s easy to associate outlier founders with traits like experience, charisma and willpower. But across the papers, books & interviews, 55% identified self-awareness as one of the top traits correlated with outlier founders. One VC study compared founders’ self-perception with their team’s perception of them, and found that the smaller the discrepancy, the better the company performed.

Though self-awareness sounds a virtue, it’s as much an acceptance of one’s weaknesses as one’s strengths. And it may be what sets exceptional founders apart from the rest.

Assessing trauma is significantly less common in VC assessments, though recently popularised by Mario Gabriele’s coverage of Hummingbird Ventures. The thesis is that the best founders have transmuted painful life events into a fuel / hunger needed to achieve extraordinary outcomes. These individuals possess the kind of resilience needed to navigate the challenges of building a world-changing company.

This thesis resonates with my view of human psychology – experiences of adversity can decrease fear of failure, and increase stress-tolerance and appetite for risk. It’s also correlated with addiction and addictive personality traits, which are hyper-proportionate in ultra-endurance athletes – a common analogy of what it’s like to run an outlier organisation. A “chip on one’s shoulder” is a subjective phenomenon which also exists in people who appear privileged and well-adjusted.

It’s critical to acknowledge that the search for “trauma-porn” can quickly become exploitative and triggering. The VC/founder power dynamic is already incredibly messy – investors must act with wisdom and exercise the utmost consideration before choosing to probe into sensitive chapters of a founder’s past. Linking to our third and final provocation:

3. Embedded team analysis is not enough. We have to intentionally set aside time to understand a founder.

Embedded analysis involves evaluating a founder’s mindset indirectly through observations and interactions, instead of through direct questioning. It ranges from assessing communication style to running secret tests to see how a founder responds.

One of the appeals of embedded analysis is that it may seem less prescriptive or prone to bias than asking directly about e.g. motivation, ambition, or self-perception, which result in answers that may be easier to script/fake. Context like the market, sector and team makeup are also so varied it can feel near impossible to ascertain what a “good” answer should look like.

While some traits and behavioural indicators are perceptible during the course of typical diligence, to be able to properly understand someone’s motivations you have to create the space and be willing to go deep. Understanding what is (and isn’t) driving a founder is essential, not only for the long-term working relationship but also to deepen the view of the founder you’re creating and dispel assumptions or prejudices. At Form, we create space for the founders to ask us personal questions back – the best founders are assessing us as much as we’re assessing them.

What do you think? If you think I’m wrong, you’re probably right – there’s a mountain of evidence and counter-evidence in your processes and experience, and I’d love to explore your strongest views. Sign up to Team Talks to share feedback and get into the weeds with me.

Reading List

• Interviews with UK and European seed funds

• Index Ventures, Scaling Through Chaos

• Village Capital, Evaluating Founding Teams

• Guimtrandy F, Burger-Helmchen T. (2022), The Pitch: Some Face-to-Face Minutes to Build Trust

• Balachandra, Lakshmi & Sapienza, Harry & Kim, Dennie. (2015), Investor Mentor: Evaluating the Entrepreneur as Protege

• Ali Tamaseb, Super Founders: What Data Reveals About Billion-Dollar Startups

• Balachandra, L., Briggs, T., Eddleston, K., & Brush, C. (2019), Don’t Pitch Like a Girl!: How Gender Stereotypes Influence Investor Decisions

• Sifted, VC Founder Due Diligence

• Defiance Capital, Unicorn Founder DNA Report

• Mario Gabriele, The Best Venture Firm You’ve Never Heard Of

• Sam Walker, The Captain Class

**Last note by Team Associated! We asked Mayowa to join us for a catch-up after we realized how many synergies we have. Team Talks is exactly what we care about at Associated, making VC more accessible. We’re excited to support emerging investors like Mayowa and will continue to do so. Watch this space :).

Thanks for reading!

Danielle & Francesca**

I joined a new fund earlier this year1. One reason why was because I have become obsessed with the future of the internet, which I believe is inherently tied to the future of the software engineer (SWE).

This got me thinking about how the internet runs today and how the constraints to its maintenance will impact software engineers (SWEs), who are mainly the architects and maintainers of the internet’s protocols (i.e. ~ instruction manual). Today SWEs prioritize writing, reading and testing code alongside documentation and quality control. Using tools like:

• The operating system level where most SWEs prefer Windows, macOS or Ubuntu (a Linux distribution)

• The Internal Developer Environment (IDE) where VS Code reigns supreme by over 73% utilization in the ‘24 StackOverflow Report

• The asynchronous tools space where Confluence and Jira for collaboration are most widely used

• The database level with 49% SWEs using PostgreSQL

• The language of choice where JavaScript has consistently been the most widely used language since The Stack Overflow report started in ‘13, though Python usurped them on Github in ‘24

• At the cloud infrastructure level where AWS is still the most used cloud infrastructure service, but both Microsoft’s Azure and Google Cloud have gained momentum since ‘23 with 24% of AWS users stating that they’d like to try Google Cloud in 2025 - redistributing market share

(tools a majority of engineers use to code)

This prioritization is changing though as new tools are consolidating and/or automating coding tasks. Leading the programmer to prioritize new things like code review and somewhat niche code language support. This shift is accelerated by the widespread use of similar tech stacks across the industry – when most companies use similar tools, it becomes easier to build automation solutions that work for everyone.

So change is happening quickly however, this evolution brings new challenges. In 2022-2023, we saw record numbers of security breaches, while continuous updates to AI and low-code/no-code platforms strain server capacity. These data points are in real time changing the roles of software engineers as they expand and contract to meet demand. Factors like internet privacy, automation and supply chain constraints have already changed the SWE - encouraging more to ‘shift left’, learn, review and debug with AI tools first instead of co-workers and more. How might these factors subsequently force the internet to evolve as well? Let’s first start with how the internet came to be…

Context…

The internet runs because of the internet protocol (IP). IP addresses are unique identifiers for devices on the internet and allow for pinpoint message send and retrieval. This is because HTTP or HTTPS (both protocols - the latter encrypted) are designed to enable a ‘request and respond’ structure between the server and the user’s web browser of choice. Understanding how the internet works enables developers to identify areas of improvement. As the Picasso saying goes - “learn the rules like a pro so you can break them like an artist.”

Since 2010, the number of internet users worldwide has more than doubled, while global internet traffic has expanded 20-fold. According to the latest estimates, 328 million terabytes of data are created each day. Much of that usage is on multimedia platforms with 58% of all internet traffic coming from video streaming as of 2022. Another chink in the internet’s armour in regards to performance is server demand, in large part due to the increased utilization of artificial intelligence (AI) models (supervised and unsupervised, deep learning and ML) for everything from product discovery and search to digital task automations. In part, because internet server demand is only increasing, bringing more people online and/or keeping people online longer, we currently have major security and governance/maintenance challenges. For ex. DDoS attacks are at an all-time high and we still have no universal enforcing body for the internet outside of suggestions made by The Web Foundation. This has led to challenges in consensus, maintenance and accessibility of the public good. Presenting opportunities for nefarious actors to utilize the internet to the detriment of others.

Thesis

In order to protect against bad actors and to ease the burden on our internet protocol maintainers (who historically have been majorly SWEs), I believe we will either need to create an enforceable governing body for the internet or allow for a new structure of online communication. A new paradigm that does not rely on the assumption of good actors as stewards. The internet will either evolve to create and maintain equity in digital spaces or only help its users dive further into online silos specific to a user’s communities.

So how will that impact the SWE again…

If the latter happens the SWE will moreso have to take the role of the internet’s defender. With an increasing number of AI tools coming to the forefront to make‘anyone a developer’ an increasing amount of code is being produced and maintainers will need to be prepared to filter and proactively protect internet protocols from a larger number of potential malicious actors. SWEs will need to enhance their security knowledge and tools, forcing them to -take a zero trust approach. This will likely make code review and quality assurance a larger part of the day job, potentially fulfilling the "shift left" promise that is en vogue.

Looking forward, if software engineers are to remain crucial architects of our online future to help them tackle growing challenges, we must optimize their workflows to preserve problem-solving time. The role of the developer may evolve to be less manual as they focus their time more on research and problem solving while AI co-pilots and pair programmers become mainstays in the tech stack to write and maintain a codebase. The evolution of the software engineering toolkit isn't just inevitable – it may now be necessary to protect the internet as a free and public resource. By empowering developers with these new capabilities, we can better maintain the protocols that keep the internet accessible and safe for all users.

Lastly

To this end, what companies should be backed today? Some ideas:

1. Marketplaces of trust and reputation - to use the output from a model, especially at the enterprise level you first need to trust it or at least its inputs. A ledger graphically showcasing past and potential relationships/interactions would be helpful. Upon which a marketplace could be built.

2. Compute optimization tooling - utilizing known energy demand highs and lows to simulate data server capacity limits and provide cost efficient data storage and compute.

3. Companies that make it easy to protect code even in a staging environment, leaning into the shift left movement to incorporate security concerns and requirements earlier in the development process. One example is lcl.host which provides HTTPS in a developer’s environment

If you are brainstorming anything in relation to these ideas or have thoughts on my thoughts- let me know!

The Associated Team were feeling reflective, so we invited a group of friends that we’ve met during our time as VCs together  to discuss the past, present and future of our industry. 

Our panelists consisted of brilliant individuals at different stages of their career who shared their reflections, learnings and advice. Danielle, who was moderating, asked a question that made everyone shift just that little bit closer to the stage:

Given that this is a topic that seems to be on everyone’s mind whether they’re partners or analysts, we thought we would take a stab at it in written form for all our readers. So, without further ado, here is the short answer: 

As with many career paths (in fact, in a recent survey over 40% of Americans have been fired at least once in their career), life as a VC is tumultuous and full of many factors outside of your control. It is, for all wants and purposes, impossible to avoid all the variables that could result in what you envisioned as a glorious career turning into dust. Here are just a few of the things that could thwack you: 

Curveball I

• Market downturn - gone are the times when Limited Partners (LPs) were throwing money at any fund manager with a pulse. Nowadays they are looking deeper and deeper at your fund’s performance. They’ve suddenly, magically remembered that historically only 50% of funds produce more than a 1x return for their investors (The median net investment rate of return for 2021-vintage venture funds was 2.1%, compared with 12.3% for 2020 funds - sadly we struggled to find more recent data) and Limited Partners (LPs) and, as a result, are looking at these numbers more closely than ever. This means that many are in the unfortunate position of:

1. Having a young fund that has not been around long enough to demonstrate good returns

2. Your previous VC funds have not performed as hoped

Both factors make fundraising much harder in a conservative market. And if the General Partners (GPs) running your fund are unable to raise subsequent funding, then it means that they will have no means to pay you. After all, you are a hefty negative line item on their P&L….

• Mitigation: Put succinctly by one of our panelists, ‘beware of zombie funds’. These are VC firms that have failed to raise subsequent funds but are still praying for ‘big returns’ from some existing investments. A key question to push your (potential) employer is to understand how frequently they plan on deploying tickets. If your fund is not deploying, in short, it is time to leave. Be also conscious of the management fee of the fund and the composition of your team. For example, you can roughly guess what salaries people are on (check out the average VC salaries based across various levels in your geography) and assume that everyone wants a promotion. If there are two partners, one principal and five associates on your team - for the next fund will there be a budget for everyone to get promoted? And will the GP really want to have that number of seniors not willing to do the boring and repetitive tasks - what would you do as a GP? 

Curveball II

• A universal pain in the derriere in the workplace is internal politics. No matter how well you try and navigate them, it is never easy, especially when you consider the nature of VC. VCs have a pot of money to deploy, and a number of employees who are keen to have their name on a ‘deal’, as the ‘number of deals you’ve sourced, that the fund invested in, is often a KPI for promotions/prestige/reputation in the market. This can lead to vicious competition with everyone vying for the decision makers' ears. Without it, you may end up a whole year without a deal to your name - and the title of ‘investor’ might come across as a bit of a stretch  to future employers and founders alike.

• Mitigation: Perhaps a little generic but one of our panelists mentioned that you ‘have to be indispensable’ to the decision maker. How to achieve this very much depends on the skillset and dynamic of the team, but time and observation serves as the opportunities to build trust.

Curveball III

• You decide to specialise in a particular topic, let’s say Web3, you are passionate about this sector and truly believe that this is an area that is going to produce the most number of unicorns in the next decade. The market agrees, until it doesn’t, LPs get cold feet and request the GP to no longer invest in this sector as it is ‘too risky’. Since you picked your specialisation, other colleagues have filled your shoes taking over other topics you were previously covering and anyways you don’t want to go back to those topics as you still have conviction that Web3 will come through - isn’t there a rule that you should invest more when the markets are down ;)? 

• Mitigation: It was a ubiquitous opinion from all panelists that it is so important to follow what your passionate and perhaps if the VC market doesn’t agree, it is worth heading to the operational side and work for a start up that is proving that your thesis is indeed, very correct. VC is a seasonal beast, and there could always be an opportunity to jump back in when the markets turn in your favour. Another great piece of advice that was given was to ‘set a North Star’. Although the likelihood of you achieving it may be slim, it is much easier to head towards something than to end up feeling lost in an industry that is not short of muddled opinions on what the future might look like. After all, it is much easier to add your opinion to the mix if you believe in it and, who knows, you might get others to agree with you and then you have truly cracked capitalism (check out this article for more details). 

Curveball IV

• The ever-blooming technology wave and how to protect yourself against it? A recent survey showed that graduates with bachelor's and graduate degrees were most likely to say they were threatened by generative AI, at 45% and 44% respectively. In the face of artificial intelligence and overall automation acceleration how do your avoid your job becoming obsolete and how do you keep differentiating your value in sourcing and diligence vs. what existing tools can do? 

• Mitigation: Play with these tools! Make sure you understand some of the ‘best practice’ tools (ex. VZero and o1 or Claude) and what they are good at vs. what they are not. For example, recently we found out that some large language models are not good at crossword puzzles because they cannot come up with multiple outputs based off of multiple tokens at the same time. Knowing what these tools do well will allow you to stay ahead of them as well as be able to use them to supercharge your skills. Keep your ‘enemies’ closer so to speak… 

Hopefully,  this article has been helpful in giving a not so straight answer!

Finally, to leave you with some other nuggets that we think you should adopt with gusto: 

And whatever you do:  

Huge thanks to our panelist for serving as the inspiration to this post - until next time!

From 2021 to 2023 startup fundraising from venture capitalists went from $621B to $285B and the number of emerging VC managers who were able to raise a second fund sank significantly. From 2018 to 2022 1,100 new funds launched with 307 starting exclusively in 2021, but by 2022 only 100 were able to launch the entire year. One rationale is that 26% more money went to funds with $1B AUM or larger in 2022 than in 2021, redirecting LP money from ‘risky’ emerging managers. 

These realities are just some examples of public market and overall consumer hesitancy. This is even though the US economy was growing at a steady rate of 3.4% in Q4 2023 with a lower than average unemployment rate (3.6% in 2023 compared to 4.10% in June 2024 as more people start to look for jobs), and a higher yet manageable rate of inflation at 2.97%. In spite of these numbers consumer sentiment on the economy is poor with many Americans believing that we are in a worse position economically than we actually are as a nation. This is though comically most believe their local economy alongside their personal finances are doing favorably (Appendix A below). The effects of this tension is not just noticeable from a macro perspective, but also personally. All of us at Associated know at least two people who have been impacted by tech’s 2023/2024 mass layoffs, which were in part due to public market downturns and investor hesitancy. Without question, the lie down movement of 2021 and 2022 is over and we are feeling the aches of the juxtaposition between US mass sentiment and reality.

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Soooo given these bigger market shifts what’s been up with us I hear you say? Or maybe you didn’t ask, but we’re going to tell you anywho! Since we paused the podcast (but some of us have released audio content here and there!), we now miss the more collaborative aspect of our work, so today we’re back together to talk through how, what is happening in the market has impacted us and our career. A little catch-up if you will. 

Quick plug - If you’d like these to be more frequent please join us at our first in person event on September 3rd [register here]. We’d love to meetup and opine. Now back to our points of view, which are written below.

What is Top of Mind for Us:

DB:

Given the amalgamation of strange happenings following the startup ecosystem over the past few years, one may assume that founders would seek stability today more than ever. Them building something new, maybe also in a new or underserved market, should be enough to make them yearn for non-variability in all other areas of their lives (for ex. Where they live and where their company is based). However, that doesn’t seem to be the case. What I initially thought was just a coincidence of European born and based founders, incorporating in the US in record numbers, is not one. Also, my gut feeling is not just based on being an American born and based investor, but also based on my time working in Europe’s tech ecosystem on two separate occasions. Having had the opportunity to  live in both Berlin and London alongside the Middle East and Asia, I feel like I am uniquely positioned to follow my gut in comparing the two ecosystems.

In 2023, though Europe continues to outpace the US in terms of companies founded, the number of European entrepreneurs deciding to co-incorporate or just incorporate their startups in the US is on the rise. In 2023 Index Ventures even published a book “Destination US” for European and Israeli founders on how to move to the US, after having supported 40 European tech companies in their US expansion. From Index’s perspective most of them did it mainly to obtain customers. This movement is not a wild phenomenon to me as the US has one of the most flexible and legally vanilla incorporation setups for startups. It also has historically allowed early stage companies to raise financing at better valuations with overall more founder friendly terms. Moreover, if a company decides to go public, it is becoming less and less feasible from a legal and financial perspective to be publicly listed in two exchanges at the same time. In the US, at least companies can participate in equity indexes, which allow them to potentially be placed alongside higher valued US companies in the public market asset, increasing their potential earning power. Lastly, the US also lowered their investment funding in Europe in 2023 going from 39% to 25% in one year. So though the movement of non US founders incorporating there is not confusing, I was startled by the fact that this movement doesn’t seem to be affected by industry domain. 

Given Europe’s support of ‘breakthrough’ technologies through vehicles like the European Innovation Council (EIC)’s fund, which deployed over €165m in grants in Q1 2024 alone across 68 companies, and the European Innovation Council Accelerator, which can give an ‘innovative idea’ up to €2.5m in non dilutive funding, why every type of startup founder is incorporating in the US starts to raise more eyebrows. Especially as doing so makes European grant money less accessible to US based teams. Also if there is anything I know about asset heavy businesses - it is that sooner or later they typically need government funding or at the very least, government support, so why bite a hand that is offering you a feast? The only reason I can think of is that today the potential customer, public market and favorable valuation potential decidedly outweighs the early stage grant money prospects in Europe. These pulls to the US are enough to justify getting investors as early as the friends and family round from the US for what would traditionally be a European incorporated startup. I have been a part of two rounds this year way earlier than I thought!

Being the daughter of a hardware founder as well as a college entrepreneur who worked on an asset heavy business and studied complex systems, I am interested to see how the plans these companies make today affect their business model and fundraising strategy tomorrow. I hope their calculations are correct and these earlier cross Atlantic moves only work in their favour. A take away from my reflection is that, despite all of the U.S.’s continued qualms, we still seem to be the place to be for all high growth startups. At least for now…

Francesca: A divided industry

Reflection, by its nature, is inherently biased as it draws from personal experiences. However, hard facts often reveal that factors beyond our control significantly shape many destinies the same way. Investors (both public and private) can significantly influence the future of people, companies and industries by providing substantial capital and resources that fuel technological and trend advancements. For example, we are seeing fewer companies IPO (1,035 in 2021, 181 in 2022, 151 in 2023, 98 in 2024 to date),and less capital invested into Venture Capital (VC) deals than in previous years meaning, in general, the tech ecosystem has been donned more conservative in recent years meaning capital is comparatively less available. However, there are still some vast fundraising rounds happening to the select lucky few, take these funding rounds this year for example:

• Figure, a robotics company, founded 2019:  raised $675 million (series B)

• Helsing, a defence company, founded 2021: raised €400 million  (series C)

• Moonshot AI, a LLM company, founded 2023: raised $1bn (series B+)

• Minstral AI, a LLM company, founded 2024: raised $500 million (series B)

• Zepto, a Q-commerce company, founded 2020: raised $665 million (series F)

Average ticket of top percentile company: $648 million

Interestingly, between Q4 2021 and Q1 2023, the median Series B round size on Carta fell from $30 million to $12.3 million, subsequently, these big fundraising rounds highlight the expanding gap between the top percentile (see above) and the median.

This divide is not the only one we see in the tech ecosystem. A bittersweet advancement over the last years is that the vast amount of data at our fingertips provided by the likes of Crunchbase and Pitchbook on private market investments, can help us identify inequalities easier than ever before. For example, a 2023 McKinsey report shows that only 1% of VC funding goes to Black founders, 1.5% to Latino founders, 1.9% to women-founded teams, and just 0.1% to Black or Latina women-founded teams. This could be in part because women represent only 13% of decision-makers in VCs with a staggering 66% of investment teams having no women decision-makers. Unconscious bias influences our decisions more often than not and what has been proven time and time again is that people are more comfortable in investing in what and who they know. 

I understand that the VC game, by its very nature, consists of a few big winners and many ‘losers’. However, over the years, external PR messaging from the VC world has projected that equal opportunities and/or the needs of people and the planet are the primary focus when making investment decisions.  When looking at data from the lens ascribed above, it is clear that the VC ecosystem as a whole in fact prioritises in the following order: 

a) returns first

b) purpose second

This order is unlikely to change overnight based on the intrinsic economics that serve as the foundations of industry and furthermore, history tells us that the more conservative the market, the more weighted a) is to b).

Although I have found no clear way of at least closing the gap between these priorities - I am not convinced that the growing number of micro-funds only investing in underrepresented founders or unsexy niche sectors is the ideal solution as the chances of succeeding in raising massive subsequent rounds are so low due to biases - so how can companies/founders truly compete? To put it into an astonishing perspective, the two big funding LLM-company rounds this year equate to more than the sum of all clean water tech companies (55 received a total of $1.2B in funding) last year. On this point, one could argue that the total amount of companies invested in a sector is a better reflection of the interest in the industry than the biggest funding rounds into individual companies. However, I suspect that founders and VCs would argue that to be successful, often requires a market monopoly and having more capital to deploy certainly helps beat out competition (more runway, the best talent, more marketing expenditure) - in short the system is intrinsically not fair. 

VC is a brilliant industry full of innovation and dynamism and can act as a tool to drive change, I wish in the next ten years for policy and regulation makers to enforce change around the distribution of capital across different GP and founder profiles, and investing more towards SDG goals and to clamp down hard on ESG reporting. But perhaps the most influential cause for change will be that a new generation of investors (importantly both private and public) will come through whose investment lens differs from the previous generations. I think I started my career at the beginning of this wave and although it is coming, it is likely to take time to for the purpose PR messaging to catch up with where the money is actually being distrubted, even more so when the macro-market’s conservative ‘stick to what we know’ nature comes into play when economies take a downturn. 

Tunde:

I spent 2021 quietly praying for things to change. The market felt so different from just two years prior when I got my first role in VC. There was something wrong with how we were acting as an industry - but I couldn’t quite put my finger on it. 

It all crystallized when I saw a company raise a pre-seed round and then six months later raise a $7m seed. Between these two fundraises the company had done nothing but hire a few people and get a Forbes article. But neither this lack of progress nor the size of the round are what shocked me...

What shocked me was that their pre seed investors were celebrating. These people were celebrating having to put in an additional €1.4m in a company that was no closer to being a real business than it was when they first invested in it. They were celebrating paying €1.4m for the same thing they had bought for €600k.

If you had asked these investors whether they would pay $2m to invest in this business six months prior - I'm certain they would have told you that you were crazy. Yet here they were, popping champagne at the prospect of overpaying for the same thing six months later, simply because someone else wanted to do it. That's what broke my brain.

I spent a lot of time secretly wishing that the venture industry would return back to earth. However, now that it's happened, part of me regrets my wish coming true. Since 2022 VCs have become allergic to risk - hurting founders and likely their own fund performance. We returned back to earth but then we started digging.

We're in an era where VCs, whose whole model revolves around looking at what the outcome will be if things go right, don't pay much attention to upside unless the founders are from central casting or building in the 'right' space. For everyone else fundraising has become an extreme sport. 

I think the current state of affairs is much worse for founders than the era I used to sulk about because at least back then the best companies got funded. Moreover, I think that the general negativity is one of the reasons we're seeing increasing numbers of investors getting jaded and leaving the industry. From personal experience, I know that it's extremely painful to see a company you can see performing as an insider go bankrupt because investors are scared. And this pain is being felt all over the market by VCs who were once - just like me - praying for the market to change.

…

So is any of this top of mind for you? Do you have a story you’d like to tell in theme? If so, highlighting the space we are creating for us on September 3rd again. Feel free to bring your friends in tech ++. Let’s converse together. 

- x Associated (a.k.a. Francesca, Tunde & Danielle)

Appendix A 

A representation of a junior VC who decided it was not for them ;)

Embarking on your journey as a new venture capitalist is akin to stepping into an exhilarating yet daunting numbers game, where the sheer volume of companies you'll review, the repeated rejections, and the occasional bruising of your ego are par for the course. 

Without further ado, here are some learnings I hope we help take off those rose tinted glasses and hit the ground running or if you don’t like what you read, execute a sharp pivot ;) 

1. It is a numbers game

As a new VC, the cynicism has yet to transfuse itself across your entire consciousness and unconsciousness. When meeting your first few founders, whose charm and passion ignite your imagination, you will want to invest in every single founder you meet.

Rightly so (in many cases) your superiors will pick apart your hypotheses that this company will reach unicorn heights for one reason or another; after all, they have seen a lot more deals than you have, so they should know a thing or two, right?

Realization will soon kick in that you will most likely have to review hundreds of companies, have most of them turned down by your team, and have your ego stamped on a few times before your first deal is approved by the board.

This often painful cycle equates to many hours of research, calls with founders, and shattered hopes and dreams (for both founders and yourself) - so if you are someone who likes to see a satisfying outcome to hours of work, VC might not be for you.

However, like most things, it is all about perspective. The more companies you see, the more likely you will be able to refine your search to fit what is deemed suitable for investment. If you take into account how much you will learn from founders, your research, and your peers, then it’s a healthier outlook compared to focusing solely on whether you achieved the desired outcome or not.

2. It is all about internal selling 

One of the most powerful skill sets an investor can have is the ability to convince others that the company you think your fund should invest in, is a winner. 

Particularly at pre-seed and seed stage, there are often very few numbers (if any!), to quantifiably say that a company will be a fund returner in the future. Therefore, much of the job as a junior investor is packaging the ‘vision’ of a company into such an exciting opportunity that the rest of the team also wants to allocate their finite funds towards this vision to fruition.

Here’s where it can get tricky. Each decision-maker within a fund often has preferences for certain industries, founder characteristics, business models etc. and even if you line up everything they have a preference for, they may just be having a bad day when you connect them to a founding team. One poorly phrased answer from the founder could lead to a deal going South. So play your card wisely, a top tip I was given is try and talk to your seniors during their coffee break, a casual conversation as the caffeine spike hits could help swing the pendulum in your favour. 

If you would like to learn a bit more about my thoughts on this topic, please read my last blog post. 

3. FOMO is real

What could help claw back the deal from no return? FOMO! Although some funds are more partial to it than others, nothing is often more likely to turn a deal around than another fund courting a start up.

Why? Excellent question, the reasons range from the sensible:

1. There is significant data to suggest that if a tier-one VC at Series A on your cap table then you are more likely to raise a Series B, thus it is an opportunity to surf the same wave

2. Or a fund has a unique point of view given their industry focus or current portfolio to see something your firm cannot

To the ‘ok understood’

3. Another good fund looking into a start up you are indecisive can often trigger self-doubt, did I miss something? What is this investor seeing that I didn’t that could mean that this company is a success. 

To the ridiculous 

4. FOMO can subsequently play in a junior’s favor. The fact a founder might choose a rival’s term sheet over yours can result in a bidding war where funds go to great length’s to one-up on one enough from steep valuations to see who can purchase the best gift (Yanks tickets anyone?)

FOMO can subsequently play in a junior’s favor. If a partner does not trust your opinion yet, a way of validating your opinion is to stir up interest (or at the very least) find out who else is looking to help bolster your own opinion on a case. FYI: the inverse also works i.e., x,y,z also passed.

4. Your network should become one of your biggest assets

One of my favourite things about Venture Capital is the fact that an investment round is often shared by multiple funds. Although it can foster a state of competition, it also encourages collaboration. 

Subsequently, in VC, there exists a ‘if you scratch my back, I will scratch your mentality’. Meaning that dealflow is often shared between other VCs, therefore networking is so important - you never know which source your next deal might come but a deal from a good fund automatically gives the deal a higher status than one found on the streetz. 

Additionally, at the early stage of a VC’s career unless you come from starting your own company or have deep expertise in an area, your individual value add to a founder is limited. By creating a network of individuals that can offer huge value. A top tip is to speak to several founders in the same sector, ask ‘what do they need help with’, note down the areas of support that are mentioned more than twice, then go and find individuals who can help them with this. For example, I discovered that one of the biggest challenges for Techbio founders is finding lab space, therefore I went about finding the best estate agency that does just that. 

A third reason to build your network is that it is yours and yours alone to transfer from job to job unlike many pieces of ‘work’ you have to leave in the hands of a fund. Network is a huge asset you can bring to any organisation - some people have a million-dollar salary tag based on their network, so and make sure you are one of them. 

5. Find an operational topic to work on 

VC can often be a frustrating game, where a lot of the outcomes of your work are out of your control i.e. whether a deal goes through or not. 

Therefore, a good way of demonstrating that you are an asset to the team is to provide value in another ways, and for your own sanity see your hard work translate into the desired outcomes. 

There are many operational tasks required to run a fund efficiently, from marketing (@Alpha Q Capital) to policy creation (@Aenu) to designing new ways to assess companies (@Speedinvest), contributing to a project or laborious tasks can earn you significant kudos internally.  If you are able to tie operational tasks to your KPIs for your performance report/bonus package, this can be helpful in ensuring you can have some control over negotiating a raise. 

6. Do as many deals as possible 

A good strategy for a VC early in their career is to try to do as many deals as possible. The more deals a VC has to their name, the more they increase their chances of ‘luck’, i.e. investing in a fund returner. Although the one in ten rule is a rather rudimentary measure, there is something to be said about a volume strategy as early as possible, this gives time for companies to grow and raise further funding which in turn, increases your ‘track’ record making you an attractive investor to hire (if you hit a couple of winners).

Easier said than done! But strategically, it is worth asking your new employers what is average number deals they invest in (the more the merrier) and if you have the means, it is also worth potentially negotiating having the ability to angel invest in companies.  

7. There are growers and there are showers ;) 

For anyone who has worked in the start up world, it is rarely smooth sailing for any company. But some are fortunate enough to hit the hype train (i.e. ‘showers’). For investors who put in intial first tickets into hyper-growth companies, they are hailed as soothsayer deities as other investors line up behind them to invest in massive uprounds. However, as quickly as a company rises some are unfortunate enough to fail just as fast, anyone heard of Houseparty? 

Conversely, it might take some time for some start ups to reach an inflection point (‘growers’), and yet when it does, it soars. Take Nvidia as an example, for some time the company did well but only brilliantly once it launched its GPU (six years post-founding) and their revenues only soared in 2022.

It is important to understand that as quickly as an investor rises, they can fall from the halls of fame and there are a few companies that can alter the returns of a fund exponentially after many years. In an industry swimming with egos - mind to keep yours in check until the money (returns) hit the bank account but also enjoy the limelight whilst it lasts ;). 

8. When the rubber hits the road 

VC is a harsh environment, watch how well your fund is doing. Your future salary depends on the partners’ ability to raise a new fund, if your fund’s portfolio does not perform, then the likelihood of them raising a new fund is very low and therefore, as the first one in and the lowest of the pecking order, you will be the first one out. Be sensitive to the underlying energy of the office - is there concern, positivity, openness?  

Bonus point: 

As an extra tip for new joiners, keep a track record, this will be useful for future conversations whether that be job interviews or promotion conversations. Make a note of companies you have looked at, and would have invested in if you were in the control seat, a list of your contacts, and deep-dive hypotheses. Having these documents on hand helps provide quantifiable evidence of your value.

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There has been a popular meme flying about social media: 

“What my friends think I do” 

“What my parents think I do” 

“What my society thinks I do” 

Etc.

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This meme captures how deeply perspective can shape thought.

Since the first blog post, I have asked several people what constitutes greatness in a venture capitalist (VC). Responses diverged significantly based on the stakeholder queried. From tech founders seeking funding to limited partners (LPs) investing capital, opinions vary widely:

Tech Founder raising pre-seed: “They ask interesting questions during the first interview meeting.”

Tech Founder currently raising Seed: “A great investor is someone who moves fast and pays up.”

LP: “Intellectual honesty”

Early-stage junior investor: “A great investor is one that achieves the strategy they committed to their LPs.”

Early-Late junior investor: “As much honesty as possible in communication with founders.” 

Note the juxtaposition of the last two opinions! 

VCs act within an ecosystem involving three different types of stakeholders:

• Limited Partners (those that give you money)

• Founders (those who you give money to)

• Other investors (whom you share risk with)

In Part I of this blog post, I broke down the collective actions that are expected of VCs to achieve the desired outcome of significant returns to all stakeholders involved (founders, LPs, themselves). 

1. Raise funds

2. Find founders to invest in

3. Win the deal

4. Support portfolio

5. Exit well 

But how do VCs actually achieve these goals and how much impact do they really have on the likelihood of any of these desired outcomes? 

Moreover is there a difference between what is perceived as value versus what is ACTUALLY valuable? And how do these perceptions vary from stakeholder to stakeholder?

I've been thinking about these questions since writing my last essay and I've come up with three characteristics that I think ACTUALLY make a great VC, perception be damned!

Great VCs:

1. Identify founders who are capable of successfully pitching the vision of a successful business

2. Have the capability to persuade others that their viewpoints are worth adopting

3. Have a sixth sense on when to exit

VCs wield significant influence in shaping perceptions within the startup ecosystem. If a certain VC becomes the ‘tastemaker’ to the start up ecosystem, then in all sense in purposes they have significant control over which companies get invested in over others. 

Statistically, it is more likely for companies to raise a Series A (and with a bigger valuation), if their Seed round is led by a top tier fund. This fact demonstrates the value of viewpoints and how valuations can be determined so much by the ‘vision’ and less so by the actual numbers. An obvious example is WeWork, at its peak, was valued at $47billion, and has never once turned a profit, in fact, WeWork reported total debts of $18.65 billion against total assets of $15.06 billion in a bankruptcy initial filing in 2023. 

Most ‘great’ companies experience dips in valuation, just look at any Fortune 500 company’s share prices over time. A great VC has mastered the combined ability to ignite a FOMO frenzy and maximise gains more often than not. It is a never-ending game of how high can you go whilst avoiding the unceremonious fall from grace, something that FTX has taught us can happen in the blink of an eye. 

Drawing back to the exercise of evaluating perceived versus actual value, the VC landscape hinges on perceived future potential, where those possessing the aforementioned traits excel. However, in terms of quantifiable contribution to success (i.e., profitability), their impact may be less pronounced.

Because top VCs conjure up the most convincing illusions, they no doubt play a pivotal role in shaping the future trajectory of startups, however, I would not bet on their ability to ensure actual sustained profitability. Thus leads us to the question of how much does hype actual contribute towards long term sustained profitability…. evidence suggests not a lot……..

Enjoy this illusion ;)

In both indie filmmaking and early stage technology investing, I have seen how capital providers can change how a founder runs their business. For clarification, when I say ‘founder(s)’, I am referring to both tech founders and filmmakers as I believe the title suits both, but I will distinguish between them, when relevant, in this article. In both venture capital and film financing you deal with challenges of speculation and validation stamping. The former helpfully brings more investor choice to the table for the founder(s), but has also been painful for investors when they bet incorrectly. This is because without proper discernment and strategic luck around timing, speculating on a deal can cost the investor a sizable amount. The latter sometimes incorrectly signals the prestige or experience of a team and loosens due diligence. This bystander approach to verifying the key elements of a film or startup has also led to poor financial investor experiences. Both of these asset classes require some hands-on learning, luck and discernment when assessing the risks of different prospective investments, with film being an even riskier asset than startups due to their low historical average of returning capital (45% of the time capital is returned to producers for ex.). The relative similarities between these industries are, in part, why I am tying them together to make the argument that regardless of asset class the business model of your capital provider will determine your own as a founder.

Before I get into the ‘quick science’ of predicting what constraints you may run up against depending on who you obtain capital from, I will go over the business model of indie film financing as well as early stage investing*.

—--

In indie film financing I find that people go one of a few routes to successfully raise enough funds to produce their film (more in the comments***):

1. Crowdfunding - there is an art to engaging your community to help you pay for pre-production (i.e. all the preparation before the movie shooting starts), production (i.e. the movie shooting part), and if you raise enough, post production (i.e. the final aspects of completing the film which could include tweaking the coloring of the film, editing the film, ensuring the audio lines up with all visuals and starting to execute a marketing strategy to build up anticipation and get into film festivals or on distribution platforms)

   1. A sub heading of crowdfunding is to do so not with a platform (i.e. Kickstarter or Seed & Spark), but with strategic outreach to high net worth individuals (HNWIs). A lot of times if you partner with the right producer, or indie production studio, they may already have some connections to people who would be interested in your film and can reach out directly to them.

2. Pre-sales - this is a lot less common today, but in previous decades, if you had the right connections you could get upfront cash to create your film by selling the rights of your film in specific foreign film markets. Pitting potential buyers in competition with each other, like in many negotiations,  increased the price of your film and provided you with more money for pre production, production and sometimes even post. Typically the filmmaker(s) would keep the rights to their film in their home market (i.e. the market they know and are targeting), as it provides them with the opportunity to socialize their film with local audiences, and make additional money, which can lead to a profit for the film via royalties over time or a substantial upfront deal that covers all existing costs.

3. Distributor sales - this is when a filmmaker makes a deal with a distributor platform (i.e. an organization that can show the movie to a mass audience like a streaming platform or a theatre chain) before the movie has been filmed. This typically does not happen with emerging filmmakers, but is quite common for people like Martin Scorsese who could have a first look deal. 

After a movie is filmed and any last minute money is raised for final touches in post production (the last stage of movie production), the movie tries to get to the masses by:

1. Going directly to a distributor, which could be a tech business that shows movies (like Amazon and its affiliates) or a theatre chain (like AMC)

2. Going to a broker or sales agent who has a relationship with a distributor

3. Going the film festival route, which typically leads you to one of the already mentioned options 

4. Self distributing

The thing to note about all four of these options is that each of them comes with a different set of return expectations for your film. If you decide to self distribute your work, your film will have little to no business model constraints. The filmmaker may continue to retain IP ownership and be able to make more advantageous distribution deals to specific international markets, but you may never get the kind of money associated with a high box office theatrical release. If you distribute your work with a technology company, especially if venture capital backed or a publicly listed company on an open financial exchange, know that they have a set of expectations on revenue and growth targets for their company. Think through what those expectations may be for them and how your film’s ambitions fit into those goals.

For example, Amazon, a company that typically sits in between the film and tech industry with its affiliate Amazon MGM Studios, has invested billions, including $1b/year in theatrical releases since 2022, into movies and even brought in Ted Hope, an indie producer to run the studio from 2015 - 2020. Still the public company has revenue targets that they aim to meet. If Amazon primarily (outside of AWS) makes money via selling products in their marketplace how does your film play a part in their revenue growth? Product placement in your movie? Customer acquisition increases because users come for films and later get upsold products while on their platform? Thinking through these questions will allow you to be very observant of your capital options when they are available to you, as well as give you an understanding of the difference between what a capital provider may promise v.s. will do.

—---

In technology-based venture capital, the main model is well known.

Fundraising can start as early as at the idea stage with pre-seed financing and can go up until pre-IPO or right before a public market sale, or even a private market acquisition of the company. The business model of venture is to oblige the fiduciary duty investors have to their limited partners (L.P.s) who have invested in the fund (i.e. a one off vehicle of capital) or a firm ( i.e. a grouping of funds). The investors in the fund have a contractual obligation to return the money provided to them by those limited partners with an additional outsized return (good is considered 3-5x net) over a pre-set timeframe like 7-10 or 3-5 years**. The time pressure to provide a return typically lessens over time if the General Partner(s) at a fund have successfully provided a return to their L.P.s in previous funds. Understanding the capital constraints of your capital provider may lead a founder in film or startups to figure out where a fund is in their fund timeline, as well as what fund number they are investing out of. This is information that can sometimes be found online on websites like Pitchbook or Crunchbase. Knowing this information can help you ask questions regarding the capital providers expectations of a return upfront, and this information can inform the founder’s growth expectations.

Do your research before even taking a call with a capital provider. It may save you both some time if you know you want to run a slower business than what venture capital financing typically asks of founders, or if you know that you want a committed distributor who will show your movie theatrically. Investing in films and startups are inherently risky endeavours with challenge overlaps around valuation speculation and low investment to return ratios. This is why all founders should do their own research before accepting capital from any party. It may save you a headache later on if you understand early what capital option(s) work best given your desired growth. 

…

Comments

*The models I went into detail about above are what I see as the mean models, or the most standard models in each industry, but I agree that there are many more models, especially in film that include fun things like completion bonds and state/federal tax credits.

** In the last 5 years the time frame for funds has diminished with funds using up their cash in 18 months or less. The exact timeline is usually written out in the shareholder agreement between the anchor limited partner (i.e. the limited partner with a large shareholding who typically writes the documents all other L.P.s follow when investing in the fund) and the fund they invest in.

*** Source: “The Cost of Outside Equity Control”

You can listen to the first part today through your favourite podcasting app.

Or right here.

What is very clear, in my opinion, is that all Venture Capitalists (VCs) rely on the greatness of founders to truly be successful. However, data (do check out this link) shows that some funds perform better than others, which does suggest that some VCs may know what they are doing more than others.

Whilst many VCs would likely answer “what makes a great VC” via a rumination of complex sentences (including myself ;)), I think it is first important to define the word “great”. 

Great, like many adjectives, is in the eye of the beholder, and what makes it even more challenging within this specific context, is the fact that perhaps the most quantifiable way to define a great VC is:

A VC that has invested in deals that end up exiting well (i.e. returns significant funds back to Limited Partners and into their own pocket)

but this outcome can take over ten years to come into fruititon.

In the meantime (as very few VCs have that many working years on their shoulders), I have been told that what a VC must do well and is expected of them from the ecosystem, is five tasks. All of these tasks contribute towards the “greatness” title. For each task, I will endeavour to give context and/or examples. 

However, before I do, as a prelude to Part 2, I would encourage you to challenge the value of each and everyone of these tasks and to whom it benefits the most…. 

1. Raise a fund (and then raise another) 

This is a bit of a chicken and egg task. As without a track record, it is very challenging to raise funds from Limited Partners (LPs). Pair that with the fact that most LPs require General Partners (GP) to put in their own capital, means that to raise your own fund, you have to have a lot of your own money (erhem perhaps a long lost wealthy aunt?), or strike a deal with a bank whereby your salary pays back your loan that you have invested into the fund. Either way, it is challenging and inaccessible to most. Check Warner, partner at Ada Ventures wrote a fantastic blog series on this arduous task, Associated Podcast also did a podcast Series on “How to raise your own fund” that shared light on this challenge.

Interesting fact: According to a PitchBook analysis of investment teams who raised a debut venture fund between 2007 and 2013, those with both operational and investment experience were more likely to raise a second fund, which they did 66% of the time. By contrast, teams with no experience as startup founders or investors raised sophomore vehicles 58% of the time. Key learning here, raising your first fund certainly does not guarantee you a second.

Nonetheless, to get out of the starting gates, you have to have capital to deploy. The training slopes as a junior VC is helping your portfolio companies raise money, but I will cover this topic briefly in another section.

2. Source excellent start ups

Defining what “excellent” is, is a whole series of blog posts in of itself but here are several strategies that VCs adopt to source deals:

• Network: One of the best and worst components of VC is that funds often share deals with other funds. This leads to an unusual blend of collaboration and competition. Therefore, exchanging deals becomes a flirtatious card game, where VCs meticulously choose who to tell about which deals, when. Relying on a network of other VCs, allows an individual (founders also take note) to also leverage bias, VCs are one of the worst industries when it comes to FOMO. If you have a skillset of convincing others to show their cards and for them to want to participate in your deals – then in both cases, in many peoples’ eyes, those deals might be defined as ‘Excellent’.

• Thesis driven investing: Ironically, not a huge number of investors adopt this strategy, as it is in some ways more work than chasing after the next “big thing” (erhem electric scooters, “Quick Commerce”). This is where a VC dives into the topic head first to understand the nuances of the industry, what solutions are already out there, what are the problems they are facing, how much is that industry willing to pay for that solution – rather than relying on founders telling them the answers to these questions, a VC has the answer themselves and a clear view of what they are looking for. Then it is a search to find the founder who is building or has built it, often by speaking to industry leaders.

• Data-driven sourcing: There are now billions of data points online, which could be used with the power of AI to identify start ups. The earlier the business the harder it is to determine its success, nonetheless, funds such as Quantum Light and EQT power their proprietary search engine. There are also off the shelf tools that you can purchase such as Spectre or Landscape. Searching the wide web certainly can help you uncover promising start ups, the secret is figuring out what parameters to look for before undertaking the search.

• Surround yourself with awesomeness: People are, in many ways, the currency that Venture Capital run’s off. It is not a coincidence that many say ‘to surround yourself with people more intelligent than you’. Not all, but many, of the most intelligent people I know like to challenge the status quo, a characteristic that often makes for an ideal founder profile. Investing in your friend’s businesses has one big advantage, your due diligence goes back many years (!), however, having a degree of separation can be helpful if things ever go South….

• Open mindedness: Luck flows all around us, it is up to us to ride its wave – meaning (!) – making the first move. I have had the good fortune of meeting many interesting people on planes, buses, queues, the list goes on. The next phenomenal talent you meet may not be in the most obvious place and being open to meeting new people in non-obvious settings will guarantee you to build some interesting relationships. As many people say with VC – it is a job that is very easy to never ‘turn off’.

3. Winning deals

Winning allocation in a hotly contested deal is no mean feat. Much like 2^nd year university housing (if you know, you know), a strange phenomenon happens when VCs hear the sentence: “we have a term sheet” - they enter into a state of frenzy. Valuation starts to skyrocket and investors will do anything to win over the founder.

I have heard stories like investors buying concert tickets to the founder’s favourite band, showing up to their offices unannounced with flowers and even cold calling.

Although these examples are rather extreme (!), there is a real art to building a strong relationship with a founder to the point where they pick you over the other offers available to them. Thus, reputation is everything in the VC ecosystem. The best pieces of advice I have gathered over the years is:

A)   to help everyone the best you can

B)   be open about what you know and what you don’t know

C) learn as much as you can

D)   do not jeopardise the reputation of others

E)   be early

4. Supporting portfolio

Many founders I have spoken too see most VCs as a means to an end. A rather harsh description I was once given was that VCs “are self-proclaimed surgeons who lack the knowledge of even performing the simplest of surgeries…”

Especially generalist VCs have the challenging task of having to have a breadth of knowledge, but that results in having challenges with depth of knowledge in so many technological areas. Furthermore, many VCs lack the capability to code so looking under the hood often becomes an impossible task. A prime example of this is the infamous “Bad Blood” case whereby most investors lacked the scientific acumen to understand that what Holmes was trying to achieve, was close to impossible. 

Nevertheless, capital can go a long way in giving founders time to learn, rectify mistakes and gather a super star team around them. There are also many other ways to support founders in order for them to gain the upper hand, such as:

• Solving problems: Jan Miczaika from HV Capital, told Associated Podcast when discussing on whether you should accept investment from European or US VCs, that one of his portfolio founders had a challenge with a company bank account freeze situ. Turns out that one of Jan’s colleagues’ next-door neighbours was a senior director of the bank, a phone call later well, listen to the clip to find out…. I was once told that there is almost always one valuable introduction you can make – a good tip is to start building your own personal CRM and categorising them accordingly.

Clip of this brilliant conversation below:

• Talent network: A superstar team can go a long way; VCs are in the privileged position of having met and be connected to an array of exceptional talent or great recruiters. A16z’s Ben Horowitz puts a lot of emphasis on this that he has an entire team dedicated to helping founders identify key hires. If you take pride in the friends you gather around you, there is a high likelihood you already have access to a bountiful talent pool – joining the dots is a powerful super-power.

• Opening doors: Not all money is equal. Founders often need to raise many subsequent rounds to realise their vision for their company. According to Dealroom, companies raising a seed round from top investors are significantly more likely to raise and to do so faster. There could be many factors at play here, but it is a known fact that tier one investors talk and have often built a strong relationship with one another. Thus, as a new investor, building relationships with top tier funds is exceptionally powerful, this process takes time and energy but (could) increase the success of your portfolio exponentially.

Ironically, none of the above value add services requires VCs to understand what the business does, but some founders have told me that these kinds of contributions can still significantly move the needle for them in determining the success of the company.

5. The art of adding and exiting

As mentioned briefly in the introduction, there are two scenarios where a VC might finally be able to don the label of a “great investor”. The first is rather half-baked – that the company has reached a big valuation (ideally >$1bn plus) within the private market, but some may argue that the true determinant of success is when a company exits at a much higher multiple than what was originally paid and the returns land in the bank.

Deciding whether to commit additional reserves to maintain dilution (see our past article “Fake Gods”) as well as when to exit a company at the right time, at the highest price and with full alignment from all investors and the founding team, is a difficult for just the founding team to accomplish alone. VCs can play a part by advising a founder on this journey, helping gain board consensus and potentially introducing them to a viable buyer or in some cases be the buyer.

Each task could have a standalone blog post diving many more layers deeper into what has been covered, but as a consortium, many VCs believe that they equate to the desired North Star reputation of a “great VC”. I would like to emphasise that I believe this to be the idealist version of the definition of what a “great VC” is and does - stay tuned for Part 2 a healthy dose of realism……  

A Series of Questions…

First: Why are you going?

But seriously - who told you to go and why do you think they know what is best for you? Question the intention of the occasion and your presence there. Does attending this event further your personal ambitions and put you in the right physical locations to meet people who can help you further those goals? Be selfish as you plan. Can you ensure, to a certain level of accuracy, that by attending this event you can place yourself in enough rooms and in front of enough of the people you want to meet to make this investment worth it? 

Second: Do you have the emotional and financial margin to do this trip well?

By ‘well’ I mean if you can only do this trip whereby on the second day your back hurts too much because of your friend’s lumpy couch bed, or you don’t have the budget to eat enough in order to not be ‘hangry’, then maybe reconsider. You are meeting a lot of new people; in an ideal world you get to leave each interaction lighter and more knowledgeable (even if it is about the things you realize you don’t want to research any further). Make as many good first impressions as you can - you never know where everyone will end up. 

Third: What pre-work can you do to make your life easier when you arrive?

What people, relevant to your goals, can you reach out to before you arrive? What events can you sign up for and talks can you plan your day around? Also if you are like me, what fun and easy going people can you also make sure you schedule a tea or drink with to break up the day and ensure some sunshine? 

Fourth: What, in an ideal world, would a high level schedule look like for your trip?

I am not a big planner, but I found it helpful to have blocks on my calendar for types of activities. For example, on the first day I could have a one hour block for a breakfast meeting with a friendly face, a two hour block to meet with founders, a two hour block in the afternoon to do research on a relevant subject specific to the conference followed by an evening two hour block for a network dinner. Once I had this format - I could reach out and fill in the blocks with exact calendar invites and meetings. Having this format also helped me ensure that, regardless of my length of stay, I was working towards my trip goals. It also helped me realize I needed to complete certain prep by, so I always came to a meeting with the right context and with a clear ‘why’. Doing this preparation has always helped me, especially if I am tight on time. 

Fifth -  What did I need to do every day to make sure I felt my best going into a lot of Danielle vs. the world situations?

After checking the weather and packing accordingly, I made sure I packed a couple of knick knacks that grounded me or just kept my energy up. For me it was an exercise ball for my morning stretches, a small notebook to journal in and liquid IV to try to make sure the only reason I could not show up to a meeting is if I didn’t want to. Lastly, every morning I took a tally of how I felt. Does the schedule I made still fit my mood and north star? Being flexible, even on the same day, has increased my ‘return’ in terms of productive conversations. It also helped me achieve my goals, which were to meet ux driven founders building utility driven applications for their users and to explore what novel developer tooling technologies were on the horizon. 

Anyways - just my two cents, but hope this helps someone!

I have been in a fortunate enough position to have seen hundreds of pitches, many of which have been brilliant, but a frustration as a non-partner level investor can be that you don’t always convince others in your team that the start up you sourced and have built conviction around, is one they (as a firm) should invest in. Normally, this happens more often than not and rightly so. Senior colleagues have a lot more experience than you and have identified risks in the business that they do not wish to embalm on their Limited Parnters (LPs).

This means the hours of work researching the industry, referencing experts, building up clear hypotheses and establishing a relationship with phenomenally inspiring founders, has resulted in a very disappointing and painful phone call. I often play Miley Cyrus’ “{It”s} The Climb” post a failed investment committee – to remind myself that with each investment opportunity you dive into you can take many learnings from it – regardless, it still hurts.

However, in line with Miley Cyrus’ latest hit “{Buy myself} Flowers” (!) as long as you have a clear sign-off from the firm, as an investor, you can have the opportunity to angel invest in the company independently as an angel. Thankfully, the start up founders that I have invested in, kindly have said I could put in as much capital as I was comfortable with into their business, which in my case was a small ticket. Subsequently, I own a very small percentage of each company I have invested in. A few questions might pop up here:

Hang on, junior VCs can invest? How?

As the name suggests, private markets are often only accessible to a select few individuals. Why? Well, unlike public markets that have a lot of regulation and compliance built around it to mitigate the risk of misinformation and malpractice, private markets are, in comparison, the Wild West.

Therefore to ‘protect’ consumers from being winced, in most countries there is regulation that only allows consumers that fall within a certain classification category to individually invest into a start up. For example, in the UK (as of Feb 2024), you can only invest if you are classed as a:

1. High Net Worth Individual or

2. Sophisticated Investor

In some countries, such as the UK, if you have been working at a VC firm for two years in an investor role, you fall into the later category, in some cases you must declare this to a governing body, for example the Financial Conduct Authority.

Why would a founder offer such a small ticket size to a non-partner level VCs whose fund has rejected them?

A term that is often banded around in VC is “value-add”, although, of course, capital is the central asset to why the industry exists in the first place, as the ecosystem has become more competitive, funds have devised a whole number of value-add propositions to win a deal – from an full-stack operations team, to a network of potential clients to a brimming talent pool of software engineers on tap. As an individual, you can also offer value-add that could be far more valuable than an €100k+ ticket.

A suggestion for all investors representing a fund when talking to founders, is to always ask “How can I help?”, this serves as an opportunity to understand where you can start from even the first phone call creating value for the founder. This is a win-win scenario, obviously if you convince your fund that this is a good deal, you are likely to win the deal over other funds, and if the fund doesn’t have conviction then you could still have the opportunity to angel invest in the company independently, as the founder has recognised you as an asset. For my current portfolio, I have supported them by helping them with financing from both angels and VC funds, introductions to customers, introducing them to their first hire, finding office space and introducing them to industry experts.

Regardless of whether you work for a fund or not, I can guarantee that everyone has a valuable introduction or input they can make – see yourself as an extended representative of the start up and think about what the company needs and I am sure you are able to support founders on their journey. Once a founder sees that you are prepared to work hard for them, in most cases you should be able to acquire an equity stake in the company.

I would own such a small percentage of the company, does it make sense?

Unless a very spectacular exit happens, my small tickets are not going to be making me a millionaire (unfortunately!). There are many other safer ways to allocate my savings and gain guaranteed profit e.g. Exchange-Traded Funds (ETFs), but having spoken to many general partners via the Associated Podcast over the years and our latest season being “How to Start Your Own Fund”, a point has really been driven home to me; working as a representative of a fund, you are responsible for selecting companies that are aligned with the theses and strategy of the fund.

Now, your personal theses and strategy might not be exactly the same as your current fund’s and here lies an opportunity to show who you are as an individual investor. There are considerable benefits to this, first, it could help “advertise yourself” to other funds who are more in line with your investment theses. And secondly, if you were ever to start your own fund, limited partners (LPs) typically want to see your personal portfolio, as it should reflect your ability to judge an investment opportunity this is because there is  no discrepancy around whether the investment was your responsibility or not (whereas within a fund the responsibility is on the shoulders of general partners (GPs). Another great tip I was given:your personal portfolio should be representative of what your future fund should look like, so for example, if you are passionate about web3 related business models and investing in under-represented founders – start angel investing in them.

Angel tickets don’t always result in huge returns, so why bother?

In short, it is all relative. A more conservative investment strategy, let’s say if you were to put your money into the S&P 500, on average your shares will increase by 7%-10% depending on market conditions. 

However, due to the nature of the VC market, companies are typically revalued every two-four years based on the willingness of private VC firms to pay for it, which in turn, can lead to a much wider range of potential valuation uplift. But be warned, just because the company is valued as such, does not mean that when you decided to cash in, the valuation may have changed. For a prime example of this, check out Hopin.

The main reason (non-VC) angels have told me they invest is that they can afford to lose it, and they want to make their money “work” harder. In order to support start ups, many countries have made investing in start ups attractive by putting in attractive tax benefits. For example, in the UK, the government has put in place things like SEIS and EIS schemes, this is where you receive both Income Tax relief, and exemption from Capital Gains Tax – read here for more details.

But even though you might not come out a millionaire and could even lose money, due to government schemes, angel tickets may have a relatively little downside and a chance to make much better returns than the public markets in a shorter timeframe.

When should you cash out?

What is clear is that angel investing is a very different ball game to VC investing as, at the end of the day, you are distributing your own capital versus others. A successful fund is one that returns over >3x to all their investors (1.5x at a minimum), the bigger the fund, the harder that goal becomes, hence as a fund you focus on maintaining your equity stake over subsequent rounds and praying for a massive ass exit. See “False Gods” for more details about how VCs think about exit opportunities.

However, as an angel, when a start up successfully raises just one more funding round and the valuation is higher, there could be an opportunity to sell your shares as secondaries and really feel like you’ve won the lottery. In some cases, you may even be forced to sell your shares (depending on the legal documentation). Obviously, the higher the multiple on your investment the better, but something to also take into consideration is dilution. For example:

·  You angel invest £25k and own 0.5% of the company at a pre-money valuation of £5million

·  Two years post investment: Next round is an up round and your shares are diluted to 0.4% at a valuation of £15million = meaning your shares are now worth £60,000

·  Four years post investment: Next round is an up round and shares are diluted to 0.28% at a pre-money valuation of £22.5million = meaning your shares are worth £63,000

Was it still worth holding on to your shares for another two years to add another additional £3k? Let’s just cash out now…..

But the story continues…. after year five the company turns a corner and invents a new product that quadruples sales, and therefore: 

·  Six years post investment: The next round values the company at £150million and shares are diluted to 0.196% = meaning your shares are worth £294,000

Fudge ;)

What should my investment strategy be?

For me, I am focused first and foremost on the story I can tell by placing a bet on a founder I met early on in their journey (and the satisfaction I have knowing I have played a minor role in their success). This combined with the fact that I have conviction that their product has significant value, so should in theory generate significant revenue (and hopefully returns). Importantly, your choice obviously depends on your personal goals and aspirations.

My suggestion would be to first think about the WHY you want to angel invest and work backwards from there. This decision should hopefully guide you to want to understand how much capital you will be willing to set aside; the amount of money you would be comfortable loosing, how you want to invest into each company (a significant amount in a few or a little in many), and at what valuation you would be willing to sell your shares for. Then(roughly ;) ) stick to it.

Some words of caution

1. It is paramount that you gain permission from your fund to angel invest, the VC ecosystem is a small one, and it is best to be fully transparent around your angel tickets rather than getting into trouble

2. As with any start up investment, you have to be willing to lose all of your capital, VC is a risky business, so only invest if can afford to do so

3. Really understand the tax implications of when you invest and what would theoretically happen at the time of an exit, for example if you are a US citizen living in France, investing in a French company may put you at risk of being double taxed from both the US and France – ensure you prepare all the correct documents in place once the investment is made and discuss with a tax advisor to avoid any expensive mistakes

My Investments

Common threads between all of my investments are that they sit within the realm of Techbio, an industry that I believe has the potential to transform the way we produce materials far more sustainably than existing practices. Protecting our physical world whilst maintaining or improving peoples’ quality of life is a Trillion dollar problem that needs to be solved. Additionally, the founders I have backed all have a strong belief that building a diverse team is crucial to establishing an excellent culture and executional excellence. So without further ado I am delighted to introduce you to my three angel investments:

Enginzyme

Founded in 2014 and headquartered in Stockholm, Enginzyme has developed a cell-free biomanufacturing platform that produces a range of valuable chemical compounds.

Karim Engelmark Cassimjee is the Co-Founder and CEO worked on EngineZyme is the inventor of EnginZyme's foundational technology and is complimented with his co-founder Samuel Härgestam’s ability to strategically navigate the commercialisation of this technology. Before Enginzyme, Samuel founded three other start ups (Supertext, Instabridge & Animasher), which were in the telecommunication and internet industry. The rest of the team consists of 50 FTE, less than 10 don’t have a PhD in chemistry/biology.

In short, I was excited about Enginzyme for the following main reasons:

·  Product: Their technology was patented and proven to be far most cost effective and sustainable than existing practices

·  Team: The team has exceptional expertise in both science and operations and has demonstrated their ability to follow a product roadmap cost-effectively

·  Market: The three target markets they were focusing on equated to over $100billion in revenue opportunity – all three industries were looking for more cost efficient and greener solutions to produce chemicals

·  Traction: They already had paying customers, one of them being a FTE 100 vegetable oil manufacturer

·  Investors: I participated in Enginzyme’s fundraise through an angel syndicate, within the syndicate were some of the very best Techbio investors in Europe with Bunge Ventures,  Almi Invest GreenTech and Navigare Ventures participating. Existing investors who were doubling down were Industrifonden, SEB Venture Capital, and Sofinnova Partners, again these funds are experts in Bio-industrials

Really Clever

Founded in 2021, and headquartered in Oxfordshire, Really Clever has developed a mycelium-based biomaterial that can be used as an alternative to leather.

Patrick Pinto and Matt Millar met at university and ended up starting up a successful baking business together, as much as a bit of sweet stuff makes life that much better, both were ready to tackle something that could really ensure the world was a better place to where they left it. With the help of their lead scientist Dr. Peter Wellham, who holds a PhD in Fungal Biochemistry, they have created a product that fits all of the criteria I was looking for in this sector.

·  Product: Really Clever has created a product that has the potential to reach price parity to leather, be produced at scale, meet quality protocols, be highly customisable and most importantly, is far more sustainable relative to either faux or animal-based leather.

·  Team: What sold me on the team was a combination of their ability to sell their vision whilst being bold enough to continuously iterate and push things forward at breakneck speed  – this was demonstrated by a timeline of their product samples – it was so exciting to see how quickly they reached a product that  I was excited to buy.

·  Market: The leather industry equates to a $444 billion market, although what might jump to mind in only fashion, leather has many applications including within the automotive and aviation industries. Customers are now demanding more sustainable, vegan alternatives which Really Clever will deliver.

·  Investors: Really Clever’s investors include Hoxton and Singular as well as a few other Project A team mates.

Gravel AI

Founded in 2022, headquartered in London, Gravel is an advanced database for the chemicals and ingredients industry.

Karen Ho and To Hong Chan are a husband-and-wife duo, who are nothing short of a power-couple. Some companies that aggregate hard to find data into one simple to use platform that helps users unlock commercial opportunities have been very successful e.g. Bloomberg, Zoopla, ChatGPT4 to name a few. Karen and To have built similar databases for the likes of Ebay, Travelex and RELX, and have an in-depth understanding of the underlying complexity of models required to build a world-class platform.

·  Product: The chemical and ingredient market is an exceptionally opaque one, in-house teams of both buyers and producers spend countless hours trying to predict market trends, attempting to factor in things like demand, and pricing based on an array of static reports. With new regulations coming through that are banning certain kinds of harmful chemicals, a new wave of bio-chemical producers are cropping up, which adds to the complexity and volatility of the market thus making it an ideal time for a real-time platform such as Gravel AI to exist.

·  Team: Karen continues to impress me with her ability to digest information and then present a response that, like how a flame engulfs a match, is all-encompassing, thorough, and full of energy. The duo also has a fabulous ability to hustle, whether it is to crack the LinkedIn outreach or the booth positioning at a trade fair, no detail will be left unscrutinised.

·  Market: The chemical and ingredients industry is one of the biggest in the world, totalling $4.7 trillion, and it is due to increase at a CAGR of 8.76% between 2024-2028

·  Investors: The round was led by Joyance Partners with participation from Techstars, Kicker Ventures and Supernode Ventures.

Special mentions go to two companies that I sourced for Project A and that I still feel are part of the portfolio:

twig: A Synbio company that genetically modified microorganisms to produce end-products for the ingredients industry. Round led by Project A, with participation from Seedcamp, Zero Carbon Capital, UKI2S and Gaingels.

11x: A digital workforce company, leveraging generative AI to design programs such as “Alice” , an automated sales outreach tool. Round led by Project A, with participation from No Label Ventures and Tiny Ventures.

If you would like an introduction to any of the above start ups, please don’t hesitate to ask!

For three years I worked as an investor at Icebreaker, a fund that does pre-seed investments in Finland, Sweden and Estonia. And by pre-seed I don’t mean ploughing $5m into founders who were employees number one to five at Google, I mean the real stuff. Companies that weren’t shiny… companies that VCs wouldn’t automatically fund based on the team’s CV. 

At Icebreaker what enabled us to do real pre-seed was a thesis focused on backing domain experts. Underpinning this thesis were two beliefs

1. That domain expert founders have an advantage when it comes to reaching product market fit because they are solving problems for people just like themselves

2. That investments in domain expert led companies were priced much better than the hot pre-seed deals that the whole world was chasing after

However, one thing that surprised me was that backing domain experts created a number of disadvantages. Disadvantages that began to surface when it was time for our portfolio companies to raise the next round of funding. 

These fundraising challenges aren’t limited to domain experts, they affect pretty much all founders outside the VC mainstream (whether due to the space they’re in or the pedigree they lack). Our focus on domain expertise as our north star criteria simply meant that we had a higher proportion of outsider founders in our portfolio. Thus we became acutely aware of the fundraising challenges that outsiders face.

We didn’t just note these challenges stoically. The difficulties that our band of misfits had trying to secure future capital had a darker effect on us. We felt a constant urge to take the easy route and invest in mainstream founders. This would give us easy uprounds that we could show our LPs and reduce our exposure to fundraising risk. 

For the most part we succeeded at resisting this urge. However, the entire experience led me to notice a little discussed structural reason why VCs prefer to back the already privileged. A reason that affects VCs even when they don't think that these privileged founders are better. Namely that, VCs know how much harder fundraising is for outsider founders and try to avoid taking on companies with such heightened fundraising risk.

In the rest of this post, I will walk through the fundraising challenges faced by outsider founders and why those challenges sometimes cause even the VCs who believe in them to not to fund them. Then I'll propose an investment strategy that allows VCs to back them without caring about fundraising risk.

Why is fundraising so hard for outsiders

There are two types of outsider.

1. Background outsiders → these are people who don’t come from VC central casting - they aren’t the former exited founders, startup scenesters, finance bros and management consultants that VCs love to invest in

2. Space outsiders → these are people building a company in a market that VCs believe is either too hard (overcrowded, slow customer adoption etc.), too small, or just don’t know about

These outsiders face different types of challenges. Background outsiders often struggle with knowhow and investor bias. While space outsiders typically get rejected because of half baked thinking re the markets they’re in.

Background outsider challenges

Challenge 1: They don’t know how to speak VC

Background outsiders often struggle to raise because they simply don’t know how to. Most of these founders started their businesses because they wanted to solve a real problem. They aren’t startup scenesters, suave consultants, or pedigreed investment bankers. They haven't been dreaming of venture capital their whole life and consequently haven't read all the literature or listened to all the podcasts. They don’t have 15 friends who've raised before to practise their pitch with and review their deck.

For the funds that want to invest despite this lack of knowledge, they still have to consider whether their VC colleagues will feel the same way when it’s time for the company to raise their next round of funding. Because the teams don’t ‘speak VC’, you can’t just put them in front of Sequoia. Here’s an example:

At Icebreaker, one of our founders went fundraising, and I was back channelling with a VC they had pitched. I was surprised to hear she was on the cusp of rejecting them - the business was doing well and it fit her fund’s thesis. Her reason? She was concerned that they didn’t seem to know what pre- and post-money meant. It made them seem incompetent. 

She questioned the team’s competence because they didn’t speak VC.

Background outsiders need ‘polish’ - and that means work for you as a fund.

That being said, with some effort it's possible to teach founders to talk the talk. And quite a few funds are willing to put in the effort. First Round and EF have programs to get their founders pitch ready in a short space of time. Moreover, there are a lot of resources funds can point founders to: the likes of YC will show you how to put together a Seed deck, my own site Pitchdoctor has a guide to the perfect startup blurb, NFX has tons of resources.

Challenge 2: They don’t look like the people VCs fund (yes this is about bias)

Evaluating founders is a dark art. How do you know if someone you’ve only spent 30 minutes with is going to be a great founder? My answer is “you can’t. The industry's answer is “pattern matching” (or as I like to call it reading tea leaves). 

Pattern matching involves trying to see if a founder looks and acts like other founders who have been successful before and combining this with a very large dollop of gut feeling (nobody likes to admit this part).

Looking for patterns puts outsider founders at a disadvantage because - they aren’t from the startup scene. Background outsiders worked for the “wrong” companies in the “wrong” roles and went to the “wrong” universities to stimulate VC interest.

If you came from the beauty industry and want to revolutionise it, you are unlikely to have a CV that looks like that of someone trying to fix data science. Unfortunately due to pattern matching; it feels like VCs are way more excited by founders with CVs of the data science variety.

And these are just the patterns people will admit to looking for. There is also the matter of gut feeling. If every successful founder a VC has seen is a man, or white, or even tall then why wouldn’t their gut be confused about someone who doesn’t fit the mould (only 25% of businesses that raised VC in 2023 had any women in the founding team). 

I’d be happy to wager that a black, female, clone of Travis Kalanick, would struggle to raise as much money as he did. VCs wouldn’t “be able to get conviction on the team…”

VCs are acutely aware that other VCs are biased for and against certain founder profiles, and the impact this has on a company's fundraising prospects. Therefore, even when they are excited by a deal, they ask themselves - “who on earth is going to fund this next year”. If there are no good answers, initial excitement can quickly turn into rejection.

Space outsider challenges

What is a space outsider

VCs talk about market size a lot. Because for VC maths to work your market size needs to be able to support a $1bn+ company. However, how they evaluate market size in practice is quite fuzzy. VCs do a kind of mental triage when they hear about your market. They immediately classify it into into one of three buckets:

• Hot

• No opinion

• Cold - ‘obviously’ too small / competitive / hard

If you fall in either of the bottom two categories - the chips are stacked against you. You are a space outsider. 

VCs having no-opinion on your space makes things harder for you as they typically default to the belief that a market that they’ve never thought about is too small. However, they generally are open to being convinced of your Market’s Size if you do your homework. Where the real challenges lie for founders and the funds that back them is if VCs decide that your space is ‘cold’.

Challenge 1: VCs suffer from groupthink when it comes to ‘cold’ spaces

Investors are actively biased against cold spaces. By this I mean that there is almost nothing you can say or do to convince an investor that a space they have decided is ‘cold’ is ‘hot’. This is often fatal for a company’s fundraising prospects because cold markets are by definition unable to support venture scale outcomes. A VC who thinks a company’s market is cold will reject it no matter how good they think the product is.

What makes this worse for founders is that investor opinions on whether a space is hot or cold are not individualistic but rather determined by the VC hivemind. If the hivemind decides a space is ‘hot’, 90% of VCs will fall over themselves in agreement and if groupthink says ‘cold’ 90% of them will run for the hills.

Who decides what is hot or cold? Everyone and no one. In practice it’s some combination of what the big funds (Sequoia, Benchmark, Founders Fund, a16z etc.) are investing in, what exits have happened recently, and what podcasts / blog posts VC influencers have produced recently. A great case study for this is crypto’s rapid rise and fall from grace - the space went from hot as the sun in 2021 to uninvestable by 2023 and everybody fell in line.

The negative consequences of this for founders in ostensibly cold spaces are obvious. The consequences on fund strategy are more interesting but less intuitive. 

Groupthink around cold spaces means that, even if you are one of the 10% of funds that disagrees with the hivemind about a ‘cold’ space, it’s often suicidal to invest in startups operating there. The hostility of the fundraising landscape for startups in that type of space means that even if you are right there’s a good chance that the company’s next fundraise will fail. The result is a world where most funds are constrained by the need to invest into companies in spaces that the rest of the market likes regardless of their own individual opinions.

How can funds be immune to what other funds think

From my perspective there are two things wrong with the status quo:

1. Deserving outsiders have a very hard time raising capital

2. The rare funds that want to back outsiders often don’t do it because they are acutely aware of the fundraising challenges these outsiders will face in the future

I’ve spent the last few years mulling over how to fix the second problem (the first is intractable). At its core, the question I’ve been trying to answer is: 

How do you design a fund which can invest in misfit people in unloved spaces without having to give a damn what the rest of the market thinks?

It turns out the solution has been hiding in plain sight. Pioneered first by a few funds philosophically opposed to blitzscaling and now quietly adopted by some more traditional looking VCs. The solution is to fund companies which meet the following conditions. Companies that:

1. Have a plan to break even after the round

2. Have business models that support rapid, self-funded growth

The first condition of this approach fixes the need to care what other VCs think because being break-even eliminates fundraising risk. The second ensures that the company can continue to accelerate (hopefully to a billion dollar valuation) without needing further capital injections. 

Under this conception of investing, capital is provided to get the company to a place where it can scale aggressively on its own. As opposed to the traditional model where VCs fund companies to get to the next fundraising milestone.

Who is running this playbook? 

There are two types of funds I've seen using this playbook

• Anti-blitzscalers

• Funds investing in unpopular areas

Anti-blitzscalers

The majority of funds running this playbook reject the mainstream approach to startup building insofar as they are not explicitly hunting for unicorns. Here I'm talking about the likes of Indie VC, Calm & D2. These players are animated by the belief (which I am somewhat sympathetic to) that the high failure rate of VC backed companies is largely due to needless blitzscaling. Based on this, they conclude that it's very possible to return a 3x+ fund with a portfolio of companies that don’t have the same all or nothing approach mandated by Silicon Valley lore.

These funds filter aggressively for investments that fulfil both the conditions above. However, given their reduced failure rates their fund models don’t require 100x exits to succeed.

Side note:

Interestingly a number of these funds have found that some of the companies they invest in end up looking like unicorns anyway (As of 2023 10% of Indie VC’s portfolio companies were doing >$10m in revenue).

Funds investing unpopular areas

Conversely, funds in this second category look almost identical to traditional VC. They are trying to invest in unicorns, and are largely unbothered by high startup failure rates. The main thing that separates them from standard thesis-driven funds is the fact that they select for companies that meet the criteria above. These funds do not see themselves as separate from mainstream VC. Instead they have adopted these criteria because their theses involves investing in companies that happen to be outsiders. Investing in self-sufficient companies is a tactic, not their raison d’etre. 

Consequently, compared to the anti-blitzscalers, they are hard to identify. In fact, I was only able to find one example in the wild even though I’m certain there are many more. Adjacent run by Nico Wittenborn.

Adjacent looks like a regular thesis driven fund. It’s thesis is investing in Consumer Subscriptions, which in layman's terms means SaaS for consumers (e.g. Duolingo and Calm). In stark contrast to the likes of Indie VC, nothing on their website would betray the fact that Adjacent backs companies that don't need to raise more money in the future. In fact many of their portfolio companies have actually raised further funding post their initial investment.

The only way you could know that the fund has this strategy would be if you happened to listen to Nico’s 20VC appearance where he utters the following throwaway sentence: 

Usually I structure the rounds in such a way that we can get to cash flow positive with those companies

Why does Adjacent have this strategy? Because VCs don’t care for consumer subscription companies. And that equals heightened fundraising risk. In Nico’s own words:

People don’t like Consumer Subscription until it does 10s of millions of revenue

Adjacent’s approach is a direct response to the VC hivemind that hates their thesis. By selecting for companies that don’t need to rely on VC belief to continue operating, they are able to still invest in the space they care about. Moreover, because of how quickly Consumer Subscription companies recoup their customer acquisition spend (often in 7 to 8 days) their portfolio companies can fuel their own growth by recycling cash. 

The combination of these two features allows them to be certain that their investments will not just survive but also be able continue to scale regardless of what other VCs think.

This whole time the secret to eliminating the fundraising risk inherent in backing outsiders wasn’t changing how the market sees them, instead it was making how the market sees them irrelevant.

Implications for funding diverse founders

There is an emerging crop of funds at the seed and pre-seed stages focused on backing diverse founders. I have had several conversations with people at such funds where they lament how difficult many of their well performing portfolio companies find fundraising due to their outsider status. My suspicion is that a lot of the funds focused on backing diverse founders (textbook background outsiders) could benefit from taking a leaf out of this playbook. 

While it is far from a panacea - an approach like the above that essentially sidesteps fundraising risk could form a core part of the solution. It would allow these funds to free themselves and their founders from an industry that is structurally skewed against them.

There are dozens of successful companies today, like Microsoft, GoPro and IKEA (run by The INGKA Foundation) that either have not used venture capital or utilized it later in their company journey (i.e. well after the present day definition of early stage company). At the same time there have been several companies that have become immensely successful with the support of venture capital at the earliest stages. Today, I’m focusing on the archetype of the former as the stories of the ‘venture-backed’ companies have been more widely told.

Over the last few years we have specifically seen deeptech companies, which have traditionally existed outside VCs' purview, increasingly obtain early stage funding from institutional venture capital firms and high net worth individuals (HNWI) in the form of angel investors. Does this make sense? Why is now the ‘right’ time for entrepreneurs in deeptech to obtain venture capital, if it is? What are the challenges specific to deeptech companies and how can these funds support them? 

Here are some of the challenges I see:

• The business models typically start off relying heavily on single clients, creating dependencies:

  • Many deeptech companies begin structured as consultancies with their former employer as the main client.

  • Companies often begin with a single early stage customer -  the government, who has not prioritized any one company’s product/service, requires many steps for budget approval and has long lead times to trial conversion etc.

• The Elon challenge: 

  • There is a misconception because of high profile anomaly successes in deeptech that there is a universal new norm. Some of the most high profile businesses in tech have been started by people with strong track records and unique access to financing. This leads to the misconception that any founder can replicate their playbooks, when often these playbooks are specific to those companies (i.e. it is  much harder for me to convince a government into accepting my regulatory violations than it would be for Elon Musk).

• Talent acquisition and the tension between talent types:

  • Some people solving deeply technical problems primarily approach it theoretically as it is sometimes their life’s research. They have previously not worked in industry or startups full time. Because of this, it may be hard to pull them out of the safety of their academic tenures and re-orient their priorities to understand what failure may look like in industry. One example of this unlearning could be the importance placed on preventing scoping, or taking from another researcher’s work without permission, instead of trying to be as collaborative as possible. This misdirected attention may be doing them a disservice.

  • Meanwhile another common profile we see are those who exclusively have industry experience, are amazing at business development (BD) but are not actively studying the cutting edge research in their chosen field. Though maybe they know the research being done at the company they work for, they often reject novel technologies; believing the status quo is there for a reason.

• Customer Sales Cycles: Selling to governments, hospital systems  and enterprise legacy businesses (for example) requires a person to have a different set of timeline expectations in comparison to selling a consumer software to individuals.

• Burgeoning Tensions Between Investors: Some founders take government grants, if not incubated in a government agency (i.e. DARPA, FDA, NIH etc.), and also take private capital (i.e. institutional equity and money from HNWI). These groups have different expectations of growth and returns and often different timelines. This sometimes creates tension between investors.

• Regulatory barriers: Bleeding edge technologies are often prone to regulation for national security reasons. One example is the CHIPS Act and its impact on the wider deeptech industry where the US’ more protectionist policies around semiconductors are hindering collaboration, and in many cases increasing cost of goods sold for companies. In another example, it is expected that 80% of the solar panel industry supply chain will be housed in China by 2025. Right now there are Foreign Direct Investment laws slowing US exchanges between Chinese companies. 

Given what we know about both the deeptech companies building and the business models they have, here is one person’s perspective on how company funding in the deeptech space has evolved.

• Before: founders would utilize bank credit lines, funds from family and friends as well as grants and low interest loans from the local and federal government as well as private institutions 

• Now: founders use all of the above and institutional early stage and later stage equity financing

Though personally I am excited to see more and more founders identify a customized capital allocation path that fits their business, I am wary of saying all will find equity to be as helpful as it may seem, especially given the challenges to the venture capital business model that some deeptech companies rub up against. To make sure you don’t have to just take our word for it on what the challenges are and how venture capital is and is not impacting deeptech companies, we are going to continue researching this topic and asking questions. This is so you can hear from founders and funders directly. We hope our hypotheses are disproven.

First up is a founder near and dear to Associated’s heart. We’d like to introduce Danielle’s dad, Barry Bennett. He is a metallurgist, Founder and CEO of Metals & Materials Engineers an engineering company focused on infrastructure and has a few opinions on the pros and cons of venture capital for an asset heavy business. Listen to the podcast here and below.