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Some thoughts on the future of startup investing. 2020 changed everyone's workflow including investors'.
And I think a lot of those changes will be here to stay even post-pandemic.
Thoughts here >>
And I think a lot of those changes will be here to stay even post-pandemic.
Thoughts here >>
1) First some background.
When we started @HustleFundVC, we decided to:
-do all investing via Zoom (heck, I haven't even met most of my portfolio founders in person...EVER)
-take cold-emails / cold-applications on our website and read EVERY one of them
-run our programs online
When we started @HustleFundVC, we decided to:
-do all investing via Zoom (heck, I haven't even met most of my portfolio founders in person...EVER)
-take cold-emails / cold-applications on our website and read EVERY one of them
-run our programs online
2) We made that decision only 3 yrs ago and EVERYONE thought we were nuts. (maybe we are nuts in other ways...)
The pandemic hit last year and that has forced every investor to do all of those things...even if ppl were adamantly against them before.
The pandemic hit last year and that has forced every investor to do all of those things...even if ppl were adamantly against them before.
3) Once you get used to doing all of these things, there's no way investors go back to the old way. Remote is cheaper and faster.
4) And that's good for biz. Most ppl don't think about how the investor biz works, but it's pretty similar to any other biz. Investors have CAC (cost of acq costs) and LTV (lifetime value) too!
Let's take CAC - how do you get dealflow? There's a cost.
Let's take CAC - how do you get dealflow? There's a cost.
5) That cost before was doing dinners / coffees w/ potential referrers. Hopping on planes to go to conf and meet w/ ppl. Pre-COVID, VCs' CAC was mostly in-person interactions. In-person interactions are EXPENSIVE!
Some of that will come back.
Some of that will come back.
6) But the right way to think about CAC is very much akin to a B2B biz. B2B cos don't run all around town mtg ppl in person. They do lead gen online. They speak at conf sometimes. Throw dinners sometimes for VIPs. Etc.
B2B cos do "triaged CAC" and have cheaper cust acq channels
B2B cos do "triaged CAC" and have cheaper cust acq channels
7) But CAC as a num in itself is irrelevant. What's impt is to weigh it against LTV. If you're Sequoia and you make billions on Airbnb and Doordash, who cares about a $50k dinner? It doesn't matter.
8) So who does CAC matter to? At first, it will be the investors w/ smaller pockets. Angels. Microfunds. Emerging managers.
They can afford to spend less to "acquire a winner" as dealflow.
They can afford to spend less to "acquire a winner" as dealflow.
9) That said, a few yrs ago, even if you had small change, there were so few investors around that CAC was cheap.
All startups would just come to you if you were the only investor in town. Angels could twiddle their thumbs and think about decisions for months.
All startups would just come to you if you were the only investor in town. Angels could twiddle their thumbs and think about decisions for months.
10) All of a sudden, we have a SURGE of aspiring VCs and angels. (which is great!) It will force everyone to compete.
This started around 2018 or so in SF. Valuations started rising. (Valuations are a function of supply and demand -- supply of rounds and demand of investors.)
This started around 2018 or so in SF. Valuations started rising. (Valuations are a function of supply and demand -- supply of rounds and demand of investors.)
11) But it was largely contained to the SF Bay Area, because ppl were still investing mostly locally.
Post-pandemic, everyone is used to investing online. Investors don't care where you are. They are going to start looking broadly.
Post-pandemic, everyone is used to investing online. Investors don't care where you are. They are going to start looking broadly.
12) This means that investors who can keep their CAC low (i.e. online marketing, cheaper acquisitions channels) will do well in the long run.
If you were the sole investor in your town, you no longer have the luxury of everyone eventually coming to you.
If you were the sole investor in your town, you no longer have the luxury of everyone eventually coming to you.
13) This is GREAT! As a former entrepreneur who has lived in a couple of towns with fewer investors, this accountability / pressure is fantastic for ecosystems.
14) Further yet, you now have angel-entrepreneurs raising syndicates and funds. ( @shl is a great example) who can put more money to work AND these ppl know how to do online mkt backwards and fwds.
Every seed VC will need to learn how to do online mkt if they don't already know.
Every seed VC will need to learn how to do online mkt if they don't already know.
15) This will start to affect the later stages and it's starting.
I'm seeing later stage deals (beyond seed) just comprised of entrepreneur-angels.
I personally just committed to an angel investment in a series B -- the whole round is angels. Notion is a poster child of this.
I'm seeing later stage deals (beyond seed) just comprised of entrepreneur-angels.
I personally just committed to an angel investment in a series B -- the whole round is angels. Notion is a poster child of this.
16) So if you don't already have a brand like a Sequoia, eventually the later stage funds will also have to do their own online mktg.
17) You can see how eventually this trickles all the way down to the funders of funds even.
But there is one thing that stops all of this from happening.
SEC regulations on 1) the # of investors you can have + 2) accreditation laws
But there is one thing that stops all of this from happening.
SEC regulations on 1) the # of investors you can have + 2) accreditation laws
18) If you truly have a free market, just like how technology has made a lot of things open and accessible, naturally, funding would follow suit. Competition would be good for ppl.
But it's not an open mkt. There are limits on the # of investors (& who) in a co AND in a fund.
But it's not an open mkt. There are limits on the # of investors (& who) in a co AND in a fund.
19) Later stage investors who deploy large checks are largely shielded by these rules. For ex, you cannot crowdfund $10m. That's just not allowed.
You cannot have 2m ppl in your series B round.
You cannot have 2m ppl in your series B round.
20) These rules are starting to change a bit & a lot of credit goes to @AngelList and @joinrepublic (and frankly @naval who is the leader behind all of this).
And once these rules change more, you're going to see a lot of change in funders in a way we haven't seen for decades.
And once these rules change more, you're going to see a lot of change in funders in a way we haven't seen for decades.