Angel Investor
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One of Nigeria’s high-profile angel investors is launching a fund for African startups
Olumide Soyombo is one of the well-known active angel investors in Nigeria tech startups and Africa at large. Since he began angel investing in 2014, Soyombo has invested in 33 startups, including Stripe-owned Paystack, PiggyVest and TeamApt.
Today, the investor is announcing the launch of Voltron Capital, a Pan-African venture capital firm he co-founded with Abe Choi, a U.S.-based entrepreneur and investor.
Voltron will be deploying capital to roughly 30 startups, mostly in pre-seed and seed stage across Africa, in a bid to “address the severe lack of access to early-stage funding for African tech companies.” The ticket sizes will range from $20,000 to $100,000, focusing on startups in Nigeria, Kenya, South Africa and North Africa.
Soyombo is one of the few founder-cum-investors on the continent, despite his company not being the traditional VC-backed startup the world has become accustomed to. In 2008, he started Bluechip Technologies with a friend, Kazeem Tewogbade as an enterprise company that provides data warehousing solutions and enterprise applications to banks, telcos and insurance firms. Some of its biggest clients include OEMs like Oracle.
Non-traditional startup founder to an angel investor
Six years later, the pair decided to venture into tech, a relatively nascent industry in Nigeria at the time and began investing in startups via LeadPath, an early-stage firm they launched in Lagos, Nigeria. The idea was to invest $25,000 and take the startups through a three-month accelerator program culminating in a demo day. The plan was to run LeadPath like Y Combinator but it didn’t take off as planned.
“In 2014, three months after we found out that there was no investor to put them in front of. So you’d have to write another check yourself,” Soyombo said humorously over the phone. “We quickly saw that the accelerator model didn’t work, so we started investing individually. It’s funny how things have changed since then.”
LeadPath became a special purpose vehicle (SPV) for the pair to carry out their angel investing deals. Over the years, Soyombo has launched several SPVs for the same purpose. So, why do things differently now by creating a fund? Soyombo walks me through one of the processes he has used to fund deals over the years to answer this question.
As an influential figure in Nigeria’s tech ecosystem, Soyombo has access to almost any important deal in the market. “I get the privilege of seeing many deals before most people see them. I’ve built that network within the startup ecosystem and reputation as an angel always ready to help. So obviously, that helped me see many deals very quickly,” he said. Often, his deal flows are filled with startups seeking six-figure pre-seed to seed investments. Say, for instance, a founder is looking to raise $300,000, Soyombo can typically invest $50,000 of his own money. And based on his perception of the startup’s growth prospects, he can choose to bring his friends and acquaintances on board to fill the round.
This informal approach is what Soyombo wants to make formal via a structured format where each individual or organizational LP gets access to his deal flow simultaneously. The investor believes companies will get capital quicker this way. And the interesting bit is that his work in corporate Nigeria has allowed him to access non-traditional capital, which means some of the investors that use Soyombo’s deal flows are outside the typical Nigerian tech investing landscape.
He sees his job as someone bridging the gap of angel investing between his corporate friends and colleagues who have not typically invested in tech and startups that need their money.
“There’s a bit of FOMO now,” he said. “People, including high net worth individuals, tell me to carry them along anytime I’m investing, and then I have startups looking for capital as well. But then again, I’m not trying to get a full job by managing a full fund, which is why we’ve structured it this way.”
Anyone familiar with the happenings in African tech these past few months knows the two events that have caused this FOMO: Paystack’s exit to Stripe and Flutterwave’s unicorn status. Soyombo was an early investor in the former, marking his solitary primary exit alongside two secondaries within a portfolio that have cumulatively raised over $70 million. Thus, it’s not hard to see why Soyombo isn’t having a hard time convincing non-traditional investors, including HNIs (who are notoriously risk averse when it comes to tech investing), to write checks in startups.
“All of a sudden, everyone is interested in what’s happening in the space. The HNIs that would’ve thrown money into real estate are looking for startups. We even see older HNIs telling their children to invest on their behalf, so it’s an easier conversation to have. Most of them want to diversify their portfolio by having a piece of that pie,” he said, pointing to Paystack and Flutterwave successes.
Abe Choi (co-founder, Voltron). Image Credits: Voltron Capital
Voltron Capital will be managed on AngelList. Its investors cut across HNIs and executives from banks, telcos, among other sectors, each investing a minimum of $10,000. Voltron is similar to a typical seven-figure fund targeting pre-seed and seed-stage startups in Africa, yet it’s quite different in the way it chooses to back founders. The fund remains an embodiment of Soyombo’s investment stance, which is “founders-first regardless of the industry.”
“I’m going to continue backing interesting entrepreneurs. If Odunayo of PiggyVest was building a health tech or edtech company, I’ll still back that company,” he said, referring to the $1 million investment he made three years ago in one of Nigeria’s widely celebrated fintechs. “So I think the investability of sectors, for me, is driven by quality entrepreneurs that are going to solve problems in that area.”
Early-stage investing needs more work
In 2019, African tech startups raised a record $2 billion, according to Partech Africa. They have raised half that number already this year, and some publications predict these startups will break 2019’s record.
A large chunk of these investments goes into late-stage deals, which is typical of most tech ecosystems globally. But Africa stands out because early-stage startups find it more difficult to raise investments compared to other regions. For instance, IFC reported that 82% of African tech startups cite access to seed funding and a lack of angel investors as major problems they face. Without early-stage funding, many of the startups primed to drive this growth are missing out on vital capital to support their early operations and generate revenue, which is a key requirement for securing later rounds of funding and a larger scale.
Voltron, in its little capacity, wants to fill this gap in the best way it can. Besides listing local investors as LPs, Soyombo says startups will be able to access foreign capital too. Choi is the key to making that happen. Personally, Choi has invested in 15 startups (exiting two); therefore, his experience and network in the U.S. will be crucial in sourcing foreign capital into the continent.
Soyombo believes Stripe acquisition of Paystack has made foreign investors take notice of African startups. He humorously references Paul Graham’s tweet after the acquisition as another reason why foreign investors’ interests have also piqued. The tweet from the Y Combinator co-founder read: “Investors who ignore Nigeria now have to ask themselves: What do I know that Patrick Collision doesn’t?”
That said, the investor holds that the pace at which the African tech ecosystem is maturing should excite anyone. The quality of founders on the continent is improving and will continue in that manner because there are more problems to solve, he continued.
“Also, as our startups mature, we’ll see people leaving to set up theirs. We want the next wave of African tech success stories to not only make an impact on the continent but to be truly global; through Abe’s strategic connections to the USA, we’re confident we can provide our portfolio with the best possible opportunities to achieve this through our U.S. and global network.”
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Founders: How well do you really understand seed-stage financing?
I’ve fundraised a lot. Tactically, fundraising is a skill like any other. You get better the more you do it. But practicing gets you nowhere if you don’t have a strong foundation in understanding a fundraising round’s core components.
As a founder, you will understand less than investors when it comes to fundraising. For investors, negotiating with founders is their full-time job. For founders, fundraising is just a small part of building a business. Understanding the basics of venture financing can help founders raise on better terms.
We’ll cover:
- How financing works: SAFEs versus equity rounds.
- How much to raise.
- How to arrive at your valuation.
How financing works: SAFEs versus equity rounds
As a founder, you will understand less than investors when it comes to fundraising.
Venture financing takes place in rounds. The first stage is the pre-seed or seed round, then a Series A, then a Series B, then a Series C and so on. You can continue to raise funding until the company is profitable, gets acquired or goes public.
We will focus here on seed-stage funding — your very first funding round.
SAFEs
Post-money SAFEs are the most common way to raise funding. These documents are used by Y Combinator, angel investors and most early-stage funds. You should raise on post-money SAFEs using standard documents created by YC. Standard documents have consistent terms that have been drafted to be fair to both investors and founders.
By using the standard post-money SAFE, your negotiation can focus on the two terms that matter:
- Principal: The amount you want to raise per investor.
- Valuation cap: The value of your business.
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Todd and Rahul’s Angel Fund closes new $24 million fund
After making investments in 57 startups together, Superhuman CEO Rahul Vohra and Eventjoy founder Todd Goldberg are back at it with a new $24 million fund and big ambitions amid a venture capital renaissance with fast-moving deals aplenty.
“Todd and Rahul’s Angel Fund” announced their first $7.3 million fund just weeks before the pandemic hit stateside last year and they were soon left with more access to deals than they had funding to support; they went on to raise $3.5 million in a rolling fund designed around making investments in later-stage deals beyond seed and Series A rounds.
“We closed right before COVID hit and we had one plan, but then everything accelerated,” Goldberg tells TechCrunch. “A lot of our companies started raising additional rounds.”
With their latest raise, Vohra and Goldberg are looking to maintain their wide outlook with a single fund, saying they plan to invest three-quarters of the fund in early-stage deals while saving a quarter of the $24 million for later-stage opportunities. Still, the duo know they likely could’ve chosen to raise more.
“A lot of our peers were scaling up into much larger funds,” Vohra says. “For us, we wanted to stay small and collaborative.”
Some of the firm’s investments from their first fund include NBA Top Shot creator Dapper Labs, open source Firebase alternative Supabase, D2C liquor brand Haus, alternative asset platform Alt, biowearable maker Levels and location analytics startup Placer. Their biggest hit was an early investment in audio chat app Clubhouse before Andreessen Horowitz led its buzzy seed round at a $100 million valuation. Clubhouse most recently raised at $4 billion.
The pair say they’ve learned a ton through the past year of navigating increasingly competitive rounds and that fighting for those deals has helped the duo hone how they market themselves to founders.
“You never want to be a passive check,” Goldberg says. “We do three things: we help companies find product/market fit, we help them super-charge distribution… and we help them find the best investors.”
A big part of the firm’s appeal to founders has been the “operator” status of its founders. Goldberg’s startup Eventjoy was acquired by Ticketmaster and Vohra’s Rapportive was bought by LinkedIn while his current startup Superhuman has maintained buzz for its premium email service and has raised $33 million from investors, including Andreessen Horowitz and First Round Capital.
Their new fund has an unusual LP base that’s made up of more than 110 entrepreneurs and investors, including 40 founders that Vohra and Goldberg have previously backed themselves. Backers of their second fund include Plaid’s William Hockey, Behance’s Scott Belsky, Haus’s Helena Price Hambrecht, Lattice’s Jack Altman and Loom’s Shahed Khan.
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The exit effect: 4 ways IPOs and acquisitions drive positive change across the global ecosystem
For many VCs, the exit is the endgame; you cash in and move on. But as we know, the startup world is evolving, and that means the impact of investment is no longer limited to how much money is made.
As investors, we’re looking further into what each investment means to human beings, at interlinking our mission with our money. And yet, one of the events that generates the most momentum for long-term impact — the successful exit of a portfolio company — is not being harnessed.
When leveraged properly, an exit can be the beginning of a firm’s true impact, especially when we’re talking about giving all founders equal opportunities and empowering the best ideas. The investment sphere is slowly shaking off its “America first” approach as foreign products take the world by storm and international businesses become the norm.
When leveraged properly, an exit can be the beginning of a firm’s true impact, especially when we’re talking about giving all founders equal opportunities and empowering the best ideas.
Investors will be driving forces in enabling the highest-potential companies to build products that countries everywhere will benefit from — no matter where they were conceived. The way they play the game can transform the industry into one in which a founder from across the ocean has as much of a chance to change the world as one from next door.
We know the basics of how to do this with cash: Investing in underrepresented founders is a necessary first step. But who’s talking about the power of exits to change the playing field for diverse founders? We must consider the psychological motivation of seeing a huge buyout on other entrepreneurs, what that startup’s ex-team members go on to build, and what the achievements of one citizen does for that nation’s reputation.
Last year, 41 venture-backed companies saw a billion-dollar exit, totaling over $100 billion, the highest numbers in a decade. We have an unprecedented amount of clout to do something with those power moves and four ways to turn them into a domino effect.
1. Competitor effect
When a foreign entrepreneur raises money from U.S. firms and sells to a U.S. company, other immigrants see that. Regardless of how groundbreaking their product idea might be, immigrant Americans will always be more wary of putting their eggs into the entrepreneurship basket, at least as long as 93% of all VC money continues to be controlled by white men.
This, despite research suggesting that immigrants contribute 40% more to innovation than local inventors.
What these foreign entrepreneurs most need is confidence, role models and success stories proving other people who look like them have made it, especially when those founders are making waves in the same industry as them.
So a big, well-publicized exit will create momentum in the industry for other foreign founders to give fuel to their venture and seek to take it to the next stage. Not only that, it will instill more self-assurance when it comes to fundraising, and investors will value that.
I was inspired to write this column after Returnly, a fintech founded by a fellow immigrant from Spain based in San Francisco — which, for full transparency, I invested in as an angel investor, and then for Series B and C via my fund — was acquired for $300 million by Affirm.
While there was undoubtedly a personal financial gain worth celebrating, the success of a foreign founder who persevered against the odds in such a competitive ecosystem as Silicon Valley, raised large rounds from U.S.-based investors, and was finally acquired by a U.S. company served as a moment of inspiration for other diverse founders around the world. We saw this in the amount of media attention it received in both business and mainstream press in Spain and the floods of connect requests and congratulations that followed on LinkedIn.
The impact of an exit is greater when it shows foreign entrepreneurs that there are globally minded organizations helping startups like theirs get equal access to funding. That means having VC firms that spotlight international entrepreneurship and foster global expert networks.
As investors, we can maximize the impact of our exits in the industry by highlighting the foreign origins of our founders in a big way when it comes to promoting the exit, including narrating the challenges and opportunities they encountered on their journey. We can use the victory to drive the point home to our fellow investors that diverse and international entrepreneurship is an undervalued gem. We can personally take the win to boost our brand as one that empowers foreign entrepreneurs in that niche, attracting more to seek funding with us in a positive reinforcement cycle.
2. Wealth effect
The windfall from a big exit puts all previous investors in a privileged position, and it’s unlikely that money will sit around for long. They’ll look to reinvest in other high-potential companies — probably ones that look a lot like the one that was just sold.
But in addition to those investors multiplying the positive impact in their own portfolio, they will rally other investors to behave in a similar way.
Each exit — good or bad — sets a precedent for that niche and that type of company. Other investors will follow suit if they sense that one of their peers is onto a cash cow. Because foreign and ethnic minority founders are still underrepresented in startup funding, it makes this field less competitive while harboring huge potential. VCs who have an eye out for unique opportunities will spot when an investor has made a hefty profit from an unconventional startup, especially if they continue to invest in others in that same field.
To help this along, angels and VCs who’ve been behind a recent exit and are reinvesting in similar founders should publicize those knock-on investments, explaining how their previous success motivated them to support similar ventures. They can also be vocal within their network about their decision to raise up certain entrepreneurs because they’ve seen it works.
Returnly’s founder recently offered to put some of his earnings back into our fund, enabling more foreign entrepreneurs like himself to access capital. If as investors we foster meaningful relationships with our funders and truly care about empowering diverse entrepreneurs, we’ll see more of that wealth circle back into our mission.
3. Team effect
The PayPal Mafia is a set of former PayPal executives and employees — such as Elon Musk, a South African, and Peter Thiel, a German American — who have gone on to seriously disrupt not one but multiple industries across tech. Among the companies they’ve founded are YouTube, LinkedIn, Yelp and Tesla, and they’ve even been named U.S. ambassadors. That’s just one company. Imagine what other diverse and driven teams can do with the influx of cash and inspiration that comes with a big exit. There will be a ripple effect of team members eager to start out on their own who feel empowered by the success of someone who believed in them.
Their ventures will be more likely to “pass it on” when it comes to giving equal opportunities to people regardless of origin and will generate more jobs for people with their mission. Take Thiel, who has to date backed over 40 companies in Europe alone.
As VCs, we can capitalize on this team effect by keeping our eye on any spinoff ventures that arise and supporting them when possible (with experience and contacts, if not with capital). But beyond this, you can also consider encouraging these people to join the investment sphere, maybe even within your firm. Many successful startup founders and executives go on to become investors — the PayPal Mafia has contributed to some of the most notorious funds out there today. The origin story of these former team members will make them more prone to supporting underrepresented founders they can get behind. In turn, new entrepreneurs will draw more value from their personal experiences.
4. Reputation effect
Although Returnly is headquartered in San Francisco, its founder is Spanish and many of its employees were based in Spain.
That means that the impact of Returnly’s exit will be felt on the other side of the Atlantic as well as among co-nationals in the United States. The same is true of other notable sales, like AlienVault, which was founded in Spain and had multiple offices there. AlienVault was acquired by U.S. telecommunications giant AT&T for $900 million. Or IPOs — earlier this month, the Spanish-origin payments company Flywire filed for an IPO that could value the company at $3 billion. One startup’s success boosts the reputation of its entire team, and with it other founders and talent with their same country of origin, background, education and drive.
It follows that investors and other stakeholders will be more inclined to back opportunities among founders from the same home country if it says something about the mission, expertise and culture they bring to their startup.
At the same time, growing startups will be more interested in hiring the talent of evidently successful teams. That doesn’t just mean hiring more foreign experts in the United States, but seeking to outsource farther afield. We’re already becoming far more comfortable with remote teams, and it’s more capital-efficient for one half of the team to be working while the other half sleeps. But founders will always gravitate more to countries where local talent and innovation is already seen to be thriving. Open up that conversation with your portfolio companies.
VCs have the power to change an industry forever, to connect startup ecosystems across continents and to see startups expand worldwide. But this is about staying relevant as an investor as much as it’s about ensuring this next stage in the startup world is a positive one.
Investors who don’t recognize that the future of startups is global and diverse in nature won’t be in sync with the best opportunities — and won’t be selected by the best founders. Rather than trying to play catchup, help build that ecosystem.
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5 questions about 2021’s startup market
Welcome to 2021, a year that could extend 2020’s startup market disruptions and excesses — or change patterns that previously performed well for early-stage tech companies and their investors.
The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.
As we turn the page, I have a number of questions worth raising as we muck into 2021.
Each relates to a 2020 change that is expected to persist, by either the general market or those bullish on startups. I want to know what would need to change to shake up what became the new normal last year. After all, it’s precisely when it feels like nothing could shake up a downturn (or a boom) that things often do.
Today, let’s discuss seed deals, venture investing cadence, the resulting valuation pressures from rapid-fire bets, current IPO expectations and what happens to software sales when remote work begins to fade.
1. How long can seed deal-making stay hot?
As 2020 came to a close, Natasha Mascarenhas and I reported on seed investing’s strong year and its especially strong second half. How long can that pace keep up?
Nearly all our questions today deal with the endurance of certain conditions, namely: how long the market can keep parts of startup land red-hot.
When it comes to seed deal-making, Q1 and Q2 2020 saw similar levels of investment in the United States. But Q3 proved explosive, with money invested into domestic seed deals rising from around $1.5 to $1.6 billion during the first two quarters to $2.2 billion in the July-September period.
Q4 numbers are yet to fully come in, but it’s clear that private investors were incredibly bullish on early-stage startups in the second half of 2020. How long can that keep up? I think the answer is for a while yet, as investors have shown scant enthusiasm for slowing down their dealmaking cadence.
While cadence remains hot generally, seed deals should stay heated as the number of investors who are willing to invest early has increased.
Which brings us to our second question:
2. How long can investors keep writing such quick checks?
A theme that cropped up in the second half of 2020 was the pace at which investors were conducting venture capital deals. This was for a few reasons. To start, venture capitalists have raised larger funds in recent years, meaning that they need larger returns to make the math work out. This led to many investors putting money to work in younger and younger companies, hoping to get in early on a big win. That setup led to more deal competition and faster deal-making.
How? Two things. Investors who were already on a startup’s cap table — already part-owners, in other words — led preemptive rounds, in part to get ahead of other investors who might want to poach the succeeding deal. Other investors, knowing this, seemed to do the same math and move even faster, and earlier, to get around the defense.
So how long can the trend keep up? Given that many big VC firms raised in 2020, many startups picked up some tailwinds from the COVID-19 economy and exits have been strong, forever? Until something stops things? Think of it as Newton’s First Law of startup investing.
What could be the sudden impact to shake up the current set of conditions boosting the pace at which seed and later deals occur? An asteroid strike is probably too extreme, but inertia is one hell of a drug and markets love to stay happy.
Moving along, all the competition to get money to work in hot startups now has had another effect than the mere speed of deal-making; it has also pushed prices higher.
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Entrepreneurship and investing as social good
Sree Kolli is co-founder of Conduit, a premium investment platform that connects founders with successful operators, family offices and select VCs worldwide.
2020 has been a year of social upheaval. Around the world, society is identifying different problems in our culture and pushing for widespread change. While there are notable steps we can all take, from altering exclusionary company policies to signing action-oriented petitions, the VC and investment world has another, often overlooked option: Investing in change-the-world startups.
Increasingly, angel investors and institutional funds have begun allocating a portion of their funds to startups focused on diversity and social good, whether focused on democratized access to healthcare and education, or larger scale issues like climate change.
Initially, shifting funds to empower social good may seem like a hefty feat, however investors can embrace this mindshift in three simple steps: (1) redistributing stagnant investments; (2) leveraging democratized access to change-making startups; and (3) identifying founders tracking toward success.
Allocating more investments to foster change
Most of the world’s money is tied up in stagnant places. Whether invested in real estate, bonds or other traditional vehicles, this capital typically often shows conservative returns to investors — and has negligible impact on society. The intent isn’t malicious.
Most family offices and private wealth managers strive to minimize losses and these sorts of uniformed portfolios are safe. Even the most seasoned investors should incorporate more variety into their portfolios, determining where they can make profitable investments that yield higher returns while advancing societal good. Investors can take small steps to get more confident in expanding their strategies.
To start, reframe your thinking into seeing the potential opportunity rather than the risk. A good way to do this: Look at how high-risk public equities performed over the last five years and compare it to ventures within tech. Investors will see a significant disparity and the opportunity to make different returns.
The idea is not to put an entire profile in a single venture. Rather, an investor should take a portion of their portfolio in a high-risk investment sector, like public equities or fund structures, and put it in a similar risk profile with a better return. Gradually increasing these increments, starting at 15% and slowly scaling up, can help investors to see outsized returns while making a difference in the process.
A world of passion at your fingertips
For startups of all sizes, democratized access to investors will accelerate the use of capital for social good. Until recently, only the world’s wealthiest people had exposure to premium capital, but crowdfunding and accelerator programs have ushered in new opportunities, forging connections that might not have otherwise been possible.
These avenues have opened new doors for investors and startups. Access to developed networks or innovation hubs like Silicon Valley are no longer make-or-breaks for those looking to raise capital. Extended global opportunity for startups also means investors have more options to find promising ventures that align with their values, regardless of their location.
But while crowdfunding and accelerators have made the world more accessible, they come with sizable challenges. Despite making early-stage investment more obtainable, crowdfunding often does not bring the most valuable investors to the table.
Crowdfunding also inundates platforms with poor-quality deal flow, making it more strenuous for investors to connect with fruitful opportunities. Meanwhile, various accelerators and incubation platforms have emerged, which have advanced global connection, but tend to be quite noisy.
To succeed, entrepreneurs need more than capital. Rather, they need strategic support from experienced investors who can help them make decisions and scale in an impactful way. With a world of ideas at their fingertips, investors should take time to sift through their options and find the ideas that move them the most, prioritizing quality deals and looking toward platforms that curate promising connections.
Empowering entrepreneurs poised for success
Now is the right time to invest in startups. People who innovate during the pandemic have triple the hustle of those who build in safer economies. But while the timing is right, it’s equally important that the fit is right. I’m a big believer in investing in potential: Ambition, unwavering tenacity and empathy are desirable qualities that can help bring game-changing ideas to fruition.
If an investor funds a passionate leader with a strong vision and ability to attract talent, then the groundwork is laid to build something meaningful. When considering the change-makers to invest in, ask: Is this the right person to be building this company? Do they have the ability to attract and lead talent? Is the market big enough, and is there a significant enough problem to build a company around?
If the answer isn’t yes to all of these questions, it’s important to gauge if you can see a theoretical exit, or if the company is pre-seed or Series A, if they have the ability to scale to a decent size.
Despite this, investing in startups, no matter how good their intentions, can scare investors. One way to overcome trepidation is to invest in larger-stage startups that seem less risky and then wade into earlier-stage startups at your own pace. Special purpose acquisition companies (SPACs) are also becoming an interesting investment option.
SPACs are corporations formed for the sole purpose of raising investment capital through an IPO. The proceeds are then used to buy one or more existing companies, an option that could decrease anxiety for risk-averse investors looking to expand their comfort zone.
Any strategy an investor chooses to embrace social good is a step in the right direction. Capital is a tangible way to fuel innovation and bring about impactful change.
Democratized access to startups yields more opportunity for investors to find ventures that align with their values while diversifying their profiles can provide tremendous results. And when that return means disrupting the status quo and empowering societal change? Everyone wins.
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Caroline Brochado and Sophia Bendz on the boom in Europe’s early and growth-stage startups
As part of Disrupt 2020 we wanted to look at the contrasting positions of both early and later-stage investing in Europe. Who better to unpack this subject than two highly experienced operators in these fields?
After a career at Spotify and then as a VC at Atomico, Sophia Bendz has rapidly gained a reputation in Europe as a keen early-stage investor. She recently left Atomico to pursue her early and seed-stage passion with Cherry Ventures. Bendz is a prolific angel investor, with a total of more than 44 deals in the last nine years. Her angel investments include AidenAI, Tictail, Joints Academy, Omnius, LifeX, Eastnine, Manual, Headvig, Simple Feast and Sana Labs. She is known for being a champion of the femtech space, and her angel investments in that space include Clue, Grace Health, Daye, O School and Boost Thyroid.
Carolina Brochado, the former Atomico partner and most recently a partner at SoftBank Vision Fund’s London office, recently joined EQT Ventures to help launch EQT’s Growth fund, which is positioned between ventures and private equity. Brochado led investments in a number of promising companies at Atomico, including logistics company OnTruck, health tech company Hinge Health and restaurant supply chain app Rekki.
After establishing that these two knew each other while at Atomico, I asked Bendz why she headed back into the seed-stage arena.
“I’m a trained marketeer and storyteller by heart… What makes me excited is new markets opportunities, people, culture, teams. So with that, in combination with my angel investing, I think I’m better suited to be in the earlier stages of investing. When I was investing before joining Atomico, I said to myself, I want to learn from the best, I want to see how it’s done, how you structure the process and how you think about the bigger investments.”
Brochado says the European “cat is out of the bag,” as it were:
When I first moved to Europe in 2012 and first joined Atomico, after having been at a very small startup, there was still a massive gap in funding and Europe versus the U.S. I think you know the European secret is no longer a secret, and you have incredible funds being started at that early-stage seed and Series A, and because I was here in 2012, I’ve seen the amazing pipeline of growth companies that are coming up the curve, how the momentum of those companies is accelerating and how the market cap of those businesses are growing. And so I just became super excited about helping those businesses scale… I just now felt like bridging that gap in between was really exciting.
One of the perennial topics that come up time and time again is whether or not founders should go with VC partners who have previously been operators, versus those with a finance background.
“Looking back, my years at Spotify, we had great investors, but there were not many of them that had the experience of scaling a big company,” Bendz said. “So, I’m happy to give [a startup] more than just the check in a way that I would have wished I had a sounding board when I was 25 and tackling that challenge at Spotify.”
Brochado concurred: “Having operators in the room is just is an incredible gift I think to a fund and at certain levels, having people that understand you know different forms of financing and different structures can also be incredibly helpful to founders who may not necessarily have that background. So I think that the funds that do it best have that diversity.”
Bendz is passionate about investing in female founders and femtech: “It’s such a massive business opportunity that is completely untapped. We’ve seen it many times when you have a female investment partner [that] the pipeline opens up and you get more deal flow from female founders…. So I think we have a lot of work to do. I think it’s definitely improved a lot in the last couple of years but not enough… That is one of the drivers for why I put my money where my mouth is and invest in lifting the founders, but also because there are incredibly interesting business opportunities… There are so many opportunities and products or services that we will see being developed. When we have a more equal society, and more women, both building their own companies, coding and also investing… I can’t wait to see what that world will look like.”
Brochado’s view is that “even beyond founders… the best managers today are putting a lot of focus on this and I think what’s exciting is, I think we’re past the point where you have to explain to people why diversity matters.”
Is there a post-Series A chasm?
Bendz thinks: “We have more big funds in Europe [now]. We have a really solid ground here in Europe of A, B and C investors.”
Brochado said: “It’s definitely getting better. You don’t hear as many founders say that to do my Series B or my Series C I have to move to the Valley as you used to. But there’s a lot of room still for growth investors in Europe. I think Series B is the hardest round actually because, at seed or Series A, you can raise on very early traction or the quality of the management team. At Series B the price goes up but the risk doesn’t necessarily go down as much. And so I think that’s where you really need investors who are sector or thematic focused, who can come with conviction and also some knowledge around the company to really propel that company forward.”
Did they both see European entrepreneurs still making silly mistakes, or has the ecosystem mastered?
Brochado thinks 10 years ago it was hard for European founders as a lot of the talent to scale companies was still in the U.S. “What you’ve seen is a lot of big companies grow up in Europe, a lot of people come back from the U.S., and so I think that pool of talent now is larger, which is very helpful. I don’t think it’s yet at the scale of where the U.S. is. But it gives us, you know as investors, a great window of opportunity to help get some of that talent for our portfolio companies.”
The impact of COVID-19
Bendz thinks we will “see a much slower spring, but… I think it has been overall a good exercise for some companies, and I have not seen a slower deal flow. I’ve actually done more angel deals this spring than I normally do… Some businesses have definitely accelerated their whole business concept because of COVID. Investments are being made even though we haven’t met the founders. We’re able to do everything remotely so I think the system is kind of adjusting.”
Brochado’s view is that at the growth stage “there’s been a flight to quality. So actually, the really great companies or the companies that are seeing great tailwinds or companies that will still be category-leading once [have] seen a lot of interest. It’s been a very busy summer, which usually it isn’t, particularly at the growth stage… I think a lot of money is still in the system, and has flown into technology. And so if you look at how tech in the public markets has performed it’s performed extremely well. And that includes European public companies and within tech.”
Watch the full panel below.
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When this growth investor expects startups will be able to raise again
Earlier today, TechCrunch caught up with Chris Sugden, a managing partner at Edison Partners, to talk about the current fundraising market, what’s next for SaaS startups and if there’s any good news to be found in today’s market.
As the stock market continues to gyrate (more up than down), and the unicorn exit market looks increasingly moribund, understanding how private investors are putting capital to work today and over the next few quarters is critical for startup founders. A host of startups that would have normally raised in Q1 of this year did not. The fundraising market they encounter the rest of the year will help determine their business trajectory.
Before we dive into our Q&A on all that, a short note on Edison Partners . Edison is a growth equity firm, which, according to Sugden, means that its checks range from $5 million to $30 million, with a “sweet spot” between $10 million and $15 million. Regarding stage, Sugden said that Edison looks to put capital into companies with between $8 million and $20 million in revenue, noting that the larger companies stretch his firm’s check size to the max.
About 75% of the firm’s investments are in software-as-a-service companies (SaaS), with the other 25% going into other types of startups. According to the investor, the average growth in Q4 2019 of the firm’s 12 investments from its ninth fund was about 100%, compared to the year-ago period.
So, Sugden is an active investor at a firm that has been around for a few decades with a good-sized account from which to invest. Let’s dig into how he sees the market shaking out.
Fundraising in 2020
The following excerpts come from TechCrunch’s chat with Sugden, which we’ve grouped and edited for clarity. We’ve peeled back the conversation, allowing us to pull out the parts that felt the most useful for startups. We start with his view of the 2020 venture capital market.
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In the shadow of Amazon and Microsoft, Seattle startups are having a moment
Venture capital investment exploded across a number of geographies in 2019 despite the constant threat of an economic downturn.
San Francisco, of course, remains the startup epicenter of the world, shutting out all other geographies when it comes to capital invested. Still, other regions continue to grow, raking in more capital this year than ever.
In Utah, a new hotbed for startups, companies like Weave, Divvy and MX Technology raised a collective $370 million from private market investors. In the Northeast, New York City experienced record-breaking deal volume with median deal sizes climbing steadily. Boston is closing out the decade with at least 10 deals larger than $100 million announced this year alone. And in the lovely Pacific Northwest, home to tech heavyweights Amazon and Microsoft, Seattle is experiencing an uptick in VC interest in what could be a sign the town is finally reaching its full potential.
Seattle startups raised a total of $3.5 billion in VC funding across roughly 375 deals this year, according to data collected by PitchBook. That’s up from $3 billion in 2018 across 346 deals and a meager $1.7 billion in 2017 across 348 deals. Much of Seattle’s recent growth can be attributed to a few fast-growing businesses.
Convoy, the digital freight network that connects truckers with shippers, closed a $400 million round last month bringing its valuation to $2.75 billion. The deal was remarkable for a number of reasons. Firstly, it was the largest venture round for a Seattle-based company in a decade, PitchBook claims. And it pushed Convoy to the top of the list of the most valuable companies in the city, surpassing OfferUp, which raised a sizable Series D in 2018 at a $1.4 billion valuation.
Convoy has managed to attract a slew of high-profile investors, including Amazon’s Jeff Bezos, Salesforce CEO Marc Benioff and even U2’s Bono and the Edge. Since it was founded in 2015, the business has raised a total of more than $668 million.
Remitly, another Seattle-headquartered business, has helped bolster Seattle’s startup ecosystem. The fintech company focused on international money transfer raised a $135 million Series E led by Generation Investment Management, and $85 million in debt from Barclays, Bridge Bank, Goldman Sachs and Silicon Valley Bank earlier this year. Owl Rock Capital, Princeville Global, Prudential Financial, Schroder & Co Bank AG and Top Tier Capital Partners, and previous investors DN Capital, Naspers’ PayU and Stripes Group also participated in the equity round, which valued Remitly at nearly $1 billion.
Up-and-coming startups, including co-working space provider The Riveter, real estate business Modus and same-day delivery service Dolly, have recently attracted investment too.
A number of other factors have contributed to Seattle’s long-awaited rise in venture activity. Top-performing companies like Stripe, Airbnb and Dropbox have established engineering offices in Seattle, as has Uber, Twitter, Facebook, Disney and many others. This, of course, has attracted copious engineers, a key ingredient to building a successful tech hub. Plus, the pipeline of engineers provided by the nearby University of Washington (shout-out to my alma mater) means there’s no shortage of brainiacs.
There’s long been plenty of smart people in Seattle, mostly working at Microsoft and Amazon, however. The issue has been a shortage of entrepreneurs, or those willing to exit a well-paying gig in favor of a risky venture. Fortunately for Seattle venture capitalists, new efforts have been made to entice corporate workers to the startup universe. Pioneer Square Labs, which I profiled earlier this year, is a prime example of this movement. On a mission to champion Seattle’s unique entrepreneurial DNA, Pioneer Square Labs cropped up in 2015 to create, launch and fund technology companies headquartered in the Pacific Northwest.
Boundless CEO Xiao Wang at TechCrunch Disrupt 2017
Operating under the startup studio model, PSL’s team of former founders and venture capitalists, including Rover and Mighty AI founder Greg Gottesman, collaborate to craft and incubate startup ideas, then recruit a founding CEO from their network of entrepreneurs to lead the business. Seattle is home to two of the most valuable businesses in the world, but it has not created as many founders as anticipated. PSL hopes that by removing some of the risk, it can encourage prospective founders, like Boundless CEO Xiao Wang, a former senior product manager at Amazon, to build.
“The studio model lends itself really well to people who are 99% there, thinking ‘damn, I want to start a company,’ ” PSL co-founder Ben Gilbert said in March. “These are people that are incredible entrepreneurs but if not for the studio as a catalyst, they may not have [left].”
Boundless is one of several successful PSL spin-outs. The business, which helps families navigate the convoluted green card process, raised a $7.8 million Series A led by Foundry Group earlier this year, with participation from existing investors Trilogy Equity Partners, PSL, Two Sigma Ventures and Founders’ Co-Op.
Years-old institutional funds like Seattle’s Madrona Venture Group have done their part to bolster the Seattle startup community too. Madrona raised a $100 million Acceleration Fund earlier this year, and although it plans to look beyond its backyard for its newest deals, the firm continues to be one of the largest supporters of Pacific Northwest upstarts. Founded in 1995, Madrona’s portfolio includes Amazon, Mighty AI, UiPath, Branch and more.
Voyager Capital, another Seattle-based VC, also raised another $100 million this year to invest in the PNW. Maveron, a venture capital fund co-founded by Starbucks mastermind Howard Schultz, closed on another $180 million to invest in early-stage consumer startups in May. And new efforts like Flying Fish Partners have been busy deploying capital to promising local companies.
There’s a lot more to say about all this. Like the growing role of deep-pocketed angel investors in Seattle have in expanding the startup ecosystem, or the non-local investors, like Silicon Valley’s best, who’ve funneled cash into Seattle’s talent. In short, Seattle deal activity is finally climbing thanks to top talent, new accelerator models and several refueled venture funds. Now we wait to see how the Seattle startup community leverages this growth period and what startups emerge on top.
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What founders need to know about pro rata rights
Andy Sparks is the co-founder and CEO of Holloway, a publishing and technology company that creates comprehensive, practical guides researched, written, and refined by experts.
In the context of a term sheet, pro rata rights (or pro rata) govern whether investors may continue to invest in subsequent rounds of funding in proportion with their ownership. Investors with pro rata rights can invest in the company’s next round an amount that will allow them to maintain their ownership percentage.
This is an excerpt from the Holloway Guide to Raising Venture Capital, a comprehensive resource for founders of early-stage startups, covering technical details, practical knowledge, real-world scenarios, and pitfalls to avoid. Read our accompanying article about the company over on TechCrunch.
Pro rata is Latin for “in proportion.” Most people are familiar with the concept of prorating from dealing with landlords: if you’re entering into a lease halfway through the month, your rent may be prorated, where you pay an amount of the rent that is in proportion to your time actually occupying the property.
Almost all investors try to negotiate for pro rata rights, because if a company is doing well they want to own as much of it as possible. After all, why not double down on a winner than use that same money to invest in a newer, unproven company? In the 2018–2019 fundraising climate, though, it’s safe to say we’re at “peak pro rata.” Everybody wants pro rata, even those who don’t entirely understand how it works or affects companies.
Some founders include a major investor clause in the term sheet, which reserves certain rights and privileges to those they deem “major investors,” based on amount invested or number of shares purchased. Whether to grant pro rata rights to all investors or only those above a major investor threshold is a tricky decision for two reasons.
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