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Artificial intelligence is no longer a thing of the future. It is becoming a necessity in many industries as a driving force for growth. In the VC world, a number of investors are already using AI to determine whether or not a potential investment is worth exploring.

In our most recent DiffuseTap event, we examined this growing phenomenon with our speakers, Miguel Gonzalez, co-founder of AI-enabled company and investor discovery startup FounderNest, and Brad Zapp, co-founder of VC firm Connetic Ventures. DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas).

During our session, Brad and Miguel talked to us about how they are (1) utilizing AI to ensure that they are making the right investments and (2) connecting investors with companies who share the same vision.

 

Using AI to assess value in people

According to Brad, when Connetic started incorporating AI into the company screening process, it was out of necessity. With early stage being the focus of Connetic, the challenge was how to accurately assess a startup’s potential, given they usually lack sufficient data for analysis.

Brad and his team decided that they needed to take a systematic approach to evaluating founders. However, being based in Kentucky, where there are not too many venture deals to fund, meeting founders “only through planes, trains, and automobiles” would not yield a large enough assessment pool. So instead, they sought a viable solution to help with their screening process.

But how do you dig into the DNA of a human being? How can you determine whether a person is “hardwired” to succeed?

“Entrepreneurship is really hard, and if you just don’t have the inherent behavioral DNA inside of you, it’s difficult,” Brad explained. They soon realized that there wasn’t an assessment tool in the marketplace robust enough to answer these questions. 

Thus, Wendal was born. Wendal is a proprietary behavioral survey tool that places participants in a “vector analysis”, to help Connetic answer questions like: Is this person an “enterpriser” that can really lead an organization? Is this person tilted toward sales or product advocacy? Is this a team member, a collaborator? Is this a specialist that’s really formal and likes details?

FounderNest, on the other hand, uses AI to discover companies and investors and to determine if there is a fit between the two that would warrant a “double opt-in” introduction.

Similar to Connetic’s Wendal bot, FounderNest uses an AI technology to analyze the key strengths of a team. As Miguel explained: “We’ll look at signals such as the academic and professional background of the founders. Have they worked together in the past and for how long? Do they have any relevant experience in the industry in which their current company is operating? Have they started a company in the past, scaled it, and eventually exited?”

FounderNest then supplements that team-driven analysis with traction metrics, such as the company’s revenue, CAC, LTV, and other industry-specific metrics. This combination of founder background and track record evaluation shapes a defensible picture for the VC connections to be made.

 

So how accurate is AI?

Using AI to grade investments is one thing. But obviously, investors also want to know if these AI-driven assessments are accurate. According to Brad, Connetic has an alpha-beta error to estimate how exact these AI models are, and they continuously improve on it.

Connetic runs different tests simultaneously. A recent test assesses funding opportunities similarly to Morningstar.com, using a star rating system, wherein one star is potentially a bad investment and five stars shows great promise.

“What I can tell you is that only 14% of our ‘one-star’ companies are doing well, compared to 74% of the ‘five-star’ companies.” Brad also qualified, “I think we’re about a year, maybe 18 months away, to get a lot more comfortable. But we’re running this weekly.” 

Miguel shared that FounderNest has yet to reach that point of sophistication wherein “it makes sense for us to look at the beta or alpha of our model”. Instead, they look at conversion rates on the two sides of the marketplace — investor and investee — and based on that, determine whether their “double opt-in” connections are a right fit.

“On the founder side, 80% of the investors that we identify for our startups are accepted by the company. And then 25% of the companies that we discovered for investors are accepted by those investors. So, in essence, we have a 22% conversion rate from the investors that we suggest to our company to the number of ‘double opt-in’ connections that we made,” Miguel reported.

 

AI zooms in on minority-backed companies

Connetic has seen the potential of AI beyond just geographics. Leveraging Wendal, they’re looking into new opportunities within minority-owned businesses, thus, breaking down barriers and encouraging diversity in the VC market.

As Brad explained this welcome discovery, “Everybody knows the statistics about the lack of funds getting to female, minority-backed companies. Everybody knows what’s happening, at least in the U.S. today, with all the institutionalized social injustice examples being brought to the forefront. Here’s what I can tell you from a data standpoint: out of the 1,500 or so companies that have had conversations with Wendal, approximately 40% of those are minority-owned businesses.

“And I think if I’m right, that’s about on the national average. The AI bot program itself has been recommending about 43%, so it’s basically saying ‘Hey, once we carve out [your prospects], 43% of acceptable investments actually are minorities.’ And that’s super interesting because it’s deeply correlated with the funnel,” Brad shared.

From that perspective, Wendal goes past deep-seated biases that investors, as humans, can’t simply overcome. This allows an opportunity to level out the playing field and is potentially a huge step towards the right direction in the VC world.”

“You can’t erase your own biases,” Brad elaborates further. “But isn’t it nice to have a machine tell you ‘hey, here’s these four, five, six, seven other companies that maybe you wouldn’t have picked up on, but you really need to take a closer look.’ That’s been the coolest thing so far. Personally in Connetic, once we got into diligence, we ended up funding about 48 or 49% [of minority-backed companies].” 

On the other hand, Miguel said FounderNest has decided not to explore that side of their matchmaking algorithm because aside from it being a big investment, it might pose some ethical questions on their end.

“It has some ethical -slash- legal issues that may be involved when asking that kind of ethical information from [the] founder. So we’ve decided to hold off on that until making sure that there is really an opportunity to make an impact in this space,” Miguel explained. 

Nonetheless, FounderNest has decided to power B+ Ventures, the largest initiative in the U.S. focused on connecting Black, Hispanic, and immigrant founders with investors. “So while we are not doing this directly through our own matchmaking, we are definitely all about supporting these kinds of initiatives that are trying to bridge that gap,” Miguel said.

 

Limitations of AI screening

Using AI to assess human qualities poses some limitations, especially given the ambitious goals both companies are trying to achieve. As Brad noted, “How do you assess where there is a personality fit between the founder and the investor? How do you make sure that there is that personal chemistry between the two sides?”

Miguel said FounderNest has explored these questions in many different ways. “Because it’s such an important ingredient of the equation, there is not an easy answer. At the end of the day, it is so subjective, it really depends on the tone, on the body language of the founder when you meet with the founder for the first time…And also on the dynamics between the founders when you are meeting with them, and the way they communicate. That is really hard to figure out through a model that works for everybody across the board.”

Echoing Miguel’s sentiment, Brad revealed that they loved how codification was such a hard problem. In fact, they’ve taken it on with help from an industrial psychologist at Xavier University. “We pitched him our idea on how we wanted to accomplish this, [and] he bit it. And so we partnered my team’s crazy thoughts, industrial psychology, [and] software development. And then that’s how we developed our startup DNA app.”

Brad expounded further, “So, you know, when you think about the founders of WeWork, Uber, and Theranos, I bet they were awesome. And I bet if we were in that room [when they pitched their companies], we all would want to invest. And those might have been huge mistakes, so we want to tackle this problem. It is really hard. We have put math behind it. Do we have enough data to say we’ve nailed it? No. But we’re doing it.”

 

More funds are using AI for screening

AI tools at maturity create a great opportunity for both investors and startups to increase their probability of success. And that’s why we’re seeing several funds today using AI for screening. However, we have yet to see AI fully incorporated in the process across the board. COVID may just have been the push that the industry needed.

“I do see it as a trend.” Brad noted. “Early on, pre-COVID, when we came on the scene in early 2019, and we unleashed the Wendal bot, we probably had 15 per cent serious pushback. People were like, ‘what do you mean I can’t have a coffee with you? Talk with you, pitch you all this stuff?’ Because they had been trained by their mentors or whatever on how to go through that traditional VC process.

“But then COVID hit, and all of a sudden everyone had to be digital. And all of a sudden, we were sitting here with like, 18 months under our belt, where we had been in digital VC for a long, long time. And all of a sudden the responses were pretty surprising. Like in April, we had a record high. I’ve never seen anything like it. It was 100% uptick for us from a deal flow.” 

Miguel, meanwhile, has observed that in the early stage space, there are still very few VCs building AI-based models for valuation. “At the end of the day, earlier stage evaluations of the companies are dictated by the market itself. So, how much demand you’re able to create around your company, and who is behind that demand. [Do] those VCs or angels talk to your angels? If they [do], most likely your valuation is going to go up.”

Brad agreed with Miguel, pointing out that AI-based assessments can only go so far; however, they do have great potential, and we’re all ready for it, he remarked. “Do I think in the next two or three years everyone will just let Wendal, the bot, pick investments for them? Absolutely not. I think that would be a mistake. But do I think automation, machine learning, data, and tech platforms will help enable all VCs? And even startups? Yes, I do.”

 

Brad Zapp is the co-founder and partner at Connetic Ventures, anchored in Cincinnati, Ohio. Connetic is currently valued at $30M and focuses on investing in early stage, innovation-driven startups in North America and Europe.

Miguel Gonzalez is the co-founder and COO/CPO at FounderNest, a Silicon Valley company that helps founders identify the right investors for their companies and investors discover hidden gems that fit with their investment thesis. Currently, FounderNest has made around 1,500 connections and has nearly 1,600 VCs from all over the world under its belt, 70 percent of which are top tier VC firms, mostly in Silicon Valley.

Diffuse incubates and runs emerging VC funds. If you have an investment thesis that you would like to launch into a fund, get in touch today.

“A lot of the funds we got introduced to in the U.S., they quickly closed the conversation when they realized we weren’t U.S.-based,” says Ollie Walsh, CEO of a European B2B company. 

Executives from overseas companies say that raising money abroad is harder than one might think. The distance between investor and investee is a major deciding factor from an investor’s perspective, and this is more so amplified by the current pandemic situation.

In our latest DiffuseTap conference, three executives from Ireland gave their takes on the topic: Ollie Walsh, Chief Exec of Pip iT; Paul Burfield, SVP of Enterprise Ireland; and Luke Feeney, COO of TerminusDB.

DiffuseTap is a weekly virtual event that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). Last week, we raised a new awareness on the many hurdles for foreign companies to raise money abroad, and what they can do to guarantee that dollar cheque.

 

Why is raising money overseas so hard?

Luke shared that from his experience, investors in Ireland have a tendency to avoid risk without careful consideration. They tend to invest in companies where they can see more immediate returns, and that is pushing European early stage companies to look out to the rest of the world for growth.

“Well, the big thing that’s very important for us in raising money, and one of the problems of raising money in Ireland, is that the risk appetite is quite limited. As you’re looking for patient investment in a deep tech product like ours, which requires a large degree of engineering in order to get it to zero, the people with the appetite for that type of investment are few and far between,” Luke said.

He also shared that one of the things he was surprised by was how investors in Ireland, from his experience, typically do not want to wait around to see a company grow.

“The thing that surprises us when we compare the relatively short term investment that we see here at home, to the longer-term investment that we’re looking for overseas… There’s a lot of angels here [in Ireland] that are looking to get out at series A, rather than people who want to stick round on round to see a company grow, and have that ambition and that appetite to grow something big.”

“So, patience and patient capital is often what we seek when we look overseas,” Luke shared.

 

What are the struggles European companies face in raising money overseas?

More than that initial struggle to raise money locally, the speakers also expressed that it is relatively difficult to raise money from other countries as well.

Ollie shared that starting out, he was surprised by how “local” the money really is. “A lot of the funds we got introduced to in the U.S., they quickly closed the conversation when they realized we weren’t U.S. based,” Ollie shared.

And this phenomenon isn’t limited to the U.S. Ollie said he is also seeing the same thing with other investors generally outside of Ireland, where his company is from.

“I did find the same in the UK, that we actually had an offer of an investment from a fund in the UK two years ago, which was blocked by the fund’s own legal team. They said they wouldn’t participate in an Irish investment because it was outside the UK. That’s at the time the European zone is a regulated area, so it shouldn’t make any difference,” Ollie expressed. 

Paul argued that one of the biggest reasons behind that is because face to face contact has always been a staple within the industry, and he argued that you cannot have the same level of intimacy in trying to strike a deal just through Zoom.

“Venture investing is a contact sport, and unless there is proximity between founding teams and local investors, it just doesn’t happen,” Paul said. 

And given the current pandemic situation, it’s a greater hurdle that companies have to cut across.

“You know, this is going to be the new normal for a long time. So if you want to write a cheque or receive one, we are going to have to adapt this. And it will change, but it takes a while for that legacy to roll out of what is a very, very traditional channel,” Paul said.

 

What Qualities Do Foreign Companies Need to Raise Money in the U.S.?

When asked the question of “what do all the foreign companies who are able to thrive off of U.S. capital have in common,” the speakers generally agreed that perseverance is a common denominator.

“I think a lot of it is down to focus and perseverance. There are a lot of specialised VCs, for us, it is FinTech, so find ones where your business has the best match. If you are a niche business, don’t spend time with generalist VCs. Once you have identified the best opportunities, then perseverance is required. Being from overseas means you are immediately at a disadvantage compared to local opportunities the VC can invest in. Make a strong case for your business and keep making it,” Ollie shared.

Luke added that foreign companies also have to be open to different ways of funding. Funding through debt instruments or convertible notes, for example, is one good way to receive funding that companies might want to consider, given that these notes can be converted into an equity position of subsequent investments.

Paul also said that the fundamentals have not changed: “It’s still about team and then traction.”

“Some local investors will consider European traction as proof of product market fit, and so the third variable is ‘how soon is the founding team or the C level team prepared to relocate to the U.S. to embed themselves in the market, and demonstrate commitment to it?’” Paul said. 

Paul Burfield is the Senior Vice President at Enterprise Ireland, the venture arm of the government of Ireland that invests in Irish technology companies at pre-seed to early stage to help them start commercializing.

Ollie Walsh is the Co-Founder and CEO of PiP iT, an international cash platform that powers international cash transactions, helping migrants safely support their families at home for much cheaper.

Luke Feeney is the COO of Terminus DB, an open source and full-featured, in-memory graph database management system that focuses on making the lives of data scientists easier.

What to get in touch with major industry players from all parts of the world? Don’t hesitate to ping us. We’re one chat away.

These days, access to capital is like a wellspring in the desert (or a Fata Morgana). That’s why we invited Derek J. Manuge, CEO of revenue-based funding startup Corl, and George Souri, Co-Founder and CEO of LQD Finance, to share how creative financing options have transformed how ventures can get access to growth capital. Even when traditional financing is off the table.

​The clean technology industry (or simply cleantech) is at a crossroads. On the one hand, there is huge business potential, given the urgent need to build alternative energy sources for a more sustainable future. Then again, while several areas in hardware, including cleantech, are in investors’ crosshairs right now, the available capital may be realigning in the aftermath of the COVID-19 crisis.

In our latest DiffuseTap event, we were joined by two veterans in the hardware space: Matt Taylor, managing partner of MTT Ventures, and Mike Lightman, whose background includes running a cleantech incubator, helping cleantech companies around the world, and supporting investors in the space. DiffuseTap is a virtual event that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas).

Here, we explore with Matt and Mike how cleantech is shaping the world, and how the technologies are expected to take off in a post-crisis environment.

 

Cleantech in the Spotlight

Cleantech involves technologies that help reduce the negative environmental impacts of harnessing energy, and it’s one of the things that investors are keeping an eye on right now, according to Mike.

“Diving deeper into the cleantech side of hardware or just cleantech in general, I think that cleantech is like the perfect example of [the] right time being the most important component. The majority of the cleantech things that I’ve seen, it’s really been a crescendo,” Mike said.

In the future, policies are likely to drive the demand for green technology, especially in progressive locations opting to regulate cleantech. An example of this is the Local Law 97 in New York City, which applies tariffs on energy efficiency in buildings. “If you’re a building over 25,000 square feet, you have to be something like 85 percent more energy efficient in the next couple of years, or the city slaps you with a fine. So whatever it is that ends up coming out, my guess is going to be those more energy-intensive facilities,” he anticipates.

Mike also sees more technology today around the Internet of Things (IoT) of managing various buildings, including simple technologies, “Better heaters, better insulation, and then even like better windows – so I’d say building technology is one.”

Grid-related cleantech is seen to soon dominate the market, as well. “Battery backup is blowing up right now. Anything to do with capturing energy during off-peak hours, and helping something with the energy curve,” Mike said.

 

Environmental Technologies On the Rise 

Clean energy is one of the few affordable resources that can help mitigate the effects of the pandemic on people’s livelihoods and local economies. Amidst the fallout of the coronavirus emergency, the United Nations Development Programme (UNDP) highlighted the importance of clean energy in helping countries “prepare, respond, and recover” faster from the pandemic.

Mike agrees that there is great potential in developments aimed at the environment, and is particularly curious to see how water technology and agriculture technology will develop in the coming years. “Shipping containers that have hydroponic gardens in them that you can just drop next to a grocery store, for obvious reasons – that’s become more popular now. And then also, the solar panels that will collect water instead of energy, so you can have a remote water supply.”

“I like to joke about it, but ‘zombie apocalypse preparation’ technologies that can impact large scale infrastructure are becoming increasingly popular,” Mike shared in jest.

 

Other Trends in Hardware We’re Seeing in 2020

In the hardware sector that MTT Ventures operates, Matt says the interest right now is in three areas: medical devices, consumer goods, and consumer privacy.

“I think we’ve seen [that] just in the last two months alone, there are 25 med device deals that can run the gamut. It’s a pretty broad space, but we’ve seen a lot of deal flow there,” Matt observed.

Matt pointed to Psyonic, an Illinois-based tech company that develops prosthesis medical devices, as one hardware manufacturer that is seeing a lot of investment right now. Psyonic incorporates its products with unique bionic abilities that surpass human capabilities for people with limb differences.

As for consumer packaged goods (CPG), Matt mentioned Michigan-based hardware company Inductive Intelligence, which uses induction to find more convenient, safer, and more sustainable ways to heat and cook food.

Matt also zeroes in on how consumer privacy is becoming more of a staple in the hardware industry, citing Winston Privacy as an example. This VPN alternative is a hardware that encases filtering algorithms that protect a user’s online privacy. “Coincidentally, an exact same company [as Winston Privacy] exists in ATDC in Atlanta. So you have two hardware products around consumer privacy in two different cities doing almost the exact same products. I thought that was pretty interesting,” Matt noted.

 

How Investors are Financing Tech, Hardware Companies 

When asked about how investors are generally financing hardware companies during this time, Matt and Mike agreed that most investors only do equity.

“We only do equity financing. In terms of debt, we’ll do convertible notes. But this eventually converts to equity. And our partners that we syndicate our deal flow to, as well, only do equity financing. So we’re not going to help facilitate any venture debt with a partner such as a Silicon Valley Bank,” Matt shared.

Mike, who is not a venture investor himself but helps with fundraising, echoed Matt’s view: “Right now, almost all the venture folks that I know, in fact all of them, are strictly equity or convertible note. I think it’s becoming increasingly popular. [This is because] a lot of investors don’t want you to be losing any of your cash flow. And with a loan, like with any kind of debt, you’re immediately losing that, which can become dangerous.”.

Matt Taylor is the managing partner of MTT Ventures in West Chicago. Alongside his partner, Manuel Magallanes, he manages 18 of their limited partners’ funds, and their main focus is at the pre-seed stage. They currently have nine investments, three of them are in hardware, and advise one other med device hardware startup.

Mike Lightman has had his hand in various cleantech and hardware related companies over the last decade. He has worked with a small VC concentrated on hardware and manufacturing medical devices, and also spent three years working with the World Bank for a program that builds startup ecosystems around the world. He is currently consulting for NYSERDA.

 

Want to connect with the right hardware and cleantech companies that you need to keep an eye on? Don’t hesitate to reach out.

Will fans still attend sporting events? Probably not anytime in the near future, which is why tech companies are rethinking their products to suit the needs of aficionados who cannot be physically present at competitions.

In our latest DiffuseTap event, we sat down (virtually) with two emerging leaders in SportsTech: Darius Grandberry, CEO and founder of fantasy sports app Leagueswype, and Matt Bailey, CEO and founder of sports prediction app GameOn. DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas).

 

Are people still going to sports events?

Darius has been closely watching trends in sports, since the pandemic broke. In a recent poll by Seton Hall, without a vaccine, 72 percent of sports fans do not feel comfortable going to live sports events. Darius predicts this will drive new SportsTech startups into the market to fill this obvious gap.

“There’s going to be a lot of movement around replicating the in-stadium experience at home. So you may see some of those past investments in VR and AR, and in enhanced reality start to pay off as they pivot to try to replicate that in-stadium experience,” Darius said.

This possible wave of SportsTech will not only allow fans to replicate the live experience from home, but also allow leagues and teams to advertise to compensate for lost ticket revenue.

Additionally, Darius expects athletes to continue to interact more intensively online with fans. “We may see them trying to find ways to benefit from their fan base and their personality. So I’ve seen them monetizing their images through avatars, games, and player-run eSports tournaments.”

“Any startups in that industry will see heavy investment,” he predicted.

 

SportsTech trends that are taking off in 2020

Darius identified three major categories in in-demand tech for sports teams and athletes. “Wearables, activity, and performance are leading the way.” He said these three technologies are taking off as a result of the pandemic, with the health and safety of athletes in mind.

“With fans and content close behind, you’re gonna have wearable tech that detects COVID and other injuries. You’re seeing some of the leagues invest in that technology now to detect COVID earlier as they prioritize health and safety of their players,” Darius added.

 

Is the country legalizing sports betting soon?

Making a wave in SportsTech is the legalization of sports betting, and Matt wonders if the pandemic might have something to do with it. “That’s a question, and there are two sides to whether the pandemic will induce faster legalization across the country.”

As of now, 18 states have legalized sports betting and several other states are already progressing in this direction, with only three states not having a pending bill for it, according to Darius. Meanwhile, Matt quotes sources saying sports betting is a valuable source for a state’s financing.

And so given the current pandemic, state legislators might be urged to reconsider sports betting as a matter of survival. Matt anticipates that sports betting platforms might hit it big as we see this push to legalize the activity across the country.

“It’ll be interesting to see how that plays out. I think sports betting is going to become more prominent across the U.S., as it slowly makes its way to each state,” Matt shared.

 

What sports bettors are doing right now

Due to COVID, sports and sports betting in general have come to a full stop. However, hardcore bettors are finding ways to get their fix through sports prediction apps. GameOn, for example, is helping people fill the void by branching into betting games outside of sports.

Matt explained: “We really tried to ride the wave of COVID instead of fighting against it, and we challenged ourselves to generate revenue even in a time of no sports. So we thought, where else can our prediction engine apply? We thought reality TV, news, elections, and anything – pretty much any other content or programming outside of sports.

“So we started reaching out to some media entities on a white label push and we took our prediction engine and applied to other platforms for leading media companies like NBCUniversal,” Matt shared.

Originally, Matt thought the idea was ludicrous. But later on, he was surprised to find that it was becoming more profitable than anything they had ever done.

“If you asked me three months ago if I’d be working on that, I would have laughed at you. But funnily enough, it’s generating more revenue than we’ve ever generated before, and it’s not cannibalizing our sports flagship product. So we’re really excited about it,” Matt shared.

 

Darius Granberry is the Managing Director of Gold Leaf Capital Partners, as well as the CEO and Founder of Leagueswype, a digital wallet created exclusively for the sports fantasy league market. Matt Bailey is the CEO and Founder of GameOn, a sports prediction mobile platform for fans of sports and TV, and also the Founder and Board Director of the Brooklyn Kings Rugby League. Both of them are avid sports fans.

 

Want to get in touch with people who share the same passion for investing in emerging leaders in tech? Don’t hesitate to get in touch with our team at Diffuse.

The trouble with being a first-time VC is that you may have the resources, but you may not know what to do with them just yet. And half the time, you’re trying to figure out what the pros are doing while being in the dark yourself. This is what happens when you don’t have the right fund structure.

 

Thankfully, in our most recent DiffuseTap session we had the chance to get some valuable insights from first-hand experience from two U.K.-based VC experts to give newbie investors some tips to starting out: Tom Britton, co-founder of SyndicateRoom, and Farhan Lalji, Principal at the Anthemis Group for Investment – Venture Partnerships.

DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). If you’re interested in meeting new folks who can help you boost your fund, feel free to ping us.

 

Common mistakes of first-time funds

One of the biggest mistakes new investors make is going with the wrong fund structure. Farhan shares that from his experience, a lot of newer investors get up and running before they actually understand the dynamics behind different fund structures.

And therein lies the problem with gauging GP commit. Farhan shares: “you have individual investors [who] think they’re going to raise a huge fund, and then the LPs want to see that the GPs have got skin in the game, usually by putting up a significant amount of their net worth. This can make it extremely difficult to get a diverse group of investors as GPs in new and emerging funds, especially when some people may be sitting on illiquid assets and don’t have direct access or ability to invest significantly to set up a new fund.”

And so, the problem is how do you get investors to make that GP commitment when they don’t necessarily have access to that kind of wealth, whether that be one or two per cent of a $100 million fund? Farhan said this is a common issue when funds don’t have the right structure for what they’re aiming for.

 

Untapped institutional capital

Farhan shares that another thing he’s seen happen often is investors not going after some of the other institutional capital available to them. Farhan said that beyond pension funds and other more popular resources, investors aren’t engaging national government institutions that are looking to deploy capital into venture funds early enough or through the right channels.

Farhan cited the British business bank and the European Investment Fund as examples, which have a long timeline from when they first meet you to when they make an investment. Most investors leave it until much later to engage these institutions, Farhan said, but these should be the first on the list because they take the longest to activate. “These are things that people just aren’t aware of here in the U.K.,” Farhan added.

 

Choosing the right VC structure

Tom shared that they had to go through a trial-and-error process to get their fund structure right. Before SyndicateRoom was a fund, they were a platform first and foremost, and their underlying asset was letting individual investors make small investments into companies.

So when SyndicateRoom decided to pivot to being a fund, one of the considerations was how they could build a large number of LPs without a GP. With that question in mind, their fund allowed people to invest from 5,000 pounds, about one fourth or one fifth the minimum of a typical UK fund, and they had 300 individuals invest immediately.

The other thing Tom shared they took into consideration when setting their fund structure up was the deployment structure. Tom shared: “For most of the people that were investing in the U.K. at our level, we were doing it for a tax relief incentive, which was done on an annual basis.”

“So to continue to accommodate what they wanted as investors, we set about to do annual deployments of our fund in a completely evergreen structure. To an effect, anyone who comes into the fund is putting money in. Fourteen days later, once they’ve cleared down and done all the AML and KYC stuff, their money starts to get deployed into fresh deals,” Tom shared.

And with their structure, there is no pro-rata. Investors are effectively getting their own “mini-fund” within SyndicateRoom’s wider fund vehicle. And they’re also not getting companies that the fund has already invested in.

“We looked at things like funds structure, the fees that we charged, carry that we charged, deployment, annual versus three-year versus five-year, and all the different other metrics that we could tweak to differentiate us from a traditional two-and-20 fund,” and that’s how they got their fund structure down, Tom shared.

 

Tom Britton is the Co-Founder of SyndicateRoom, a fintech company that started as an online investment platform connecting individuals to angel investments and eventually pivoted to becoming a fund, co-investing with angels who were outperforming the entire market.

Farhan Lalji is the Principal at the Anthemis Group, one of the most prolific FinTech investors, for Investment – Venture Partnerships. Anthemis has made over 100 FinTech-focused investments across the U.S. and Europe, including in companies like Betterment, Happy Money, and Currency Cloud.

Want to network with veteran investors with skin in the game? Let us know, we want to hear from you! Feel free to contact us using the form below or reach out to us.

“I was talking with a VC recently about a ‘deal gone wrong’. They had agreed to a term sheet, and the VC digitally signed it. They waited a day or two but hadn’t heard anything. Apparently, the entrepreneur had some other interest, signed a different term sheet with another firm, and the round essentially got filled out without the VC knowing.”

Misunderstandings with term sheets seem to be a common occurrence among VCs and startup founders. And when that happens, one party typically backs out of a deal resulting in a missed opportunity, and sometimes even bad blood.

During a special DiffuseTap event, we were joined by Lance Dietz, Principal at KB partners, and Drew Whiting, Senior Counsel at Michael Best & Friedrich, who shared their own term sheet terror tales from both sides of the table. DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). If you’re interested in making new friends from our VC ecosystem, feel free to contact us.

Horror stories and deals gone wrong

Poor handling of term sheets is often the reason why parties back out of a deal, and misunderstandings are commonly at the crux of it. Drew, who has been counselling companies for almost a decade, shared one story from his own experience:

“We had one deal with a VC out in California that was quick with a term sheet on their existing lead, and they were coming in to lead the next round. And after the term sheet was fully negotiated – it’s out via DocuSign – the VC was re-trading some major terms at the 11th hour, claiming they didn’t know about certain things, when they had a representative on the board of directors. It just created some bad blood with the company, and ultimately the person that was handling that for the VC ended up getting some blowback internally on their side, because of the optics of how that went down.”

The same thing happens on the founder’s side, as well. More often than not, first-time entrepreneurs might find it difficult to fully understand the nuances in a term sheet, especially when they are not able to have an honest discussion with the VCs that are courting them. This often leads them to sign it haphazardly, only for grave misunderstandings to surface later on.

“Those are problematic situations and can burn bridges that you don’t want to burn,” Drew said.

What NOT to get wrong in a term sheet

With that in mind, what is the most important part to get right in dealing with a term sheet? Lance answered with a good example:

“Once, we had a situation in which, after a fantastic few weeks of getting to know a startup and the founding team, we issued a term sheet to the company. The founders were really excited, as were we, and quickly agreed to the deal verbally, probably without having fully understood the entirety of the term sheet. I think there was some miscommunication/misunderstanding regarding certain terms, even though both sides were excited about working together. The deal lost momentum, unfortunately, and we weren’t able to finalize it. Both parties were disappointed but also respected the needs/priorities of the other in trying to get a deal done.”

Thus, Lance explained that the most important part is making sure that both parties have a clear understanding of what they’re agreeing to. Potentially walking through various parts of the term sheet, discussing the economic and control items (and the rationale for those), could be helpful. Using advisors and counsel to get feedback on the term sheet in a timely manner is also worthwhile.

“Being open, clear, and communicative is the best practice, and realizing that you’re looking for the best partnership, not necessarily just the highest valuation. How VCs and founders think about managing that relationship starts before and during term sheet talks/negotiations, in my opinion.” Lance shared.

What causes a misunderstanding

Company founders have all the resources in the world available to them to learn about term sheets and yet, misunderstandings are still very common. Why is that?

Two reasons come to mind, according to Drew. One is that typically, founders that are extremely passionate and competent in their subject area want to leave the parts that are outside of their purview to others. And when they don’t get help before they sign a term sheet, it becomes a problem.

Another reason for this comes from a psychological standpoint. Drew argues that from what he’s seen, entrepreneurs sometimes have a tendency to avoid asking about parts they’re unsure of and avoid having those difficult discussions in fear of being judged.

“I think some of the reasons for why people do that are psychological. It’s avoidance anxiety, they don’t want to sound stupid. They’re afraid that if they ask a question about something, it might look like they don’t know what they’re doing. And they may not have people around them that are giving them good advice as well, that could be it also. At the very early stages you see a lot of that,” Drew explained.

Drew Whiting is a Senior Counsel at Michael Best & Friedrich, where he advises high-potential venture-backed companies and the angels, family offices, and funds behind them. Lance Dietz is a VC Principal at KB Partners, a Chicago-based venture firm that invests in passionate innovators at the intersection of sports and technology.

Diversity is a hot topic these days. Especially within the VC community. The long-standing struggles of minority entrepreneurs persist, even as the call for heterogeneity and inclusivity everywhere has grown louder in light of current events.

In our recent DiffuseTap event, we sat with Nora Peterson, co-founder of Halo Incubator (an accelerator for women-backed early stage companies) and Mackeever (Mac) Conwell, Deal Team Coordinator at Tedco (the investment arm for the State of Maryland). Both staunch advocates of diversity in entrepreneurship, they shared with the session participants the steps that they’ve taken to promote it in VC.

DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). Feel free to ask for an invite, using the form at the end of this page or simply email us at contact@diffuse.vc.

How do you define diversity?

All of us by now might be familiar with the word “diversity”. More than a mere metric or checkbox that founders are obliged to tick, it is beyond just having a target number of minority people within a group. Mac Conwell shared his take on diversity:

“‘Diversity’ itself means everybody. Very often, people like to use the term when they’re just talking about their own affinity group, on the one group that they’re trumpeting for. But when we talk about diversity, it’s not just people of colour. It’s not just women. It’s not just indigenous founders. It’s not immigrants or international founders or people disabled, or white. It’s everybody,” Mac explained.

Nora Peterson added that inclusion is the other half of the equation that makes a well-diversified team. “I’ve read this somewhere, which I’ve written down. Diversity is being invited to the party, and inclusion is being glad you’re there. And I think just as in everything, whether VCs, whether an accelerator or corporations, diversity matters,” she said.

Founders not only need to have a culturally diverse organization; they also have to make sure everyone feels welcome. “Just because you’re meeting these quotas or these numbers, it doesn’t really mean anything unless people feel welcome and that they’re glad that they’re part of something and not just a metric,” Nora argued.

What are the advantages of having a diverse organization? 

The benefits of a diversified organization might not seem obvious at first, but recent studies show that organizations actively seeking diversity are producing better outcomes than the ones that do not.

Nora weighed in on this revelation, highlighting that, on the companies’ side, hiring people from different backgrounds forces founders to think differently. It allows them to tap into a lot of talent that they wouldn’t have otherwise discovered.

“Recruitment and retention are key. Startups, for example, if you have an all-white male on a team – which is a lot of companies especially in certain industries – it’s understandable. But early on, if they’re not able to hire and build a diverse team, it becomes really difficult to attract minorities and women to join the company, and they’re just missing out on so much talent.”

Another reason for founders to build a diverse team is that investors are more likely to become attracted to companies that have a diversified team. Mac, having helped the State of Maryland make investment decisions with startups, recalled from his own experience:

“As an investor, we are all intellectually curious, and we’re always looking for a competitive edge and learning about new markets. The amount of wealth you can learn from an entrepreneur who’s from Portugal, or Germany, or rural Middle America is immense. You will learn about new markets and about elements that you’ve never considered […] Founders are paying attention to that, and that’s going to become a thing,” said Mac.

What challenges are there for minority entrepreneurs?

Minority entrepreneurs have to hurdle a lot of barriers to raise capital. Mac remembered an extraordinary story of how a Black woman he knew funded her business by becoming a surrogate mother. “She’s a single Black mother here in Baltimore. She’s got an engineering degree from Oregon State, my alma mater, and a Master’s from Johns Hopkins. Really smart woman.

“When I met her three years ago, she told me she had an idea for an all-new beauty product. It’s a physical product in the beauty space [that was] really innovative. I thought it was really unique, I had never heard an idea like that. When I looked into the market, it was a $5 billion market that has not had that innovation in 60 years. Something amazing.

“I made every introduction I could for the woman and nobody cared because she was too early. So she came up with a small prototype of an off-the-shelf product and reconfigured it to show that her idea could work. Still, nobody cared. So what did she do? She called me a year ago and told me she became a surrogate mother so she could get the money to build her prototype.

“That’s the life that she had to go through, just to get to the point to start building a prototype. And the amount of money she got from her surrogacy, it’s not enough to get the full prototype done; it’s just enough to get started.”

Coming from a disadvantaged background, they typically don’t have family or friends with that kind of money to invest, and it may take years to get a decent-sized capital to start with. And so sometimes they have to resort to rather creative means to raise funds, as this case clearly illustrates.

How do you promote diversity?

When asked how they factor diversity into their investments, Mac and Nora had different takes. Back at his own minority-focused fund, RareBreed VC, Mac said he doesn’t look for people from any specific ethnicity or cultural background. Rather, he looks for entrepreneurs who have great products but are “under-network”, or those that have access only to limited investment connections.

According to Mac, they do not necessarily look for people from different racial or cultural backgrounds. “I’m finding these hidden gem entrepreneurs that are typically overlooked, and give them access to that larger investment network – to a larger pool of customers and partners and such. I don’t have any designations for my funds or anything like that. But inherently, when you talk about entrepreneurs who are under-network, you’re going to go into communities that typically don’t get venture capital.”

This approach has led him to create a diverse pool of entrepreneurs without focusing on any specific demographic, thus, creating real diversity. “For our fund, we were about to deploy our first eight investments: three Black men, a Black woman, a Latin-mix gentleman, a young Asian man, two men from the Dominican Republic, and a white guy in New York. That’s how that worked out,” Mac recounted.

Nora’s incubator, on the other hand, focuses on creating equity in different industries by specifically seeking innovative women entrepreneurs. Halo Incubator wants early stage women founders to have the right resources, including access to knowledge on funding.

“Our core focus is just helping this minority group within the entrepreneurship ecosystem. Our requirement is one woman on the founding team, in order to be considered into our accelerator program. But we also look at diversity within industries. We’re industry-agnostic, but we like to have a diverse portfolio of companies. We like to see Black and Latina founders, for example, represented. So we do look at that, but women are definitely in a niche spot where we’re focused on.”

 

Mckeever Conwell is the Deal Team Coordinator at Tedco, where his primary role is to help the state of Maryland decide which startups to invest in. Nora Peterson is the Co-Founder of Halo Incubator, which focuses on building women-led early stage companies.

Are you an under-network or minority entrepreneur? Maybe we can help! Leave us a note below and let’s have a chat soon!

Venture capital and corporate venture capital operate very similarly, except that CVCs have only one LP and strive to create value in a manner that fits with their corporate strategy. Thus, it begs the question: Does this actually make a difference for startups?

In our latest DiffuseTap session, we took a deep dive into this curious VC-CVC dynamic with two investors from the corporate side: Serhat Cicekoglu, Founder of Sente Foundry, and Jay Bunte, M&A and VC manager at Ingredion.

DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). If you want to make new friends from our VC ecosystem, feel free to contact us.

 

What’s the difference?

When it comes to structural differences, the obvious distinction again is CVCs have only one LP. This means that their decision-making process caters to industry-specific objectives, with respect to their corporate strategy. Jay explains the mechanics behind this process from his side:

“From a structuring perspective, I don’t think there’s much of a difference between a VC and a CVC. I think the meaningful differences lie in the purpose of the fund. Obviously both VCs and CVCs aim to create value, however, the way in which value is created can differ. For instance, there’s likely not a VC out there with the same investment thesis that we at Ingredion maintain for our venturing efforts, which is much more focused on our corporate strategy. I think that’s a key difference.”

Another key difference is the time frame in which they operate with their startups. Jay shares that while VCs usually have an hourglass timer to their investments, deals with CVCs offer a little more flexibility:

“Another difference is the investment time horizon. Our investments have the ability to be evergreen, whereas some VCs are limited from their LPs seven to 10 years, or what have you.”

 

How to leverage a CVC relationship

Having CVC support can give a startup several benefits, one of which is wider sales reach, Serhat says. Corporate investors typically have a wider network compared to VCs, therefore startups in their portfolio have access to a wider range of potential customers. Serhat says this is the biggest advantage to working with a CVC:

“Being capital efficient in the sales process is obviously extremely important, especially during these times. One of the biggest advantages to having a CVC backing is that startups can be introduced to more potential customers because corporate investors typically have a wider network.”

Not only that, but there are other non-monetary ways CVCs can provide support to startups with their wider network, according to Serhat.

“In some cases, CVCs are also able to provide engineers or experts to solve some of their problems, like in logistics, marketing, etc. Sometimes these weigh much more than financial resources, so in my view, this is one of the most important ways that corporate venture funds can create value for their portfolio startups.”

 

“Dumb money” and why it happens

VCs and CVCs can collaborate to optimise the process of growing a startup. However, not having clear objectives in the decision-making process can lead to waste, which is a common narrative among corporates. They gave it the name “dumb money,” and Jay explains how it happens:

“You hear that term ‘dumb money’ in reference to corporate venturing. It does make me chuckle, but I also think it serves as a reminder of the importance of having a solid investment thesis and clear investment objectives, which I don’t think all CVCs have. When corporates are not aligned internally on their objectives, their structure, and on their governance, I think that term “dumb money” can be well earned.”

To avoid that from happening, VCs and CVCs should have a tight working relationship with their startups, Serhat argues:

“There’s possibly an enormous amount of inefficiency in creating a working environment between corporates, VCs, and startups. But I’m a firm believer that there’s an efficient way to create a process for all these parties to work together, the results would be more beneficial for everyone involved. What the corporates have as capabilities are well beyond financial resources that VCs don’t have, and I think that’s why figuring out a way to complement each other is really important.”

 

Want to get connected to CVCs looking for startups like you? Leave a message below and let’s have a chat.

Serhat Cicekoglu is Founder of the Sente Foundry, a Chicago-based startup investment platform that brings startups, investors, corporations, and public institutions together to scale innovative ideas from around the globe.

Jay Bunte leads the corporate venturing efforts at Ingredion, a Fortune 500 B2B company that provides ingredient solutions to the Nestles, Modeles, and Coca Colas of the world. Ingredion’s VC arm focuses on funding innovators within the alternative proteins and sugar reduction space.

Often deemed synonymous with incubators and accelerators, venture studios help early stage startup companies develop their ideas into worthwhile investments. This kind of support goes beyond monetary funding and into other foundational business elements in getting to a launch.

During our latest DiffuseTap session, we had the chance to explore these different models with two front runners within the venture studio space: Amanda Joseph, VC Investor at Founder Equity, and Kevin Lindbergh, Managing Director, Operations at the Northwestern Mutual Venture Studio.

DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). If you want to make new friends from our VC ecosystem, email us at contact@diffuse.vc.

 

What is a Venture Studio?

Rarely will you meet two venture studios with the exact same model. Some look for founders with skeletal ideas, while others provide a founder with a complete business plan to execute.

According to Kevin, Northwestern Mutual’s venture studio looks for entrepreneurs who are very early in the game and could greatly benefit from the studio’s resources.

We work with external entrepreneurs, and try to bring them in very, very early. Basically when they’re at the idea stage. We then work with them through the process of shaping the idea, running the customer discovery process, and then ultimately building the business, before helping them raise funding to spin it out of the program.

Northwestern Mutual model provides considerable support to its founders, Kevin shared. In addition to covering startup costs, the founder is given a team who will provide expertise around product development, software engineering, go-to-market, and other operational needs. In exchange for this support, Northwestern Mutual is treated as a co-founder on the cap table, being allocated 30% common ownership prior to the seed round.

As part of our model, we cover a lot of the costs of the program. We provide the founder a stipend so they can focus on the new venture. We also fund the demand generation experiments, the MVP creation, and other costs prior to spin out.

Amanda’s at Founder Equity revealed a different approach. Her team does not come on board as co-founders, but rather preps early entrepreneurs to get ready for their seed round.

We have three pieces to our platform: We’ve got our fund side, we’ve got a product and advisory firm, and then a venture studio. In our venture studio, we work with entrepreneurs who are too early for our fund. We call them pre-seed. What we do is we partner with them but not necessarily as co-founders. We give them a dollar allocation and we help them build their product for market within a 12 to 18 month period, allowing them to leverage all the resources that we have in-house. Basically, we’re preparing these companies to get to that next seed stage of investment, and most importantly, we’re teeing them up for other seed stage investors.

 

Accelerators, Incubators, and Venture Studios: Is There a Difference?

Incubators, accelerators, and venture studios are usually lumped together, but they are distinctly different. According to Amanda, one of the main distinctions is that incubators do not always act as investors, but merely help companies innovate their disruptive ideas. Amanda explained:

When I’ve worked with incubators, they’re generally these ecosystems for startups to help them grow. They’re not always investors in the company, but they provide other resources, mostly in programming, to help startups succeed. it’s a little different than with our venture studio, where we’re taking direct investment in the company. We’re providing the actual resources to actually build it.

Kevin added that accelerators are typically shorter term, meaning they work with startups on a certain time frame.

For our program, we make a longer bet in our founders. This lets us wend and wind our way up to the point where we can get them out the door with something that’s venture fundable and scalable, compared to accelerators, where it’s more of a 10-week boot camp. Working with venture studios is more of a long-term process by which we want to work together with a founder to get to a launch.

Because the Venture Studio landscape is as varied as it gets, VCs have to choose a structure that suits their investment style, risk appetite, and resources. Meanwhile, founders have to find the studio that caters to their funding stage, support requirements and industry focus.

 

What Do Venture Studios Look for in a Startup?

So what’s the secret sauce that Kevin and Amanda look for in startups?

For Kevin, oftentimes, it’s more about the founder than what they’re trying to build:

The model is really focused on the founder. As we’re recruiting and bringing people in, the criteria is 80 percent on who the founder is and 20 percent of whatever their idea is. Knowing that the initial idea will likely pivot several times, we’re looking for the archetype founder. Maybe they’ve been a successful CEO and had an exit or have been an early senior leader in a company that grew rapidly. Somebody that has that kind of experience.

For Amanda, however, it’s equal parts founder capacity and market feasibility:

We have not worked with an entrepreneur that just had an idea. We typically find out whether there is some need for it in the market. As an example, right now we’re working with a company that is a marketplace connecting designers and suppliers. When this founder came to us, she already had an MVP that already had some traction, and she was able to demonstrate that there was a need. Those are the kind of startups we look for. The ones we want to take to the next level.

Ultimately, venture studios present a viable solution for startup founders still trying to find their edge. Not only will studios be invaluable in polishing ideas for market readiness; just as importantly, they can also help startups attract other seed stage investors. If you’re a new entrepreneur looking to land a deal with a reputable venture studio, let’s have a chat.

 

Amanda Joseph works with the fund and venture studio arm of Founder Equity, a Chicago and Dallas-based early stage venture fund that makes seed stage investments ranging from 500 to a million dollars across a wide variety of sectors in technology companies.

Kevin Lindbergh leads the day-to-day operations at the Northwestern Mutual Venture Studio, a Wisconsin-based financial services company that co-founds FinTech and Health & Wellness startups, helping them with ideation, discovery, validation, launch, and funding opportunities.