Venture capital as an asset class has far outperformed other alternative-asset classes, including private equity, hedge funds and real estate, over the past several years. And it is not slowing down. Pitchbook reports that VC funds across the globe recorded the best performance among all private capital strategies in the first quarter of 2021, tallying an impressive IRR of 19.8%.

Numbers like this suggest that, if I’m a pension fund or sovereign wealth fund, I’m going to place even more of my allocation with venture than I did in the past. This is why, in 2021, for the first time ever, venture firms are poised to raise $100 billion in a single year.

But here’s the thing. The amount of money flowing into venture is now far outpacing the number of fundable opportunities. This is bringing major change to the VC industry. Here are three ways venture will be different in the coming year.

A good LinkedIn network will be more valuable than capital

The one consistent theme I’m seeing in venture-backed startups is a scarcity of talent. And it’s not just the engineering team that is suffering a talent shortage. It’s sales, marketing, finance, human resources, you name it.

The hunt for talent has become so intense that if, as a VC, you ask your founders how you can be most helpful to them, very few will ask you to help them raise more money. Instead, they’ll ask you to help them find and recruit people. They’ll ask you to help them convince this or that person to leave their job at Apple or Amazon and come work for them.

This trend will continue to accelerate in the coming year, to the point where who you know and can inspire confidence with as a VC will be far more valuable than what size check you can write.

Startups will embrace automation

The scarcity of talent will require startups to embrace a new set of tools that can help them automate their processes. These tools will become increasingly vital to their success. A company like Carta, for instance, is a game-changer for startups because it automates the process of managing their cap tables and issuing shares. Other tools automate expense management and HR from the cloud (such as Expensify and Gusto). Already old accounting systems which originated on desktops are starting to look very archaic.

Going forward, this kind of automation will be required for many more functions, roles and specialties, whether it’s bookkeeping, tax compliance or inside sales. That’s why, as a venture investor, I think there is now a huge opportunity to invest in companies that offer tools to automate the administrative aspects of growing companies.

More Wall Street types will make their way into venture capital

Go to the “Our Team” page of any blue-chip firm on Sand Hill Road. You’ll see that almost everybody at the firm was previously the founder of a tech firm or, at the very least, a high-ranking executive with an operational role.

But a change is taking place. We’re starting to see more people with Wall Street-type backgrounds moving into VC firms, particularly those focusing on growth stage (post revenue, and sometimes after achieving over $25M to $50M in recurring revenue). These are often finance professionals who can help with tasks that typical early-stage investors don’t normally think about, like: various industry and regulatory compliances, internal governance, and the overall preparation for an ultimate IPO?

Professionals with financial services expertise rather than tech expertise will become increasingly prominent in the venture universe, especially now that many tech firms, after years of eschewing the public markets, are once again pursuing IPOs early in their lifecycle. Indeed, the tech-heavy Nasdaq saw an impressive 410 IPOs in the first half of 2021, which raised the greatest amount of money on record.

VC is all about investing in disruptive companies. Now VC is being disrupted—perhaps in a good way. It is not being dismantled like, say, the brick-and-mortar retail businesses driven under by Amazon. It is being retooled to do its job better in a fast-changing world with lots of money and a shortage of talent.

The post VC Is Charging Ahead and Changing Fast: Here Are 3 Ways It Will Be Different in 2022 appeared first on VC List.

We all know that VCs look for strong founders who are capable of leading their companies to extraordinary success. But what should founders look for when choosing a VC? Assuming you have the luxury of choice, here’s some things I suggest based on several years of working closely with founders and observing what’s worked and what hasn’t. In many cases, your investor(s) can have a significant influence on the path a company takes. I worked as CFO for SentinelOne across three rounds of funding and have therefore been on the operating side dealing with fundraising in addition to being, as I am now, a full-time investor.

Here are five guidelines for founders who are in the process of selecting a VC partner.

1: Don’t just pick a VC firm, pick the individual partner

Consider the firm, but more importantly, consider the partner who is leading the investment. When did they join the firm? What are their personal incentives? What is their expertise? You may have a younger partner who needs to make their name at the firm. This can sometimes be an advantage because maybe they’re managing a smaller portfolio and will have more time to dedicate to your startup. That investor is more likely to champion you because they have a greater stake in your success compared to a more seasoned partner with many successful investments already under their belt.

Also, try to gauge the level of commitment and influence that the partner has to their venture firm. The last thing you want is a partner that joins your board and leads the investment, or departs the firm a year later for another firm (which can leave your company “orphaned”), depending on the firm and the stage of your business. Remember, the board seat is owned by the firm, not the individual. And if that individual leaves, you may no longer be at the same level of priority within that firm. For the same reason, make sure you have at least one other partner in your corner to guarantee that your company gets long-term support. Don’t be afraid to ask your prospective VC this question up front: Who will be our partner/champion if you leave?

2: Be operationally aligned

You want investors whose skills and experience are aligned with your startup and the goals you’re trying to accomplish from the current stage-of-company onwards. Look for a partner with expertise in your domain and, ideally, expertise in your specific stage.

For instance, if you’re trying to expand strategically and more investment is not a pressing need, you should look for a partner who has a track record of helping companies build strategic partnerships and scale. On the flip side, you may be a younger company that needs an investor who is skilled in helping companies get off the ground, building the initial wiring, helping with early recruiting and strategizing for future fundraising rounds.

3: Get references from other founders

Look for investors who come with references from founders with whom they’ve worked in the past. Ask for examples that show in detail how that investor benefitted the startup. You’ll want to connect with at least one or two founders who can go deep in explaining how, specifically, the investor added value. This can include strategic guidance, operational advice, recruiting, helping with future financing rounds, and introductions to business partners.

Additionally, founders should ask all potential VC investors for a reference from a company that the investors chose not to fund. How they said no and how they treated the founders throughout the process will say a lot about who the VCs are as people and about the respect—or lack of it—that they have for those in the daily grind of building companies.

4: Make sure you have the same expectations around outcomes

There are some founders who want to get massively rich and will settle for nothing short of a grand slam. There are other founders—usually first timers—who may not admit it, but could be happy with a single or double if the market conditions or original assumptions change; and other founders who know that a smaller exit will put a notch in their belt, provide some financial security and set them up for a home run with their next company.

These are both valid and different objectives, and they require investors who are in alignment with founders, ideally from the get-go. Because there will always be forks in the road and, when you reach a fork, you don’t want a VC who insists on turning right when you want to turn left. For instance, you get a $200 million buyout offer which makes everyone money just a few years into your startup journey. Is this an acceptable exit? There is no right or wrong answer. But you need a VC who shares your expectations from the start.

5: Watch how the VC does technical diligence, and whether they respect YOUR time

If an investor is outsourcing their technical due diligence, that can be a red flag. While not every investor will know your space inside out, they should still ask intelligent questions that get to the heart of what you’re trying to achieve.

Many investors may ask founders to run through a technical-diligence check with a third-party technical “expert” like, say, someone in academia or a technical person in their current or past portfolio. In my experience, that third party is often biased against a technology they did not personally invent. Then they tend to see the risk and rarely the upside.

Each situation may be different and if there is a very specific innovation you are pitching on which the whole business depends on, of course, that may be diligenced. It may be good to push back a bit and understand what the investor is aiming to verify or confirm with the diligence. I’ve seen situations where I’ve supported founders and new investors don’t even attend their own technical diligence calls – a clear signal about how they valued the founders’ time. In fact, as a rule of thumb, I would say don’t take a diligence call unless the investor is also ready to spend the time on that very call. Overall, I believe investors themselves should have a body of knowledge to understand whether or not a startup is onto something truly innovative.

When investors and founders are truly aligned, it can be a beautiful thing and the odds of a successful outcome are greatly amplified, as the founders don’t have additional distractions. True alignment frees up time for a founder to focus on managing the business and ALSO helps accelerate the business vs managing investors—and that can make all the difference.

The post 5 Guidelines for Founders When Choosing a VC Partner appeared first on VC List.

We decided to answer our readers’ cap table questions. To do so, we interviewed Howard Lubert, who has over three decades of experience in private equity.  For the last ten years, he has led Keiretsu Forum Mid-Atlantic and South-East through record growth. Howard is well known within the angel investment and VC community as being an expert on Due Diligence and Term Sheets, which include Cap Tables.   

See the questions and Howard’s answers below.

Question:  A Cap Table is not a priority or something founders are thinking about when raising non-institutional early-stage funding. How do Angels and VCs propose to address this shortcoming? 

 Howard: “Most founders in early-stage companies may not even know what a Cap Table is, let alone its impact on the business.  As early stage investors, we are sometimes amazed at the lack of thought or effort that founders and management teams have applied to this critical component!  Simply put, a Cap Table details how much of the company each individual owns and shows the impact that future investors will have on existing shareholders.  The impact comes as new investment money dilutes the ownership of everyone who came before them regarding their percentage of ownership.  At Keiretsu Forum, we typically negotiate a Term Sheet as part of our Due Diligence efforts.  During the diligence process, we work with the company to craft the appropriate Cap Table so that everyone understands their position before and after investment.

Question:  What can a startup do about its Cap Table when it has a large number of individual investors from whom it has raised money before institutional investment? 

Howard:  “It amazes me that some founders and CEOs are obsessed with the size of their Cap Table and believe that this will be detrimental to raising ‘institutional funds’.  First, everyone should know that you can have 2000 investors on your Cap Table before you have to consider an IPO.  Second, and of note, less than 1% of all the companies who are able to raise funds from angel investors will ever see any investment from VCs or institutional investors – this according to research done and tracked over more than 20 years of tracking early-stage investments.  Finally, and possibly most important, without the investments from angels and other investors the company would not be able to stay alive.  Founders should welcome each and every investor to their Cap Table.  At Keiretsu Forum, we started investing in Savara Pharma 9 years ago.  Rob Neville, Savara’s Founder is famous for having raised more than $50 million from 400+ angels!  Rob never spoke to VCs and was obviously successful in funding FDA clinical trials using our money.”

Question:  What is the impact of equity crowdfunding models which are on the rise on the Cap Table, and challenges they present to institutional investors like VCs? This is not Kickstarter type crowdfunding where people pay in advance for product development. But rather true equity fundraising using crowdsource platforms or regulations.   

 Howard:  “There are two flavors of equity crowdfunding, one accepts only accredited investors and the other allows almost anyone into a deal.  Under SEC 506(c) companies can raise money through online services that cater to and take a cut of every investment.  At Keiretsu Forum, we shy away from considering deals that have a crowdfunding history and most VCs are also wary of this direction.  That said, under Regulation A, which is a mini IPO, companies can raise up to $75 million a year from the crowd.”

Question: How much are VCs familiar with Reg CF and Reg A equity funding models? How would VCs deal with a cap table where a startup has raised funding using Reg A or Reg CF provisions?  

 Howard:  “I can’t speak for all VCs, but most are well versed on what is happening in our industry and where Reg A is for large investments.  Reg CF (or Title III as it was originally named in Obama’s Jobs Act) allows a company to raise up to $5 million.  Both Reg A and Reg CF are highly regulated, require the backing and direction of a licensed broker dealer and in some cases generate more expenses than investment money for the company.  Once a company has successfully executed a Reg A deal there is no need to turn to VCs or other investment groups like ours.  The best course is to go for another round the following year.  In the case of a Reg CF, there is likely a large and cumbersome accounting burden that will, in my opinion, impact the interest of professional investors.”

Question:  Do VC’s force changes in the cap table that will directly impact prior investors(angels, friends, and family). For example, forcing them to give up their equity or disproportionate dilution.  

Howard:  “This question makes me think “Vulture Capital” and it still does exist.  There are bad apples in every barrel and private equity is no exception.  That said, when we negotiate a Term Sheet and the resultant Cap Table, we are never trying to hurt the previous investors who obviously took greater risks by investing earlier than us.  The assumption is that the previous investors wrote checks into the deal at a lower pre-money valuation than we are, i.e., they invested in the company with a pre-money valuation of $5 million and paid $1 per share for their stock.  We structure our deal on a negotiated and validated pre-money of, say, $10 million and pay $2 a share.  All the previous investors still have all their stock but control a smaller percentage of the company’s equity, but their stock just doubled in value by this latest round.  And the smart investors will exercise their right to participate in the new round which allows them to maintain their original percentage ownership of the company.”

Thank you Howard for your insight on Cap Tables. If our readers have any further questions on Cap Tables or the startup funding process, please leave them in the comments below. We be doing a series of Q&A articles interviewing funding experts.

The post What Startup Founders Should Know About Cap Tables appeared first on VC List.

The drop in April was stark, but the real question is whether the drop portends a long-term pullback. We can’t extrapolate a trend from a single data point, so any guess will simply remain that: a guess, at least until we have a few more months of data.  Anticipating the trend will require first identifying some important market factors and regulatory hurdles.

One important point is that a correction is a healthy move for the market.  Double-digit growth month over month is almost certainly not sustainable long-term, so a pullback is not just expected but also indicative of a healthy market.

SPAC Report

PitchBook recently released a new report on the SPAC market and noted that current interest rates near historic lows have created an environment in which the opportunity cost of locking money in SPACs is very low, so investors are much more likely to risk their money in SPACs because the returns can be so much better than investments that rely on interest rates.

Certainly, other contributing factors also affect the market. For example, the flurry of activity in Q1 may be the last vestiges of the pent-up demand from last year.  However, the possibility of a sharp increase in capital-gains taxes could be encouraging the sudden pullback. 

SPACS SEC

Congress is also looking intently at whether existing legislation is sufficient.  According to a recent report, Congress is showing interest in toughening transparency and investor protection requirements that govern SPACs, potentially adding pressure on regulators to increase oversight of these alternate funding vehicles that are disrupting capital markets. 

SPACS IPO

Regulators have raised concerns about whether SPAC mergers — whereby a shell takes a target company public — bypass investor protections in traditional IPOs. Some market participants say legislative attention could prod regulators to move faster, regardless of whether bills get enacted.

PitchBook also noted that, independent of pending Congressional action, the SEC is rumored to be considering a rule change regarding SPACs:

The main issue seems to be that the changes in the warrants’ fair market value would now flow through as accounting earnings for the SPAC, complicating the once-simple SPAC financial statements. This adjustment may disincentivize the inclusion of warrants in new SPAC IPOs which, as noted earlier, are a critical benefit to the SPAC IPO investors.

The big difference between a SPAC IPO and a traditional IPO is that a traditional IPO is selling based on three years of trailing revenues, whereas a SPAC is selling on three years of future revenue.  The playing field is not level. Pending Congressional or SEC action could change that.

Some wonder whether a SPAC is a useful vehicle to advance technology innovation.  SPACs offer simplicity and efficiency in an industry that simultaneously depends on both while also struggling with regulations at odds with them.  But in a market that has seen such explosive growth, investors may choose to focus on their existing investments for now, rather than pursuing new ones.

Long-term, the market will find some sustainable level of SPAC IPO activity.  Increasing by 13% per month only to drop by 88% the next month perhaps suggests that the market was not just oversaturated but that companies are still figuring out how best to use this investment vehicle that, while 30+ years old, has only recently gained widespread market acceptance.  As long as SPACs can provide some measure of simplicity to companies going public, they will likely remain popular. 

Keep an eye out for any Congressional action, legislation or proposed rulemaking from the SEC, and see what effects any rise in interest rates or tax changes will have on SPACs, while also looking for any waning in investor SPAC fatigue.

The post Are SPACs Dying Off? A Few Points to Consider about the Future of SPACs appeared first on VC List.

Venture capital investment in Canadian startup companies had a stellar start to 2021. In the first three months of the year $3.1 billion was deployed across 157 rounds. In dollar terms, this was the single largest quarter ever recorded for the country, surpassing the previous record of $2.8 billion in the third quarter of 2019 by 10 percent. In volume terms, the number of rounds were flat year-over-year. This resulted in an average round cheque size of $23.1 million, up 77 percent from the first quarter of 2020 and the highest quarterly average ever.

Of the ten provinces, eight more than doubled their venture investment from the first quarter last year and three set new records for strongest quarters overall: Ontario, British Columbia, and Alberta. With $1.2 billion of financings, Ontario-based startups saw an increase of funding of 101 percent and captured a 41 percent share of the national total. British Columbia was the next most active with $1.0 billion of investment, a 106 percent increase year-over-year and a third of the national total. Alberta was the fourth most active province with $234 million of investment, an increase of 665 percent from last year and an 8 percent share of the total. Quebec and Saskatchewan were the only two regions that saw year-over-year investment declines with dollar values dropping 32 percent and 61 percent, respectively. Despite the decrease, Quebec-based companies still received a 14 percent share of all investment with $440 million of financings.

Computer related and internet specific sectors jointly received a 78 percent share of all investment during the quarter, whereas no previous annual share for the combined group had ever surpassed 70 percent. Internet specific companies alone received $1.4 billion of investment, or 44 percent of the total, while computer related businesses received $1.0 billion, or 34 percent. Much of these amounts were a direct result of the top five rounds for the quarter all belonging to one of the two groups, with these five companies alone bringing in $1.2 billion.

Nine rounds in the quarter saw investment values of $100 million or greater, surpassing the previous record of six such rounds in the third quarter of 2019 and ultimately representing a 55 percent share of the total with $1.7 billion of round values. The top round for the period was the $385 million investment into blockchain-based game and entertainment company, Dapper Labs. The funding received by the Vancouver-based business was the second largest Canadian venture capital round of all time and was led by Coatue with support from a large group of firms and individuals. The second largest round for the quarter was obtained by digital home equity platform, Fraction, also based in Vancouver. The $289 million round was backed by Impression Ventures, Primetime Partners, Global Founders Capital, Panache Ventures, and others. Rounding out the top three was the $214 million investment into Montreal-based travel platform, Hopper, led by Capital One with support from Inovia Capital, WestCap, Goldman Sachs, and Citi Ventures.

Canadian investors lost their status as top backers during the period once again after reclaiming it in 2020, contributing 42 percent of total venture investment in the first quarter, down from 57 percent in 2020 and less than the 46 percent contributed by investors based in the United States. Other nations actively providing cross-border support for Canadian startups during Q1 included funds from Germany with $134 million of investment, the United Kingdom with $54 million, and Singapore with $28 million.

Venture capital fundraising by firms also rebounded following a dip in 2020, with 14 Canadian venture funds raising a combined $1.5 billion in commitments. This was up 265 percent from the same period last year and the sixth largest sum historically, behind the first and fourth quarters of 2019 and a handful of quarters in the midst of the dot-com era. Inovia Capital’s second growth fund was the largest fundraise for the period, with a close of $560 million in March.

Venture-backed exits also set a new record with $5.7 billion of completed deal values from 16 transactions in the quarter, an amount higher than that of the previous three years combined. A large contributor to the increase was the top completed exit for the period, Nasdaq’s $3.6 billion cash purchase of Newfoundland-based financial security company, Verafin, announced in November and completed in February. The top newly announced exit for the quarter was the reverse takeover transaction to take Ontario-based lithium-ion battery recycling business, Li-Cycle, public via SPAC. The transaction valued the company at $1.2 billion prior to deal proceeds.

Download: Canada Venture Capital 21Q1 Review

Visit Refinitiv Deals Intelligence for more information keeping you up-to-the-minute on market intelligence through a variety of research reports, weekly investment banking scorecards, deals snapshots and our industry-leading quarterly reviews, highlighting trends in M&A and capital markets

The post Explosive Start to Year: Canadian Venture Capital appeared first on VC List.

Startups often start in a garage or spare room funded by personal funds, credit, and loans or investments from family and friends. As a startup grows, the founders seek funding beyond their intimate circle, seeking more prominent angel investors and venture capital. Along the way, especially in the early stages, it is easy for startup founders to mishandle finances leaving behind a trail of broken friendships, angry family members, and distrust from investors. To help startup founders and newbie angel investors to understand how startup finances can be used, we interviewed Venture Capital Lawyer Honghui Yu from Olshan Frome Wolosky. Honghui represents emerging companies in forming, funding, and operating an early stage startup.

Spending years in Silicon Valley, working with startups in various stages, and running VC-List there are definitely some entrepreneurs who are financially unorganized and some bad entrepreneurs doing outright fraud. We have all heard the famous cases of Ponzi schemes, vaporware, and startups skirting regulations, but let’s talk about the very early stages of startups, where it is easy for startup founders to attract naive investors whose funds can be miss handled if they get into the wrong hands.

Question: If a startup founder works from their home, can they use investors money to pay their rent or mortgage? No, they should not. As corporate lawyers, we frequently counsel clients on best practices to avoid “piercing the corporate veil”, which is a legal concept that refers to when a court can disregard a business entity’s corporate form and impose personal liability on the shareholders of the entity (i.e., the founders). For example, we advise businesses that they should maintain separate books and records and bank accounts from the business owners and that they should avoid any commingling of funds between the business and the business owner. Even if a startup founder works from their home, their rent and mortgage are personal expenses and it’s not a good idea to use business funds to pay for those personal expenses.

Question: How can angel investors make sure funds are not being used to pay personal property? Many investment agreements have a use of proceeds provision, which says that the proceeds from the investment can only be used for certain specified purposes.

Question: Can a startup founder take a personal loan from funds that they received? For example, the startup has $1 Million in the bank from angel investors. Can the startup founder use it to pay off personal debt or make a personal purchase with an understanding they will pay back the funds they borrowed? No – again, this touches on the corporate veil piercing concept I mentioned earlier. Personal debt and liabilities should be kept separate from the business’s accounts.

Question: How can angel investor see what loans have been granted from the startup funds? Personal or not personal? To the extent the startup produces financial statements (even if they’re very simple financial statement generated by accounting software), the loans should be reflected on those statements, and we always advise investor clients that, as part of the due diligence process, they should ask to see those financials if they exist. Also, post-investment, it’s important that investors have some ongoing visibility into the business’s financials so we counsel our investor clients that they should push for information or inspection rights when negotiating the investment agreements.

Question: If a startup has a credit card that has a rewards program who is entitled to the rewards? Can the startup founder use them for personal use? If the credit card is a business credit card that is associated with the startup’s business bank account, any rewards belong to the business and should not be used for purely personal use.

Question: How can angel investors make sure funds are not getting used for personal items such as cars, vacations, and home improvements projects. A use of proceeds provision is critical here. Admittedly, enforcement can be difficult if the investor doesn’t have visibility into the startup’s books and records so it’s important that investors ask for information or inspection rights, which means that the investors will receive periodic information from the company (typically annual, quarterly and/or monthly financial statements, depending on how mature the business is) and have a right to inspect the business’s books and records and speak with management to get business updates.

Question: Can a startup founder use investors money to pay for their immigration issues, using investors money for immigration lawyers? If the immigration issues go to the founders’ ability to work for the startup in the U.S., that’s generally considered a business expense and so long as the investment documents permit it, the funds can be used to deal with those immigration issues (including engaging immigration lawyers to assist with those issues). We frequently see use of proceeds provisions referring to the use of funds for “general corporate purposes”. Hiring an immigration attorney to assist obtaining work visas so that an employee can work for the startup would typically be considered a general corporate purpose.

Question: What legal fees can be covered and not covered by a startup for the founders? Generally speaking, when the business is first formed, the founders are covering all legal expenses for the business (including expenses incurred to form the business). However, one of the first things a business should do once it is formed is obtain an employer identification number (EIN) with the IRS so that it can open its own bank account. Then, on a going forward basis, all expenses, including legal fees, should be paid only from funds in the business bank account. Of course, initially those funds will be capitalized by the founders, but it is still important to maintain the separateness of the business’s bank account from the founders’ personal accounts.

I would like to thank Lawyer Honghui Yu from Olshan Frome Wolosky for the detailed answers on misuse of early stage startup funds by founders.

The post Startup Founder Fraud: the Misuse of Early Stage Funding appeared first on VC List.

Two years ago, I wrote an article that examined why private equity firms were increasingly investing in enterprise cloud software companies. Back then, it was clear to me that traditional private equity firms from the East Coast and elsewhere were starting to ramp up their activity in Silicon Valley, where many top cloud companies are located.

In the article, I explained the attraction of enterprise cloud companies for private equity firms, noting that the firms love the recurring revenue stream—the fact that cloud customers pay a subscription fee every year to run the software. Some private equity firms were also quick to recognize that companies across every industry are now racing to modernize their infrastructure and digitally transform their business, which serves as a further catalyst for cloud software providers.

Now, two years later, this trend has accelerated, with more and more private equity firms setting their sights on enterprise cloud software. In recent activity, Bain Capital Private Equity made an investment of $750 million in enterprise cloud company Nutanix and private equity firm Abry Partners acquired CloudWave, a cloud and managed-services provider in the healthcare sector.

At one time, there were only a handful of specialist tech-buyout firms like Vista Equity, Silver Lake and General Atlantic. But today, a growing number of generalist firms are moving into the market and executing impressive deals, especially in the cloud space.

For example, Advent International, one of the largest global private equity investors, deepened its commitment to the technology sector with a new office in San Francisco and a $2 billion global tech fund. Meanwhile, KKR launched its $2 billion Next Generation Technology Growth Fund last year, following on the heels of other prominent tech-buyout funds from the likes of Bain Capital and Blackstone.

Indeed, according to Pitchbook, there has been a dramatic increase in the number of VC-backed tech companies that are exiting to buyout firms. Pitchbook reports that between 2000 and 2019, private equity buyouts went from accounting for an anemic 2.4% of VC exits to a staggering 19.2%.

We believe private equity activity in the space will further gain steam as a diverse range of private equity firms start to target the enterprise cloud market.

What is particularly new and noteworthy is that many private equity firms are not taking control positions in their portfolio companies when they enter the cloud market. Now, big private equity firms are raising growth funds and are content to take a minority position in cloud companies. As a result, they look less like buyout firms and more like the late-stage venture capital firms that typically are involved in leading Series C and Series D financings.

Thoma Bravo, for instance, recently closed three new funds last year totaling $22.8 billion in capital commitments. The smallest of those funds, the $1.1 billion Explore Fund, is exclusively focused on earlier stage Series B/C software companies. Vista, for its part, launched the $850 million Endeavor Fund II targeting high-growth enterprise software companies with $10 million to $30 million in annual recurring revenue.

Another intriguing trend we have seen is that a growing number of private equity firms are now pursuing a bolt-on strategy in which acquisitions of cloud software providers are being done through companies that are already owned by the buyout funds, rather than the funds directly. In essence, private equity firms are turning their portfolio companies into acquisition platforms, enabling them to snap up more startups in the cloud sector and giving these platforms increased pricing power and scale in the market.

A great example of this is Optimizely, a cloud-based progressive delivery and experimentation software provider that was acquired by Episerver via its financial sponsor Insight Partners for $600 million in October 2020. Insight Partners purchased Episerver for $1.16 billion in 2018 and, since then, Episerver has been successfully pursuing a bolt-on strategy in the software space.

So what does this all mean for enterprise cloud companies? First, it means there is more capital available from more and different firms—and that translates to greater funding options to choose from for these companies as well as, potentially, higher valuations.

It also means that, if your company is part of a bolt-on acquisition, you instantly have a receptive new customer base at your disposal. You will receive valuable introductions to all the customers of the parent company that acquired you.

Also noteworthy is that traditional private equity firms have very large companies in their buyout portfolios that they can introduce a Series B/C/D cloud company to. This is different than owning a cloud company and buying and cross selling.  

These large private equity firms have teams of operating executives that support their buyout funds to help companies improve their businesses. They are now in the position of making their people, knowledge and experience available to the early- and mid-stage cloud companies in their growth portfolios.

At Cloud Apps Capital Partners, we appreciate the fact that, as the cloud companies in our portfolio prepare for their Series C and D funding, there is a much more diverse universe of investors that are capable of leading those late-stage $50 million to $100 million financings—and that are also capable of paying higher multiples.

This is all great news for early-stage enterprise cloud companies that are preparing to take the next leap forward. We at Cloud Apps Capital Partners are thrilled that more large private equity firms are choosing to enter the cloud market and we welcome the opportunity to engage with these new players.

Because everyone wins. private equity firms gain access to emerging cloud companies that are highly profitable investments. And the cloud companies, for their part, gain access to new sources of capital as well as high-value customer introductions, which will supercharge their business.

The post Private Equity Continues to Find Opportunity in the Cloud appeared first on VC List.

If you have no background or understanding of the VC & startup ecosystem, where should you even start? I recommend this article, but the first person you should reach out to without a doubt is Tom Williams.

Tom is a renowned angel investor and former entrepreneur, but above all Tom is known as an incredible friend. He strives to be the best friend to every founder that he backs, the one that they want to call on the darkest of their days. He invests via his syndicate on AngelList and the Heron Rock Fund.

Below is my interview in Tom Williams where we cover, his greatest investment yet, the mistakes he made early, and what advice he has for startup founders:

Jonathan: Tom, for those that are unfamiliar with your background how did you get into technology, entrepreneurship and eventually early stage investing? 

Tom: My father was a professor at the local university and brought home a Mac LC with 2 megs of ram and a 40-meg hard drive (it sits in my office to this day). It had HyperCard on it and I taught myself basic programming. I had always had an entrepreneurial instinct (which I think came from the fact that I hated school and saw making my own money as a means by which to break free of the shackles of other people’s control over me) and began to sell the games to my friends. I learned about forming my own company, writing a business plan and raising capital by the time I was 13. That set in motion a professional career in technology and startups that now spans more than 30 years of my life.

Jonathan: What has been your greatest investment to date?

Tom: The most legendary journey I’ve been on with any of my investments is by far and away Jumbotail. I have long believed that America is dying a long, painful death both in GDP growth and as a union because of a lack of a robust public education system and as a result, wanted to make a single bet on the Country I felt was most likely to surpass America’s economic superpower status. There are only two logical conclusions: India and China. I chose India. I looked to understand the economic makeup of the country and where money was spent and came to realize that food & grocery represented a US $400 billion market, in which most food & grocery is sold from Kirana stores (unorganized “mom & pop shops). I found Jumbotail. Karthik’s (the CEO/cofounder) background stood out as head and shoulders above everyone else’s. I cold emailed him. On my first phone call, he was the first founder in my entire career to paint a vision I could see so clearly 20 years in the future. I then met his cofounder, Ashish, who was equally impressive. I led their Series B and it was a test of faith amongst my LP’s at the time. One said “I would follow you blindly to anywhere on the earth except anything in India.” I ended up having to borrow money to complete the investment as other investors backed out at the tail end of 2018 when some thought the global macro was about to turn sharply. The only thing that could have killed Jumbotail was its inability to access the capital it needed. It just needed believers like me. It now has a lot of believers growing by the day. I sit on the Board and it is the single largest investment in my portfolio. Regardless of what happens in the future, my journey with Karthik & Ashish is one in which brings me an incredible amount of pride and joy.

Jonathan: What an incredible story that exhibits your incredible conviction in yourself.

What mistake did you make early and often as an entrepreneur and what did you learn from it? 

Tom: Not listening to people around me. Not really trusting anyone other than my own instincts. Unquestionably, that held me back from achieving my potential for many, many years.

Jonathan: Similarly, what is the biggest challenge to entrepreneurs today, specifically those trying to raise their first round of capital at the pre-seed stage? 

Tom: That they don’t know me. 

Jonathan: If you were to start your own business today, what would it be and/or what target market/customer would you go after? 

Tom: Your customer should be someone you genuinely enjoy talking with and serving and that when their lives are made better, they love you for it. 

Jonathan: You pride yourself on your connection with founders and really being their best friend throughout their journey as an entrepreneur, how crucial is it for an entrepreneur to have someone like you who has been in their shoes and can really relate and empathize with what they are going through when they inevitably face tough times? 

Tom: I’ve backed more than 100 entrepreneurs. Exactly 3 of them didn’t really need much more from me other than capital. I’m not that close to them and 2 of the three of them are exceptional in every way. Some founders, those with the experience and networks from prior successes really just need friendly passive money to be successful. But almost everyone else, including most of the other very successful companies in my portfolio had multiple moments where it looked like the Company would die. In those cases, when I look back on it, I could have helped those founders avoid those mortality events but we hadn’t built the trust that we enjoy today so in 2020, I started focusing on first check investing, where I am to be the first money in or the earliest money possible. By working in a far closer and in the trenches way, it allows me to help founders build the best possible foundation for their companies and establishes the trusted relationship much sooner.

Jonathan: We live in an incredibly crazy world currently, and so much has happened and changed over the course of the last year, what is the most important macro trend/thesis that you are looking at that not enough people are talking about? 

Tom: I think we’re setting up for two types of tech companies: Good and Evil. And there will be a battle between those two forces. My bet is entirely on the side of good. 

Jonathan: One incredibly important thing to consider for both entrepreneurs and young investors is building your social capital and network. How did you initially go about this and how would you go about it today if you were starting from scratch? 

Tom: My entire career has been built on the power of cold emails and cold calling. I literally write a set of instructions on how to cold pitch me and very few people follow the instructions. First impressions are crucial. 

Jonathan: You clearly have an incredible knack for picking people and founders, can you shed some light on what you attribute this to and the process that you go through when evaluating founders? 

Tom: I get to know them for who they are rather than fitting them into some pattern-matching algorithm like so many robot investors do. 

Jonathan: HAHAHA, I love that answer! One final piece of advice for any entrepreneur looking to raise their pre-seed round and what you are looking for? Best way for founders to contact you as well? 

Tom: For as long as I’m making direct investments, I read every one of my cold emails via LinkedIn. Just follow the rules. 

Jonathan: Awesome, thank you so much for your time Tom!

Key Takeaways:

So, in summary I think there are three important takeaways from this interview with Tom.

First, as a founder you need to have someone you can rely on and talk with when the going gets tough. What makes Tom so great is that he is that person for almost every founder that he backs. What’s more, he has been in their shoes as a founder, which allows him to relate and show compassion to these founders while also problem solving for them. Finally, as an angel investor he is often the first check in and has a clear interest in seeing you and your company succeed. These three things are what makes Tom such a powerful ally.

Secondly, for entrepreneurs out there thinking about starting a business it is incredibly important that they know the market and problem intimately, know their customers, and love when they make the lives of their customers better. If you can’t see yourself working on this for more than 5 years and don’t delight in the simple things such as a solid customer review, then this is probably not the right occupation for you.

Finally, for any investors out there it is obvious from reading this how you can separate yourself. Don’t be a “robot.” It sounds so simple, yet Tom illustrates how rare it is for investors to actually be human! Get to know the founders that you want to invest in for who they really are, not who you want them to be or who you think they might become. Take a vested interest in not just their startup’s success, but the founder and their journey. Empathize with them, help them in the darkest of days, and not just success, but happiness too will ensue.

If readers are looking to learn more about Tom and how he thinks, I highly recommend the interview he gave awhile back on the Meb Faber Podcast.

The post An Interview with Angel Investor and Cheer Captain, Tom Williams appeared first on VC List.

In 2020, investors flocked to companies with a track record of success – but were slower to open their wallets to earlier stage startups. Between January and November, 69% of U.S. deal value went to late-stage deals. Although venture funding was up 4% worldwide, according to the Global VC Report, early-stage companies still ended 2020 down 11% year over year.

Theoretically, 2020 might have been a banner year for startups. The shift to virtual, one may have argued, could have increased the odds of startups in far-flung places getting meetings with venture capital (VC) firms that previously would have snubbed them for geographic reasons. Proximity didn’t matter anymore. So why couldn’t startups capitalize?  

Raising money in 2020 was more difficult than ever

It may seem counterintuitive, but in a year filled with online pitch meetings, the most successful early startups had a decidedly offline advantage: their networks.

A VC firm’s raison d’etre is profiling risk precisely enough to determine whether an investment has a probable chance of achieving a desirable ROI, and much of this decision-making process requires VCs to truly get to know the founders. This is exponentially more difficult in a virtual setting. Meeting someone face-to-face adds dimension to risk profiling. A VC can look founders in the eyes and get a feel for who they are, what drives them and whether they’re willing to go all the way to protect an investment.

In 2020, the dearth of in-person events made this kind of relationship building nearly impossible. As a result, a founder’s pre-Covid network became the currency on which, in many cases, the business lived or died.

Referrals became exponentially more important

Referrals and other tools that help establish the credibility of a founder have always been part of the VC world, but in 2020 they were more important than ever. Founders who came to the table with a person or institution backing them were automatically a step ahead of the competition.

StackStr, an AI technology startup participating in Georgia Tech’s CREATE-X Launch accelerator, offers a case in point. Dustin McAllister, the co-founder, participated in more than 50 pitch meetings in less than two weeks, jumping from sessions with West Coast VC firms to meetings with Atlanta-based investors. In the end, it wasn’t a Zoom meeting with strangers that paid off, but a referral made by a co-founder of CREATE-X. Thanks to the introduction, Dustin forged a close relationship with Andrew Dorman, a partner at Knoll Ventures, and closed a seed round in November.

Advice for startups in a virtual world

If the traditional mechanism for raising capital used to be attending as many face-to-face meetings as possible – and then 2020 was 100% virtual – 2021 may see a swing back to a hybrid model. Many VC firms found the virtual alternative cheaper to execute and easier to accommodate more meetings per day, even if it disadvantaged some startups. Getting back to the old normal may never happen.

Beyond joining an accelerator or finding creative ways to network, founders must adapt to the new normal and find creative ways to build investor confidence. Here are a few strategies to consider.

1. Enhanced metrics. VCs have begun expecting enhanced metrics to compensate for the virtual vetting process. Startups should reevaluate what they’re presenting to investors in the seed and subsequent rounds based on these new expectations.

A few years ago, for example, VCs might have been willing to invest in a company with a few pilot tests. In the past year, that standard notched higher. Now they might need to see actual paying customers and a certain amount of recurring revenue. Push yourself to a higher standard and you’ll position yourself for success.

• Increased attention to organization. You can make up for a certain level of unpreparedness when you’re meeting in person. Now, there’s no excuse. Founders must think through and create plans for all possible scenarios, anticipating questions about specific financials and considering what an investor might need as follow-up material. One tactic is to create a digital lock box with all relevant documents so you can send a follow-up note and file link the minute you “leave” a meeting.  

• Who, what and where. Address who you are, what your business is about and where it’s going. The goal is to include things that make the VC more comfortable with you and your business style. Anecdotal stories don’t happen as organically during virtual meetings, so you’ll have to be more purposeful about getting those points across.

To help founders understand the value of humanizing themselves and their business, I often tell young entrepreneurs about an exchange that occurred when I was raising capital. I handed my business card – which I had made from a free online template – to a potential investor. The investor asked why I had chosen the free business card option rather than spending a little bit of money on something more substantial. My decision told him a lot about who I was and the value I placed on a dollar, which the investor found encouraging. That kind of serendipitous side conversation is much more difficult now, so founders have to find a way to get points like this across in a virtual setting.

Looking ahead

There are profound advantages to raising capital in a digital world. Founders can cast a wider net and VCs are getting more comfortable providing funds to companies that aren’t based in their city or state. Over time, this transition will lead to a freer flow of capital that is less geographically concentrated. But we’re in the early stages of that transition.

Founders can benefit from this new model if they successfully navigate the new normal. A founder’s network – including all the connections he or she makes at an accelerator – will remain the single best way to build fruitful VC relationships, but other factors are also rising in importance. At CREATE-X, we’re helping to connect students with VC funds more often than ever, while also encouraging founders to focus on other business fundamentals that will help them meet rising expectations in a changing fundraising world.

The post How Startups Can Raise Venture Capital in a Virtual World appeared first on VC List.

Large multinational corporations often ask, “how do we best innovate and compete with the smaller, fast-moving and well-funded startups…” At the same time, startups are desperately trying to figure out how to best work with large corporations who could provide opportunities, scale, infrastructure, systems, etc. Thousands of corporations are attempting to bring a startup culture in-house, yet often failing to realize what actually makes a startup culture and how to reward and recognize “intraprenuers”. So how do startups and multinationals best work together? Collaboration!

Commercial collaborations are often one of the easiest and most efficient ways to innovate. Corporations are able to quickly “test & learn” while gathering valuable data, consumer insights and customer feedback.  For the startups, they can tap into the vast resources of the large companies and leverage the experience, connections, and resources which are often taken for granted.

In 2012, while running SoloHealth (now Pursuant Health), a self-directed Health Kiosk, I got a call I waited for, for nearly five years; it was from the largest mass-merchandiser on the planet… they said, “your pilots exceeded our expectations; how soon can you be in 3,000 locations?” I will never forget that moment…It was exciting and it was terrifying.  How could we possibly develop, build, deliver and serve 3,000+ health kiosks in all 50 states. How would we get the money to make this happen?   

Dig Your Well Before You are Thirsty

Fortunately, we had been “Digging our Well” [Thanks Harvey MacKay] for nearly four years. We had formed relationships with large multinational corporations including DELL Computers, Intel, Wellpoint, Blue Cross Blue Shield, RedBox, and Walmart. Each of them had a vested interest in our success. When we got “the call”, I scheduled an emergency meeting with the management team on a Saturday.  We made a list of all the activities that had to get done and all the resources that would be necessary.  The list was long and it was scary. Security, privacy, logistics, distribution, finance, marketing, contracting, just to start. We then looked at our various partnerships and realized they each had much more than cash to bring to the table… they had teams of resources, experience, knowledge, systems and infrastructure.  So, on the following Monday I started making calls to our partners… I explained our situation and asked for their help. 

I am happy to say that our partners came through in a big way. In the summer of 2012, SoloHealth was producing over 40 units per day and installing over 50 units per day in retail locations throughout the U.S.  It was amazing. DELL provided us with $25M in debt to scale, however equally valuable was their legal team who helped us with security, privacy and contracting.  RedBox, who once had over 50,000 units in retail, brought in their logistics team to help us figure out how to deploy quickly and efficiently. In less than three months we had installed over 3,000 units, each of which was being used an average of 40+ times/day. Over 3 million people a month were testing their blood pressure, vision, body mass index, etc.  We couldn’t have pulled this off without our strategic partners. 

If You are Wildly Successful, Who Wins?

When I advise other startup founders & CEOs I like to ask, “If you are wildly successful, who wins?”  The “winners” should be early investors, partners, customers, board members, advisors, etc. They will be the biggest champions and are able to open up their vast resources.  After-all, they want you to be successful. 

For large Corporations wanting to be more innovative, I suggest they do an exercise I learned from Solve/Next called, “Asset Jam”.  It’s a visual inventory of all the resources you currently have available that could help a startup to be successful. Most companies are surprised at how extensive this list is. Here is a Top-10 list of assets most companies take for granted:

1. Customer Relationships & access – to drive revenue
2. Regulatory resources – to reduce risk
3. Marketing/Communications – to get the word out
4. Customer Service / Ops – to manage satisfaction, returns, call center
5. Corporate Strategy – to refine the revenue model
6. Human Resources – to assist with hiring
7. Legal – to help with contracting, IP strategy
8. Security & Privacy – to button-up backend systems
9. Engineering / IT – software architecture
10. Finance – cash flow management, debt, etc. 

80% And Go

Another concept I like to introduce to Corporations is, “80% and Go!”  Don’t expect 100%.  Consumer are no longer wary of products that are not perfect.  According to Bruce Haymes, “Consumers want the latest and greatest and they are willing to experiment. Enterprises are coming to the same conclusions – fast, innovative solutions no longer need to be 100% or offer five 9’s of reliability. Consumers are now active supporters of startups, participating in the startup phenomenon on easily accessible platforms like Kickstarter and Indiegogo. Startup culture is now mass culture. For large companies, traditional defense tactics are no longer an option to stave off the competition posed the relentless innovation and disruption of startups.”

Startups can disrupt and create a lot of angst for large multinational corporations.  However, with effective collaboration programs this angst and be converted into opportunities.  Make it Happen!

The post Are Strategics the New Angels? – Leveraging Strategic Partners to Scale appeared first on VC List.