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Understanding the Pre-Seed Ecosystem

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Understanding Pre-Seed Startup FundingAs a founder or early-stage investor, you have probably heard the term pre-seed being tossed around. But what constitutes an official round before the seed stage and why is the pre-seed so important now? In this article, we will delve into what exactly the pre-seed stage is, the top VC firms, accelerators, and angels for this stage, and finally some resources for founders looking to raise capital for this stage.

So what qualifies a company and/or round to be considered ‘pre-seed?’ According to Crunchbase: “A Pre-Seed round is a pre-institutional seed round that either has no institutional investors or is a very low amount, often below $150k.” It is the round after the ‘angel’ round and before the ‘seed’ stage. In reality, most define pre-seed to be after a friends/family/angels round, and before ‘seed’ of course, with a company typically having achieved an MVP (minimum viable product) but yet to establish firm market validation or product-market fit (all the better if they have though). Some other common characteristics:

  • ARR between $50-250K
  • Pre-money cap is less than $5M
  • Round size less than $1.5M
  • Prior capital raised is <$500K

Of course, there is no one size fits all for pre-seed. It is more about how early a founder wants/needs to raise capital and the risk that investors are willing to take.

What can explain the growth of the pre-seed stage though over the past 5 years or so? Really it has to do with investors being able to receive such a high multiple on their initial investment when a company is successful. VC returns are not a normal distribution, but rather a power-law distribution.

Pre-Seed Funding

Why is this important? This is important for investors to understand as they search for the rare winners in this fat-tail, but also founders. If founders can better understand how investors look for and evaluate companies based on this distribution, they can better position themselves to raise VC money and hopefully build a successful business. In looking to understand why the concept of the fat-tail matters so much to VCs, this article writes about how most investments return very little or lose money, some return a multiple on initial investment, but it is the very small handful of “hyper performers” that return an outcome well outside what could be expected in a normal distribution. These few start-ups more than compensate for a fund’s losses, while also generating most of a portfolio’s returns. The last point explains the idea of ‘fat tails’ –  as the tails have more bulk, the probability of extreme events is higher compared to the normal. While these ‘hyper performers’ are rare, the lower valuations for these companies at the pre-seed level present an exceptional opportunity for investors if they are able to identify these companies at a higher rate than average.

Besides the power-law distribution to help explain the growth of the pre-seed round, NextView believes that there are two main factors that have contributed to the rise of pre-seed rounds: “the frothy late-stage financing market, coupled with both the scaling-up of some of the early winners in the institutional seed ecosystem and the scaling-down of some larger funds that retrenched after the financial crisis.” The fact that the late-stage financing market for tech companies has been typically over-funded with valuations/multiples that seem completely ludicrous over the past 10 years has incentivized investors to invest earlier, as they recognize this same trend. If a company is able to make it to a Series C, the pre-seed investors will have already have a 10-100X multiple in unrealized gains that will soon grow further with the frothy late-stage markets and the hopes of an IPO or acquisition. Finally, some of the first early-stage investors and VC firms have realized the returns on their first and second wave of winners and have been able to grow considerably with more institutional investors flooding in to generate alpha.

Let’s take a closer look at some of these top pre-seed VC firms and some of the criteria that they look for in companies, founders, and some resources to contact them and reach out if you feel you fit their thesis. Here are 5 of the top VC firms that focus almost exclusively on the pre-seed round:

  1. Afore Capital: Backs product-centric founders at the pre-seed stage exclusively. The investment team brings 16 years of founding product experience (Android and Twitter) and 7 years of institutional investing experience (Founder Collective and Foundation Capital). Their sweet spot is the ~$1M pre-seed round, where they can lead the round as an institutional investor alongside high value angels. The firm has made 4 investments so far this year, including most recently Flatfile, a leader in data onboarding. Their SaaS solutions enable bulk data transfer between businesses; no data science required. Afore invests across all industries, but has a preference for SaaS & Supply Chain Tech.
  2. Founder Collective: Created by a group of former founders who have each started a technology company. They see themselves as a peer-to-peer investing firm who aligns themselves with each founder/company that they back. The firm has made 11 investments to this point in 2020 and makes a majority of investments in software & internet. Most recently, Founder Collective invested in Front of the Pack which delivers dog supplements.
  3. Lightspeed Venture Partners: Lightspeed Venture Partners is a venture capital firm that engages in consumer, enterprise, technology, and cleantech markets. The firm was founded in 2000 and is based in Menlo Park, California with additional offices in Beijing, China; Shanghai, China; New Delhi, India; and Herzliya Pituach, Israel. Lightspeed has made 62 investments so far this year with the most recent being ShareChat which is a social networking and regional content platform for India.
  4. Ludlow Ventures: Ludlow was founded in 2010 and is based in Detroit, MI. They see themselves as a different firm, one without ego that funds the dreams of entrepreneurs and startups, becoming close friends with all of the teams they invest in. Ludlow Ventures has made 8 investments so far this year, with the most recent being Welcome, which offers management and compensation data platforms for HR and recruiting teams.
  5. Initialized Capital: One of the most well-known pre-seed & seed VC firms in the world, Initialized Capital is led by Garry Tan and formerly Alexis Ohanian. Initialized has 6 investing partners and over $770M under management over five core funds since its founding in 2012. The firm focuses on investing in high-potential software startups with small teams that include great engineers, designers and product founders. Initialized has invested in 27 companies so far this year, most recently investing in Silo, a wholesale food marketplace that enables customers to buy and sell produce, protein, dairy, and shelf-stable food quickly.

Pre-Seed Venture Capital Startup Funding

The table above provides some more information on these VC firms including a tier ranking, website, contact info, number of investments, and some notable winners from their portfolio.

Obviously, there are many more VC firms that invest in the pre-seed stage, but the ones highlighted are heavily focused here and have a strong track-record. This list provides a look at over 750 seed stage funds and could prove extremely useful in your search for your first round of VC funding. Next we will take a look at the role that accelerators take at this stage and some of the top ones.

Accelerators/incubators are unique in the start-up ecosystem in the sense that they are more hands-on than a VC firm, but only for a selected duration of time. Almost all focus on the earliest of stages, and therefore if you are a pre-seed company should be a perfect fit for any accelerator. These incubators/accelerators will typically take a minority stake in a company and in return provide support in the form of: formalizing your goals/vision, market sizing, product development, branding, finance/accounting, legal, fundraising and introductions to angels and VCs, team building, sales strategy, communication/presentation skills, and other training programs and aid. Each accelerator really differs in their approach and the nature of their aid in the process but there have been countless successful startups to come out of accelerators and it’s fantastic for first time founders. There is also the venture studio which is like an accelerator where companies are incubated inside of the studio and you have multiple people working on multiple companies at a time. The successful ideas are spun out of the studio. With this information at hand, let’s take a look at some of the top accelerators, incubators, and venture studios:

  1. Techstars: Techstars is known as one of the top accelerators around the world, with incubator/accelerator programs throughout the globe, serving different niches and founders from all different backgrounds. From their website: “Applications open six times a year, and stay open typically for 12 weeks…” Their programs range from varying industry focuses such as the ‘Farm to Fork’ to ‘Allied Space’ to ‘Air Force’ among others. Some cities include Banagalor, Chicago, Boston, New York, Singapore, Amsterdam, Berlin, among many others. They have backed some amazing start-ups and their programs offer mentorship, access to investors, an extensive community, and help local areas really develop the best set of entrepreneurs and companies and spur economic growth.
  2. 500 Startups: 500 Startups calls themselves the “most active global venture capital firm of 2019.” They have invested in over 2500 startups and in over 75 countries. Like Techstars, they are international and very renowned. Their success in investing is in parallel with Techstars as well and their focus also ranges from niches to more general city accelerator programs. They help founders navigate regulatory and legal issues, provide them with access to hundreds of VCs and their global network of investors, entrepreneurs, and advisors to ensure that the companies that go through their program are set up to succeed from Day One.
  3. Y Combinator: YC is probably the most well-known accelerator program and is utterly dominant. Founded in 2005 by Paul Graham, YC has created an incredibly competitive program in which teams essentially compete with each other over a 3-month period and continually refine their pitches for the most important day that lies at the end: Demo Day. YC’s Demo Day and program has seen the likes of AirBnB, Stripe, DoorDash, DropBox, Coinbase, and countless other unicorns. Their start-ups have raised over $100B and they have invested in over 2,000 companies. For all of their help, they invest $125k for 7% equity stake and invest in the best of their graduating classes through their YC Continuity Fund.
  4. Acceleprise: Acceleprise is a top-notch accelerator that focuses on B2B SaaS companies that was founded in 2012 in Washington DC by Sean Glass, Allen Gannett, and Collin Gutman. They believed that there was a lack of resources for early-stage enterprise technology companies at the time. Acceleprise takes a different approach than the accelerators listed above, as they focus on smaller cohorts and devote more time, energy and attention to these select few. They have invested in over 150+ early stage SaaS companies and use their own experiences, network, and expertise to help their founders.
  5. Betaworks: Betaworks is a product-focused seed stage incubator, VC, and studio that incubates companies, invests, and creates their own businesses. They are based out of SF and NYC and focus primarily on new consumer behaviors and trends powered by frontier technologies. They have backed more than 150 companies that include Giphy, Anchor, Gimlet Media, Product Hunt, Medium, Kickstarter, and Tumblr. They have two main incubators: Betaworks Camp & Lab. Betaworks Camp focuses on start-ups building frontier technologies while Betaworks Lab focuses on entrepreneurs, academics and investors who have a passion for fixing the internet. Betaworks is certainly less well-known than the others on this list, yet their unique model has produced and invested in some truly extraordinary companies and their high rate of success here should be noted.

Startup Pre-Seed VC

The table above again provides some more detailed information on these incubators including their average check size, application link, and some notable companies they have invested in. Again, there are thousands of accelerators and incubators across the globe and this website does a fantastic job of breaking down over 500 of them.

What are some key things investors are looking for at this stage? Because traction is so limited, many qualitative factors must be considered. Five of the most important are:

  • Founding team (prior experience, expertise in the industry, passion for the problem, charismatic and/or technical)
  • Total Addressable Market (how big is the market for the problem that this company is solving?)
  • Business Model (how does the company plan to make money and what will the revenue streams be?)
  • Business Development / Go-To Market Strategy (how does the company plan to acquire customers and increase retention rates?)
  • Competition / MOAT (what are the barriers to entry and what do the competitors in this space look like? How is this company different and better?)

The risk at the pre-seed level is the highest in an asset class that is already known to be the riskiest. Hence, investors are looking for exceptional returns on these early stage bets and the 99% percentile in the categories listed above. VC is a numbers game and investors see thousands of deals a year and pass on almost every single one (so don’t take it personally if you’re business is passed on by a VC).

In conclusion, we have learned that Pre-Seed can generally be defined as a pre-institutional seed round with prior capital raised often below $150k” It is the round after the ‘angel’ round and before the ‘seed’ stage. Companies have generally yet to establish firm market validation or product-market fit but some sort of minimum viable product (MVP).

Hopefully this article was useful in providing some insight into what exactly pre-seed means, why it is rising, and some of the top VC firms and accelerators at this stage. If you are a first-time founder or just want to learn more about the VC space, I highly recommend listening to the first 10 episodes of the first-ever VC podcast called The Full Ratchet. Nick Moran helps to break down the blackbox of VC and give founders a better idea of the funding process and what investors are generally looking for at this stage. The episodes can be found here.

If you have any questions, comments or useful tips about pre-seed investing and the process of raising capital or any interesting start-ups please feel free to comment below!!

Additional Resources for Startup Funding:

Startups May Soon Get Help From an Unexpected Source: The SEC

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Many businesses have struggled to maintain adequate working capital throughout the Covid-19 pandemic, and startups are no exception. Although government stimulus packages have been implemented to help small businesses, most of these liquidity programs are geared to bridge payroll and overhead expenses, not provide the seed or growth capital typically sought by startups. With many early-stage ventures entering survival mode, the agency charged with policing the US securities markets, the Securities and Exchange Commission (SEC), may soon provide some relief.

For those unaware, any offer or sale of a security (a broad term that includes common stock, preferred stock, convertible notes and even simple agreements for future equity (SAFEs)) must be either publicly registered with the SEC or qualify for an exemption. Since the time and expense required to register an offering with the SEC make it unrealistic for most early-stagers, founders generally seek to raise capital in the private securities markets. While this may seem like a straight-forward endeavor, the rules governing a so-called “private placement” are complex and constraining, presenting thorny obstacles for startups during a challenging economic climate.

Recent proposals floated by the SEC, if adopted, could help.

In June 2019, about nine months before Covid-19 turned the US economy upside down, the SEC published a concept release soliciting input on how to harmonize the existing registration exemptions. In response to feedback on this release, the SEC has published two rule proposals. On December 18, 2019, the SEC proposed expanding the definition of “accredited investor,” the qualifying standard for participation in most exempt offerings. On March 4, 2020, with the US on the brink of the Covid-19 crisis, the SEC published a broader rule proposal, this one seeking to clarify and improve the utility of numerous existing exemptions.

The primary purpose of these two rule proposals is to facilitate capital formation, a concept that has been driven, in part, by the SEC’s Office of the Advocate for Small Business Capital Formation and the Small Business Capital Formation Advisory Committee, both established by the Small Business Advocate Act of 2016.

Not everyone is in favor of the SEC’s rule proposals. During the public comment period, which officially expired on June 1, 2020, opponents included the North American Securities Administrators Association (NASAA), which criticized the ability of private companies to continuously amass investors through exempt offerings, thereby avoiding the transparency of a public company and increasing the risk of fraud. On June 25, 2020, Maxine Waters, Chair of the US House Committee on Financial Services, sent a missive to SEC Chair Jay Clayton—urging the agency to pump the brakes on the new rules. Most recently, on July 17, 2020 the US House Appropriations Committee introduced a proposed bill that would prohibit the SEC’s use of funds to finalize the March 2020 proposal unless the SEC first takes action on a prior proposal that would strengthen filing requirements for exempt offerings. Although this is just a proposed bill, the unusual restriction shows that there is significant opposition.

If the proposals are ultimately adopted, the next step would be for the SEC to publish a release disclosing the final rules and announcing their effective date. It’s anyone’s guess when that will occur, if at all. Assuming it does, here are some of the proposed changes that would be most helpful for startups.

Accredited Investor Definition

Although the basic metrics for accredited investor status would remain unchanged (annual income exceeding $200,000 ($300,000 with spouse) or net worth exceeding $1 million, excluding primary residence), the SEC proposal would add several new categories to the definition, including: individuals holding certain certifications or credentials (such as a Series 7 license), family offices with at least $5 million under management, registered investment advisers, and rural business investment companies (RBICs).

The significance of these additions is grounded in the fact that an overwhelming number of private offerings are limited to accredited investors. The primary reason for this limitation is that SEC Rule 506(b), by far the most popular safe harbor exemption, contains a burdensome disclosure requirement that applies if any non-accredited investors are included in the applicable offering (up to 35 are permitted by Rule 506(b), provided they, or a representative retained in accord with the rule, are financially sophisticated). Coincidentally, the SEC’s March 4, 2020 proposal seeks to address the exclusion of non-accredited investors from Rule 506(b) offerings by eliminating the audited financial statement requirement for such deals that do not exceed $20 million.

Accredited investor status carries even more weight in an offering exempt under Rule 506(c), a separate safe harbor that, unlike Rule 506(b), permits a general solicitation (securities law lingo for advertising), so long as all purchasers are accredited investors.

Rule 506(b) and Rule 506(c) have no dollar limits, so the expansion of the accredited investor universe could ultimately result in more dollars being invested in these deals—a good thing for startups, especially since most founders are currently fixated on their runways.

While, in theory, the elimination of the audit requirement for Rule 506(b) offerings that include non-accredited investors and do not exceed $20 million could translate into more purchasers in such deals, the inclusion of non-accredited investors will still trigger a disclosure requirement that would not otherwise exist, thereby adding time and expense. As a result, startups may continue to limit Rule 506(b) offerings to accredited investors only.

The new accredited investor categories could also help startups planning an offering under Regulation Crowdfunding, the highly anticipated but so far underutilized exemption that was introduced by the JOBS Act. Currently, all investors (accredited and non-accredited) are subject to a 12-month dollar limit on the amount they can invest in Reg CF deals. The SEC’s proposed rules would eliminate the limit for accredited investors altogether, and they would also modify the formula applicable to non-accredited investors to effectively increase their 12-month cap.

Increased Offering Limits

Although Rule 506(b) and Rule 506(c) place no dollar limit on the total amount of the applicable securities offered, certain other registration exemptions do have a 12-month cap, and the SEC has proposed to increase some of them.

For Rule 504, a private company safe harbor exemption with no investor qualifications or specific disclosure requirements, the SEC has proposed to double the 12-month limit from $5 million to $10 million. The snag with Rule 504 is that, unlike Rule 506(b) and Rule 506(c), there is no preemption of state securities laws, meaning issuers need to confirm the availability of state exemption(s), or else register or qualify the offering in the applicable state(s), which could render Rule 504 unworkable as a federal exemption.

While the Rule 504 increase would provide an obvious direct benefit to startups by allowing them to raise up to $10 million from non-accredited investors every 12 months, there could also be an indirect benefit for startups considering a merger or business combination transaction.

As a result of equity awards to employees, many early-stage companies have stockholders who are not accredited investors, which can make startups an unattractive target for a private strategic suitor that wants to use its stock as deal consideration without registration. Although Rule 506(b) permits up to 35 non-accredited investors, each such investor must be financially sophisticated, a test some employee stockholders may fail to satisfy, and, as mentioned above, inclusion of any non-accredited investors triggers an onerous disclosure requirement.

An unsung benefit of Rule 504 is that it allows private acquiring companies to include stock in an acquisition deal without registering the “offering”, regardless of the number of non-accredited stockholders of the target and regardless of their financial sophistication, obviously subject to the 12-month dollar limit. The Rule 504 increase to $10 million would provide meaningful flexibility for the inclusion of stock in private M&A deals involving startups, which could stimulate transactions while companies look to preserve cash.

For Regulation Crowdfunding, the SEC has proposed to increase the 12-month limit almost five-fold, from $1.07 million to $5.0 million.

Again, since the startup runway is now front and center due to Covid-19, these increased offering limits, if adopted, would be an obvious upgrade for early-stage ventures.

In addition to the above, the SEC has also proposed to increase the 12-month limit under Regulation A – Tier 2, an exemption that requires public filings with the SEC, from $50 million to $75 million.

Safe Harbor for Demo Days

In the startup ecosystem, so-called demo days provide founders with an opportunity to showcase their products and services in front of prospective angel investors, seed funds and venture capital funds. Without guidance from the SEC, these events can cause heartburn for securities attorneys because, depending on the circumstances (such as the breadth/scope of the invitation and any communications regarding a securities offering), there could be an offer via general solicitation, which would forestall the availability of many private exemptions, including the ubiquitous Rule 506(b).

To help startups avoid this legal landmine, the SEC has proposed a rule that would prevent a demo day from crossing the general solicitation line if: (i) it is sponsored by certain qualified groups (such as angel investor groups, incubators, accelerators and non-profits), (ii) no securities offering is referenced in the event invitation and (iii) communications about a securities offering at the event are limited to (1) a statement that the startup is offering or planning to offer securities; (2) the type and amount of the securities and (3) the intended use of proceeds.

The safe harbor would also place restrictions on the event sponsors, including (A) no investment recommendations or advice; (B) no engagement in negotiations between any startup and investor; (C) no attendance fees other than reasonable administrative fees; and (D) no compensation for introductions, negotiations or any other activity that would require SEC registration as a broker-dealer or investment adviser.

In its proposing release, the SEC acknowledged that the demo day safe harbor would provide startups with the opportunity to grow their networks, a benefit bolstered by the blockbuster proposal to permit generic solicitations of interest.

Generic Solicitations of Interest

Perhaps the most significant rule proposed would allow startups to “test-the-waters” by sending a generic solicitation communication to prospective investors in advance of a proposed securities offering.

Historically, the SEC has tried to muzzle issuers before the launch of a securities offering, on the theory that information should only be provided after all required disclosure is made available. However, this limitation has been relaxed through SEC rulemaking, and the proposals would now extend the exception to any startup contemplating a private placement.

The beauty of being able to test-the-waters is that the startup can gauge interest before pulling the proverbial trigger and incurring the expenses of launching an offering. Even better, under the proposed rule, there would be no restriction on the qualifications of the recipients, meaning moms, pops, kooky cousins and anyone else could be included. Importantly, if the communication is sent by means of a general solicitation, exemptions that prohibit such advertising (such as Rule 506(b)) would be unavailable.

Any testing-the-waters communication would require a cautionary legend stating: (1) the company is considering a private securities offering, but has not decided which exemption it will rely on; (2) no money is being solicited and none will be accepted; (3) no sales will be made or commitments to purchase accepted until the exemption is determined and all requirements are satisfied and (4) indications of interest are non-binding.

The combination of the demo day and generic solicitation of interest safe harbors could be a godsend for founders. Although not crystal clear from the SEC’s proposing release, it seems that founders would be permitted to expand their networks at demo day events, and then later ping these new contacts with a generic solicitation of interest, all within the boundaries of the SEC’s rules governing private offerings.

One potential pitfall on this proposed rule is that any testing-the-waters communication would be considered an offer for federal securities law purposes. This is significant for two reasons. First, there could be fraud liability for any false or misleading statements in the applicable communication. Second, since the SEC has indicated there would be no preemption of state securities laws with respect to this rule, state registration or qualification requirements could be triggered. As an example, in New York, subject to certain exceptions, issuers need to register as dealers in their own securities before making any offers in the Empire State. Absent state relief, New York issuers would have to register (or qualify for an exemption) before sending a generic solicitation of interest in New York. This burden could outweigh the benefit of gauging interest before incurring the expenses of launching an offering.


This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).

Getting Funded Now – Building a Compelling Executive Summary to Hook The Most Seasoned Investors

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How to write an executive summaryThe private equity space is famous for getting “buried in the paper” with due diligence reports often running hundreds of pages. Yet a little-known fact is that Pareto’s Law (the 80/20 rule) is alive and well in our space, and 80% of angel investors will likely read less than 20% of your material before deciding to invest or to pass. How do you sink a hook into an investor in order to have them seriously consider funding your startup?  You create a compelling Executive Summary (ES) that entices us to want to read more.

An exceptional Executive Summary should deliver the compelling business case much in the same way your presentation deck does when you pitch to investors. It covers all the reasons we should want to invest by fleshing out the content we see in your slides, taking no more than 2-3 paragraphs to cover each of the slides. If the Executive Summary grows beyond 4-6 pages, the 80-20 rule will kick back in and you will lose the investor’s attention.  

I know that there are hundreds of suggested pitch deck templates out there, and you likely have already picked one. When asked, I recommend the 10:20:30 rule from Guy Kawasaki because it builds on the 80/20 rule that I live by and if you implement the suggestions that I recommend in this article, you can develop an exceptional executive summary that will grab investor attention.

Trust me – an Executive Summary that follows your pitch deck will resonate well with angel investors.  If the slides did their job then the ES will be a reminder that we will think back on and remember as we pursue the deal.  So your Executive Summary will present a well-rounded summary of your INVESTMENT OPPORTUNITY in a way that engages the reader and serves to sell your value proposition.  Assuming that your presentation generated lots of interest by focusing on the investor audience then your Executive Summary will go a long way to getting investors interested if it follows the deck.

Your Executive Summary is an opportunity to continue telling your story. The story should not be overly comprehensive, but it has to cover all the bases. The investor will most likely be skimming the content to decide if they need to know more. Therefore, the first sentence must be brilliant, attention-getting, and demonstrate your unique investment opportunity. The first sentence should open the door to the problem you are going to solve and why it’s a critical need. The rest should flow from there.

A second possible opening sentence might hinge around why you started your business in the first place.  Many entrepreneurs start or get involved with a startup because they have a personal connection to the solution being developed. Perhaps it is a pharmaceutical or medical device that solves a problem experienced by a family member or maybe it’s a software solution that fills a gap in the market, a good place to start your Executive Summary is to share that personal motivation or discovery. A way to engage the reader is to have them understand your connection and passion for achieving success. This sentence is the Founder’s reason for investing time, money, and effort. To derive the desired outcome from your reader, they must connect with this reason.

The Executive Summary should then flesh out the bullets that you speak to in your slide presentation. As suggested in the Kawasaki model, this means following with sections on the Value Proposition, your Secret Sauce, the Company Business Model, your Go-to-Market Strategy, a small piece of the Competitive Analysis, your Management Team, Financial Projections, the current Status-Use Funds, and the Timeline to the investors ROI.

Based on experience, I know most of you reading this article will have used a variety of pitch deck templates.  The Executive Summary that you lead with MUST be tailored to the deck that will be used in your presentation.  If the story told in your ES does not match the pitch, it will not work.

It is your job to provide context for the reader to understand the environment. Make sure to reference factual information. Avoid making sweeping generalizations about market size. Your reader will disqualify your claim if it is too vague. As you describe the opportunity, be mindful of who will be reading your document – granted lots of people will read it, not just investors, but ask yourself who is the real target?  Dedicate your focus there. If you want my attention and possible investment, then focus the Executive Summary on INVESTORS. I believe that most, if not all the other readers will be able to follow along.

Some of you are asking if you must limit each section to just 2-3 paragraphs, and the answer is no. If you have already been awarded Intellectual Property for your secret sauce, for example, then embellishing that section to make sure the reader gets and stays hooked is perfectly acceptable. IP creates a barrier to entry for the competition and is a compelling investment decision factor. But work hard to keep the Executive Summary brief knowing that if you did your job and “hooked” me that I will continue to read the rest of your investment materials.

Let’s take a minute to focus on language. Do not use superlatives that cannot be substantiated, like cutting-edge, ground-breaking, or world-class. Preferably present real points of differentiation like patents issued and/or pending, personal entrepreneurial experience, qualifications of the leadership team and advisory teams, the status of clinical trials, or if the Company already has sales revenue. These are factual considerations that could not or would be very difficult for a competitor to duplicate.

Your paragraphs on financial projections will, in most cases, force the investor to continue, but only if the numbers tell an equally compelling ROI story. How far will this investment take you, will you need more money to get to profitability, when will I see my Return on Investment, and how much could that return be? Understand that while we would like all of our investments to return 10X+, we live in the real world.  Research on angel investing tells us that our overall portfolio will return 2.5x on a 27% IRR. Do not hesitate to say to me that you are pre-revenue but will be generating revenue by the ‘x’ month after completing this funding round. If already generating revenue, make sure to tell me how this raise will get you to cash flow positive, to profitability, or through your next clinical trial. No matter where you stand in development, this is the section that investors pay the most attention to, so make sure you nail it.

Don’t forget to save the last few paragraphs to build on why we need to consider investing in you and your Company. Share how “our win” together will make a part of the world a better place while allowing us all to make money.

Finally, You may have heard the riddle, ‘How do you get to Carnegie Hall?’. The answer is practice, practice, practice. Do not think that writing your Executive Summary is one and done.

You should refine the summary based on feedback and Company developments. You never get a second chance to make a first impression. Please don’t waste it.

If you are interested in the pitch deck template that I referenced, you can find it at https://keiretsuforum-midatlantic.com/the-only-10-slides-you-need-in-a-pitch.html .

Good Luck!

How Hyper Local Startups Can Secure Investment from Their Neighborhood To Power the Reemergence of Local Communities and Economies

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Startups Secure FundingMost people have heard of equity crowdfunding and the process where small to medium-sized businesses seeking investment can raise capital from accredited investors. Much is also written about describing the opportunities opened up by the democratization of investment via Title III of the JOBS Act that came into effect in 2016. These changes helped to shift focus to supporting startups in the uncontested market space away from the traditional powerhouse of Silicon Valley. However, the untold story is of the challenges faced by locally-based entrepreneurs and startups, particularly minorities, when accessing startup capital.

When entrepreneurs from all walks of life are able to find low-cost ways to access and secure funding for new businesses, and people can build wealth through a diverse investment strategy, local economies and the U.S. economy can thrive. Connecting small business entrepreneurs with people looking to invest in their local neighborhood businesses is what’s powering the reemergence of hyper local communities and economies. This is our mission here at MainVest, an alternative small business investment marketplace that was founded in 2018 with the sole aim of revitalizing the American dream through hyper local investment.

You might ask how MainVest understands the plight of entrepreneurs compared with the other 30 or so regulated equity crowdfunding portals available in the marketplace. It’s the only alternative investment platform focused solely on small businesses as there are no seed rounds or seed funds required. And banks typically require demonstrations of one to two years of capital or leveraging loans against assets for small business loan applications. This places some businesses in a tricky position if they are unable to fulfil a bank’s requirements.

Amplifying the Uber Model

As an early employee at Uber launching the brand in the Boston market, I helped to build one of the fastest growing companies of all time, and obtained a unique perspective into the small towns and businesses of the greater Boston area including former mill towns like Worcester and Lawrence, Massachusetts, noting the income disparities in these once thriving heavily-populated places. Once centers of economic prosperity, these suburbs have become overlooked by traditional investors, and are now struggling economically. This reality prompted deeper thought into ways in which these communities could help themselves by providing alternative routes to accessing small business funding and wealth generation, similar to how Uber provided opportunities for people to generate additional income around their day job.

Time spent working for Uber in Washington, DC right around the time that Title III of the JOBS Act came into effect was introduced by Congress was particularly formative. While the legislation was largely aimed at opening up investment for early-stage tech companies there was also the opportunity to empower non-tech founders to access the capital they so often struggle to find.

In particular, minority entrepreneurs have traditionally faced challenges in accessing startup capital. The most recent report by the U.S. Office for Advocacy in 2018 focused on Financing Patterns and Credit Market Experiences: A Comparison by Race and Ethnicity for U.S. Employer Firms. It showed that there was still a gap in unmet funding needs, as many minorities said they didn’t apply for small business loans because they didn’t think they would be approved by the lender. While this is a perception issue, the report also cited that this demographic was more averse to accruing large sums of debt therefore, are more likely to seek alternative funding.

Retrofitting the New Financial Regulations

While private investment typically focuses on west coast and Silicon Valley startups, this gap in the market for providing pathways to capital in communities completely disconnected to traditional funding options is a huge opportunity. The change in financial regulations means that entrepreneurs and small business owners can become connected with potential investors who may not normally invest in a startup, but are looking for alternative investment opportunities, creating financial opportunities for everyone.

MainVest utilizes the revenue sharing note as the main investment vehicle on its platform. Investors purchase revenue sharing notes, usually with a minimum of $100, which entitle them to a set percentage of revenue on a quarterly basis until a target return is hit. This aligns incentives between issuers and investors, as investors are paid back faster the quicker that the business generates revenue. Therefore, investors are incentivized to frequent the businesses in which they’re invested and act as evangelists, allowing businesses to rely on strong community support, revenue, and loyalty as they grow. The tax revenue, jobs, and financial returns created by the business flows directly back into the community of investors that supported its launch. At this time, 100 percent of businesses that have raised investment through MainVest are on track —or ahead of – their repayment schedule.

A Growing Local Movement Restoring Main Street America

This new movement of community-led positive transformation to impact the longevity and vibrancy of local towns is supporting the reemergence of strong local communities and economies. Encouraging people to invest in their communities ultimately creates healthier towns with thriving economies, valuable real estate, strong school systems and more. And with the relaxation of restrictions around how individual investors – regardless of their income or net worth – can invest in private, early-stage companies, neighbors, friends and family can now directly impact and shape the communities they live in.

Investors are able to generate passive income from an entirely novel asset class that rewards them for the risk taken without being overly complex or time-inclusive. While accredited investors have long been able to build wealth through private investment and pursue both financially and emotionally rewarding opportunities, MainVest aims to open up investment to non-accredited investors who are typically limited to their employer-sponsored 401k or online investment portals for investment opportunities.

Win-Win for Startups and Investors

Startup and small business founders can utilize the revenue sharing model to grow their business flexibly when private equity or traditional lending are not options. Traditional lending is out of the question for any founder with a less-than-ideal credit score, or more importantly, collateral. Younger generations are buying houses later in life and paying off unprecedented student loan debt, meaning that a once-reliable source of collateral is out of reach for otherwise qualified business owners. Because capital raised through MainVest lives lower on the capital stack than other debt, it is an appealing solution for founders with a solid business plan that cannot secure a loan otherwise. Given that private equity is heavily concentrated in Silicon Valley and often reserved for high-growth opportunities, startup founders that don’t fit into the traditional mold (including female and minority entrepreneurs, who still receive far less funding than other groups) can tap into their community for startup funding. Using MainVest as a first step can unlock other forms of capital later on as founders can build out initial locations, purchase inventory, and grow their brand. There are 9,000 investors signed up on the platform and in the last six months of operation, 30 businesses in the New England areas have been successfully funded.

Seeking Investment for the Most Instagrammable Restaurant in America

Teatotaller is an example of a business that utilized community investment via the MainVest platform for their expansion. Despite having a solid financial track record for their cafe and meeting space in Somersworth, New Hampshire, the founder did not feel confident that a traditional bank or term loan would be the best choice for his business. With the knowledge that food ventures are seen as extremely risky by traditional lenders, and that the timing of build outs can be variable, the founder sought a more flexible option. Adept at brand building and named one of the “Most Instagrammable Restaurant in America” by Food Network Magazine in 2019, Teatotaller already had generated interest within its community, but still needed to raise $60,000 of flexible capital, which it did and will be repaid once the new location is fully built out and operational. A local startup that secured investment from their neighborhood that continues to thrive.

Five Factors for Startups to Consider When Seeking Alternative Funding

  • How much capital will get the job done without creating too much debt, or a shortfall for key projects?
  • Alternative funding options typically require grassroots efforts to market your business, investment offering, or pitch. Are you prepared to spend more time on this?
  • Is the business plan easily understood by investors of all experience levels? Consider creating multiple pitch decks for VC-level investors and first-time community investors.
  • Is it simple to inform and educate target audiences about alternative funding methods? Will potential investors and supporters fully understand this approach?
  • How does any alternative funding secured fit into your overall capital stack? What are future implications?

How Venture Capital Is Changing to Adapt to the Global Innovation Landscape

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Future of Venture CapitalWe errantly believe the venture capital model was invented in Silicon Valley. Its roots are much older. The modern VC model was adapted from a bygone industry – whaling in New Bedford. As innovation becomes global, the venture model is again being adapted to the new reality in other ecosystems.

Venture funds are adapting in three key and often intersecting ways.

New players are entering the market

Investment in innovation is no longer restricted to venture capital. Corporate investors are becoming a major driving force in innovation. Between 2013 and 2018, CVC investment grew fivefold, from $10 billion to over $50 billion, and today CVCs participate in nearly a quarter of all deals (versus 16% in 2013).[i] There are over a thousand major corporations with CVCs, including 75 of the Fortune 100.[ii],[iii] This includes everyone from Salesforce to Sesame Street. CVCs are increasingly international: 60% come from outside North America.[iv]

The CVC model itself is adapting. For instance, in China, powerhouse technology players like Baidu, Alibaba and Tencent (BAT) don’t just invest capital or seek to acquire companies. Leveraging their platforms, like Tencent’s WeChat or Alibaba’s Ant Financial, they can offer powerful distribution through their ecosystems.

Corporates of course are not alone. A range of new players are entering the market including family offices, hedge funds, and impact investors. The field is becoming more nuanced and often more crowded.

Funds are becoming more global

Historically, venture capital was a local game. For good reason: it requires deep knowledge of industry pain points, the political and regulatory landscape, and economic dynamics to be able to successfully support entrepreneurs. It’s also because Silicon Valley investors prefer to invest closer to home. An analysis of venture capital funds found that nearly two thirds of a Bay Area-based investor’s portfolio was in the Bay Area and 80% in the West Coast.[v]

For many Frontier venture capitalists, multi-regionalism is intentionally woven into the fabric of the firm. That’s because tech has becoming global. Moreover, innovation trends are no longer unidirectional from Silicon Valley, and today follow a global supply chain. Being global helps understand this.

This of course is not just a global phenomenon. Even in US: initiatives like Rise of the Rest are scaling venture capital in places like the Midwest.

Different investment approaches

Historically, venture capital invested preferred equity and decisions were made by individual partners judging the merits of the entrepreneurs and the business. These two dynamics are changing.

New investment structures are being tested. Notably, revenue share financing is on the rise (whereby investors purchase a portion of a startup’s revenue for a certain amount of time). A number of emerging venture funds pioneering this – unsurprisingly, many are outside Silicon Valley including in Dallas, Park City, Toronto, and Seattle.[vi]

Decision making as well is shifting. Artificial intelligence is becoming an increasingly important tool for venture capital sourcing and decision making in both Silicon Valley and the Frontier. Already, over 80 venture capital firms globally have publicly disclosed their artificial intelligence models. Many others are likely already doing this privately.[vii],[viii] For example, Social Capital (which is no longer raising outside capital) pioneered a model called Capital as a Service, or CaaS, which created algorithms to benchmark and predict companies’ performance objectively. If Social Capital’s algorithm liked what it saw, the company would write a check of up to $250,000.[ix]

By focusing only on impartial metrics, computerized decision makings helps support diversity. Among Social Capital CAAS’s over 75 investments, 80% of founders were nonwhite and 30% were women, spread across twenty countries, statistics far above traditional industry numbers.[x],[xi]

Conclusions

The traditional venture capital model remains dominant in Silicon Valley and beyond. Yet, a range of players are pioneering new approaches. It is likely the next model for innovation will look nothing like its whaling forbearers.

[i] CB Insights: “The 2018 Global CVC Report” https://www.cbinsights.com/research/report/corporate-venture-capital-trends-2018/

[ii] Jean-François Caillard “Why is the Corporate Venture growing so fast? What are the keys?” October 27, 2017, accessed June 29, 2019 https://medium.com/@jfcaillard/why-is-the-corporate-venture-growing-so-fast-what-are-the-keys-b7cab8156b5e

[iii] Teddy Himler “Corporate VC Is On The Rise: Here’s What To Know” February 14, 2017 accessed June 29, 2019 https://www.forbes.com/sites/valleyvoices/2017/02/14/corporate-vc-on-the-rise/#178efe5abbf2

[iv] CB Insights: “The 2018 Global CVC Report” https://www.cbinsights.com/research/report/corporate-venture-capital-trends-2018/

[v] Jason Rowley “Where and why venture capitalists invest close to home” November 16, 2017, accessed July 3, 2019 https://techcrunch.com/2017/11/16/where-and-why-venture-capitalists-invest-close-to-home/

[vi] Includes firms like Lighter Capital (an early pioneer of the model) in Seattle, Cypress Growth Capital in Dallas, and Decathlon in Park City Utah.

[vii] Bartosz Trocha “How 83 Venture Capital Firms Use Data, AI & Proprietary Software to Drive Alpha Returns” July 1, 2018, accessed July 3, 2019 https://hackernoon.com/winning-by-eating-their-own-dogs-food-83-venture-capital-firms-using-data-ai-proprietary-da92b81b85ef

[viii] Eze Vidra “How Venture Capital Funds Leverage Ai And Big Data” November 28, 2018, accessed July 3, 2019 https://www.vccafe.com/2018/11/28/how-venture-capital-funds-leverage-ai-and-big-data/

[ix] Connie Loizos, “Social Capital Has Started Investing in Startups, Sight Unseen,” TechCrunch, October 25, 2017, accessed August 9, 2018, https://techcrunch.com/2017/10/25/social-capital-has-started-investing-in-startups-sight-unseen/.

[x] Katy Steinmetz, “How Chamath Palihapitiya Wants to Disrupt Silicon Valley,” Time, July 19, 2018, accessed August 9, 2018, http://time.com/5342756/chamath-palihapitiya/.

[xi] Ashley Carroll, “From Experiment to Product: Capital-as-a-Service One Year Later,” Medium, Jun 18, 2018, accessed December 16, 2018, https://medium.com/social-capital/from-experiment-to-product-capital-as-a-service-one-year-later-6d8b4b9c038b

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