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Resources related to raising capital from investors for startups and VC firms.
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Carried Interest in Venture Capital: What It Is and How It Works
Carried interest is a fundamental concept in venture capital (VC) that plays a pivotal role in shaping the financial rewards for venture capitalists. This financial term, often shrouded in complexity, directly influences the profits venture capitalists receive from successful investments. As founders navigating the intricate world of VC funding, understanding carried interest is crucial not only for grasping how VCs are compensated but also for appreciating the motivations behind their investment decisions. This article demystifies carried interest, detailing what it is, its importance, how it functions within a venture capital framework, and its implications for both fund managers and investors. By unpacking the intricacies of carried interest, founders can better position themselves to partner with venture capitalists, aligning interests towards mutual success. Related resource: How to Find Venture Capital to Fund Your Startup: 5 Methods What is Carried Interest? Carried interest, in the realm of venture capital, refers to the share of profits that general partners (GPs) of a venture capital fund receive as compensation, beyond the return of their initial investments. This form of income is contingent upon the fund achieving a return on its investments above a specified threshold, incentivizing GPs to maximize fund performance. Typically, carried interest amounts to about 20% of the fund's profits, with the remaining 80% distributed among the limited partners (LPs), who are the primary investors in the fund. Why Carried Interest is Important Carried interest is a critical component of the venture capital ecosystem for several reasons. It aligns the interests of GPs with those of the LPs, ensuring that fund managers are motivated to seek out and support businesses with high growth potential. Additionally, it serves as a reward mechanism for GPs, compensating them for the risk and effort involved in managing the fund and guiding the companies in their portfolio to success. How Does Carried Interest Work? Venture capital thrives on the principle of aligned interests, with carried interest at its core serving as the linchpin for this alignment. In this section, we’ll cover how carried interest functions, from incentivizing fund managers to maximizing investment returns- cementing the foundation for understanding its critical role in venture capital's operational and strategic framework. Fund Structure and Contributions Venture capital funds operate as partnerships between Limited Partners (LPs) and General Partners (GPs). LPs, including institutions like pension funds and high-net-worth individuals, provide most of the capital but are not involved in day-to-day management, limiting their liability to their investment amount​​​​. GPs manage the fund, making investment decisions and actively advising portfolio companies, with their income primarily derived from management fees (typically 2%) and carried interest (about 20% of the fund's profits), aligning their financial incentives with the success of the fund​​​​. The structure, usually a limited partnership in the U.S., offers tax benefits through pass-through taxation, allowing profits to be taxed once at the partner level, and establishes a clear separation of operational roles and financial responsibilities between LPs and GPs​​. This model ensures a strategic alignment of interests, with GPs using their expertise to grow the investments and generate returns, acknowledging the inherent high-risk, high-reward nature of venture capital investing​​. Related resource: A Quick Overview on VC Fund Structure Management Fees Management fees in venture capital funds are structured to cover the operational and administrative costs of managing the fund. These fees are typically calculated as a percentage of the fund's committed capital, ranging from 1% to 2.5%, and are charged annually to the fund's limited partners (LPs). The exact percentage can vary based on several factors including the size of the fund, the investment strategy, the fund's performance, and market norms. For instance, a fund with $100 million in committed capital charging a 2% management fee would incur a $2 million annual fee​​. The primary purpose of management fees is to cover day-to-day operational costs such as salaries, office rent, legal and accounting services, due diligence costs, and other expenses associated with running the VC firm. This ensures that venture capital firms can continue to provide investment opportunities and support to their portfolio companies without compromising on the quality of management and oversight​​. Management fees are an important consideration for both venture capital firms and their investors as they directly impact the net returns of the fund. While these fees are essential for the operation of venture capital firms, it's important for LPs to understand how they are structured and the factors that influence their calculation to ensure transparency and alignment of interests​​​​. Profit Wharing: The 'carry' Carried interest, or "carry," is a profit-sharing mechanism in venture capital funds, allowing fund managers (GPs) to receive a portion of the fund's profits, aligning their interests with the investors' (LPs). Typically, GPs earn carry after returning the initial capital to LPs, with a common share being around 20%, although this can vary from 15% to 30% based on market conditions and the fund's performance​​​​. Carry is distributed after certain conditions are met, such as the return of initial investments and possibly achieving a hurdle rate. The distribution models include European-style, focusing on overall fund performance, and American-style, based on individual investment performance. The taxation of carried interest at capital gains rates, lower than ordinary income rates, has been debated as a potential "loophole"​​. Hurdle Rate The hurdle rate is essentially a benchmark return that the fund must achieve before the fund managers (GPs) can start receiving their share of carried interest, which is a percentage of the fund's profits. This rate serves as a minimum acceptable return for investors (LPs) and ensures that GPs are rewarded only after generating sufficient returns on investments​​. There are two primary types of hurdle rates: hard and soft. A hard hurdle implies that the manager earns carried interest only on the returns exceeding the hurdle rate. In contrast, a soft hurdle allows the manager to earn carried interest on all returns once the hurdle rate is met, including those below the hurdle​​. The purpose of establishing a hurdle rate is to align the interests of fund managers with those of the investors, ensuring that fund managers are incentivized to achieve higher returns. The actual percentage of the hurdle rate can vary but is often related to a risk-free rate of return or a predetermined fixed rate. This mechanism ensures that fund managers focus on exceeding specific performance targets before benefiting from the fund's success​​​​. In the context of venture capital, the typical hurdle rate is around 7-8%, benchmarked against returns from less risky asset classes like public stocks. This reflects the expectation that investors locking their money in a VC fund for an extended period should achieve annual returns exceeding those of more liquid and less risky investments​​. Understanding the hurdle rate and its implications is crucial for founders considering venture capital funding, as it impacts how and when fund managers are compensated, ultimately affecting the fund's investment strategy and focus. Distribution Waterfall The distribution waterfall process in VC funds is a structured method to allocate capital gains among the participants of the fund, primarily the LPs and the GP. This process ensures that profits are distributed in a sequence that aligns the interests of both LPs and GPs, establishing fairness and transparency in the profit-sharing mechanism. Understanding the distribution waterfall is crucial for founders as it impacts how VCs are incentivized and how profits from successful investments are shared. This knowledge can be particularly beneficial when negotiating terms or evaluating potential VC partners. The waterfall structure typically follows a hierarchical sequence with multiple tiers: Return of Capital: This initial tier ensures that LPs first receive back their initial capital contributions to the fund. Preferred Return: After the return of capital, LPs are entitled to a preferred return on their investment, which is a predetermined rate signifying the minimum acceptable return before any carried interest is paid to the GP. Catch-up: This tier allows the GP to receive a significant portion of the profits until they "catch up" to a specific percentage of the total profits, ensuring they are adequately compensated for their management and performance. Carried Interest: In the final tier, the remaining profits are split between the LPs and the GP, typically following an 80/20 split, where 80% of the profits go to the LPs and 20% as carried interest to the GP. This tier rewards the GP for surpassing the preferred return threshold and generating additional profits. The distribution waterfall can adopt either a European (whole fund) or American (deal-by-deal) structure. The European model favors LPs by requiring the return of their initial investment and preferred returns before the GP can receive carried interest, enhancing long-term investment returns motivation. In contrast, the American model allows GPs to receive carried interest on a per-deal basis, potentially enabling them to realize gains more frequently but also includes mechanisms like clawback clauses to protect LP interests if overall fund performance does not meet expectations. Long-term Incentive Carried interest aligns fund managers' (GPs') interests with investors' (LPs') by linking GP compensation to the fund's long-term success. It rewards GPs with a portion of the profits only after meeting predefined benchmarks, such as returning initial capital to LPs and achieving a hurdle rate. This ensures GPs are committed to selecting investments and supporting them to maximize returns over the fund's life, often spanning several years. For founders, this means VC firms are incentivized to contribute to their company's growth and success genuinely, reflecting a partnership approach aimed at mutual long-term gains. Understanding Clawbacks and Vesting Clawbacks and vesting are key elements tied to carried interest in venture capital, designed to align the interests of fund managers (GPs) with the fund's long-term success and the investors' (LPs') expectations. Clawbacks act as a financial safeguard for investors. Imagine a scenario where a sports team pays a bonus to its coach based on mid-season performance, only for the team to finish the season at the bottom of the league. Similarly, clawbacks allow LPs to reclaim part of the carried interest paid to GPs if the fund doesn't meet overall performance benchmarks. This ensures GPs are rewarded for the fund's actual success, not just early wins. Vesting in the context of carried interest is akin to a gardener planting a tree and waiting for it to bear fruit. Just as the gardener can't harvest immediately, GPs earn their carried interest over time or upon meeting certain milestones. This gradual earning process keeps GPs motivated to nurture the fund's investments throughout its lifecycle, ensuring their goals align with generating lasting value for LPs. Together, clawbacks and vesting weave a tapestry of accountability and commitment in the venture capital ecosystem. They ensure that the journey to financial reward for GPs mirrors the fund's trajectory towards success, fostering a harmonious alignment of objectives between GPs and LPs in cultivating prosperous ventures. Carried Interest Calculation Calculating carried interest involves determining the share of profits that general partners (GPs) in a venture capital or private equity fund receive from the investments' returns. Here's a simplified process to understand how carried interest is calculated, keeping in mind that actual calculations can get more complex based on the fund agreement: Determine the Profit: Start with the total returns generated from the fund's investments after selling them, then subtract the original capital invested by the limited partners (LPs). This figure represents the profit. Profit = Total Returns - Initial Capital Apply the Hurdle Rate (if applicable): Before calculating carried interest, ensure that the returns have met any specified hurdle rate or preferred return rate. This rate is the minimum return that must be provided to LPs before GPs can receive their carried interest. Calculate Carried Interest: Once the profit is determined and any preferred return obligations are met, apply the carried interest rate to the profit. This rate is usually agreed upon in the fund's formation documents and is typically around 20%. Carried Interest = Profit x Carried Interest Rate For example, if a fund generates $100 million in returns with $80 million of initial capital, the profit is $20 million. If the carried interest rate is 20%, the GPs would receive $4 million as carried interest. Example Calculation: $20 million (Profit) x 20% (Carried Interest Rate) = $4 million (Carried Interest) Remember, this is a basic overview. The actual calculation may include additional factors like catch-up clauses, tiered distribution structures, and specific terms related to the return of capital. Fund agreements often detail these calculations, reflecting the negotiated terms between GPs and LPs. Tax Implications for Carried Interest Carried interest is taxed under the capital gains tax regime, which typically offers lower rates compared to ordinary income taxes. This tax treatment applies because carried interest is considered a return on investment for the GP of a VC or private equity fund, which receives this compensation after achieving a profit on the fund's investments. To qualify for long-term capital gains tax rates, the assets generating the carried interest must be held for a minimum of three years. This structure is sometimes debated for its fairness, with some viewing it as an advantageous "loophole" for high-income investment managers, allowing them to pay taxes at a lower rate compared to ordinary income rates​​​​. Unlock Venture Capital Opportunities with Visible Navigating the venture capital landscape can be a complex journey, but understanding the nuances of carried interest demystifies a crucial aspect of VC funding. This knowledge not only enlightens founders on how venture capitalists are rewarded but also sheds light on the motivations driving their investment choices. Through this exploration, we've delved into the essence of carried interest, from its foundational role in aligning GP and LP interests to its implications on fund structure, management fees, profit sharing, and more. Armed with these insights, founders are better equipped to forge partnerships with VCs, ensuring a unified path to success. As you venture further into the intricacies of raising capital and managing investor relations, remember that tools like Visible can significantly streamline your efforts. Visible empowers you to effectively raise capital, maintain transparent communication with investors, and track important metrics and KPIs. With Visible, navigating the venture capital process becomes more manageable, allowing you to focus on growth and innovation. For more insights into your fundraising efforts, Visible is the go-to platform. Raise capital, update investors, and engage your team from a single platform. Try Visible free for 14 days. Related resource: 25 Limited Partners Backing Venture Capital Funds + What They Look For
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[Webinar Registration] VC Fund Performance Metrics to Share When it’s ‘Early’ with Preface Ventures
It’s common for venture firms to start raising their next fund in the last year of capital deployment, typically years 3-4 of a fund’s life. This poses a sort of chicken-and-egg problem because many of the common fund performance metrics that Limited Partners use to drive allocation decisions only become reliable, and therefore more meaningful, around year six (Source: Cambridge Associates). Farooq Abbasi, founder and General Partner of Preface Ventures, created a Seed Stage Enterprise VC Funding Napkin to help GPS think through alternative fund metrics that help communicate performance outside the traditional indicators that LPs use to measure success for more mature funds. The Seed Stage Enterprise VC Funding Napkin is inspired by Christoph Janz’s Saas Funding Napkin which helps answer, “which KPI's indicate a company is in a good position to raise another round of funding in this environment?”. This version created by Preface Ventures answers the question for fund managers, “What needs to be true about a seed-stage fund to raise another fund”? Join us next Tuesday, February 27th for a discussion with Farooq Abbasi from Preface Ventures about the fund performance metrics GPs should share when their current fund is still 'early'. Learn more and register for the webinar below. Webinar Topics The issue with ‘typical’ fund performance metrics for ‘early’ funds Overview of Preface Venture’s Seed Stage Enterprise VC Funding Napkin Deep dive into alternative early performance benchmarks How to keep track of alternative fund performance metrics How to leverage alternative fund performance indicators into your fundraising narrative Inside look into how Preface Ventures keeps LPs up to date Q&A About Preface Ventures Preface Ventures is a New York City-based firm started in 2020 led by Farooq Abbasi. Preface invests $500-$2M at the pre-seed and seed stage into startups who are building the Frontier Enterprise structure. Preface has 20 active positions in Fund II and 7 active positions in Fund III. (Learn more)
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Top Creator Economy Startups and the VCs That Fund Them
The creator economy is rapidly transforming the global economy, driving billions of dollars in value as it reshapes how content is created, distributed, and monetized. At the intersection of technology and creativity, startups within the creator economy are pioneering innovative platforms and tools that empower individuals to turn their passions into professions. This rapidly growing sector not only offers vast opportunities for creators but also attracts significant attention and investment from venture capitalists keen to support the next wave of digital innovation. What is the creator economy? In today's digital age, the "creator" embodies a broad and dynamic role, reflecting the vast opportunities for individual creativity and entrepreneurship online. A creator is anyone who produces content across various platforms to engage, entertain, or educate an audience, leveraging digital tools and social media to monetize their skills and passions. This definition spans from writers, artists, and musicians to influencers, vloggers, and podcasters, among others, who utilize platforms like YouTube, TikTok, Instagram, and Twitch to share their work and generate revenue through ad shares, sponsorships, merchandise sales, and more​​​​​​. The creator economy has democratized content production and distribution, enabling individuals to turn their passions into professions without the traditional barriers of entry like access to large capital or institutional gatekeepers. With just a smartphone and internet access, creators can reach a global audience, exemplified by individuals who have gained fame and financial success through platforms like TikTok and YouTube with minimal initial investment​​. In the evolving landscape of the creator economy, founders, content creators, and VCs are witnessing a dynamic shift towards diversified revenue streams beyond traditional brand partnerships. The spotlight has increasingly turned towards direct audience monetization strategies, including digital product sales, affiliate marketing, ad revenues, and brand deals. This shift underscores the importance for stakeholders in the creator economy to innovate and adapt. For creators, it's about embracing new technologies and platforms to engage with audiences and monetize their content effectively. For founders and VCs, the emphasis is on investing in and developing tools that support creators in these endeavors, recognizing the value of direct audience relationships and the growing independence of creators from traditional advertising models. It's not just about creating content but also about understanding the ecosystem's business models, audience engagement strategies, and monetization mechanisms. As the creator economy continues to evolve, staying informed and adaptable will be key to leveraging its potential for individual growth and investment opportunities. Related Resource: 18 Pitch Deck Examples for Any Startup Creator Economy Areas of Investment VCs are investing in tools to help influencers operate and monetize. Here are some examples of the areas of focus that we gathered from SignalFire’s Creator Economy Market Map. Related Resource: 14 Gaming and Esports Investors You Should Know Content Creation Tools Video Photography / Graphic Design Motion Photos Music Podcast Influencer Marketing Specialized Influencer Marketing Agencies. Influencer Marketing Platforms and Marketplaces: CRM Tools Patronage Platforms Ad Hoc Project-Based Funding Kickstarter, Indiegogo, and GoFundMe Subscription-Based Funding Patreon Tip Jar Concept Ko-fi and Buy Me a Coffee Other Opportunities Community Engagement Tools Finance Management Tools Top 8 VCs Actively Investing in the Creator Economy Venture capitalists play a crucial role in fueling the growth of the creator economy by providing the necessary capital and resources for startups to thrive. Here are eight leading VCs that are making significant investments in this sector: 1. SignalFire Location: San Francisco, California, United States About: SignalFire is a venture capital firm that invests in seed-stage companies and breakout companies. Investment Stages: Seed, Series A, Series B Popular Investments: OneSignal Ledger Investing Join Check out SignalFire’s Visible Connect Profile, to learn more! 2. Antler About: Antler is a global startup generator and early-stage VC that is building the next big wave of tech. With the mission to turn exceptional individuals into great founders, Antler aims to create thousands of companies globally. Thesis: We identify and invest in exceptional people Investment Stages: Pre-Seed, Seed Popular Investments: Mast Technologies Upflowy Appboxxo Check out Antler’s Visible Connect Profile, to learn more! 3. Harlem Capital Location: New York, United States About: Harlem Capital is an early-stage venture firm that invests in post-revenue tech-enabled startups, focused on minority and women founders. Thesis: Women or POC founders (no deep tech, bio, crypto, hardware) Investment Stages: Seed, Series A, Series B, Growth Popular Investments: Lami Gander The House of LR&C Check out Harlem Capital’s Visible Connect Profile, to learn more! 4. Night Ventures Location: Texas, United States Thesis: Our LPs are 50+ of the top creators in the world across YouTube, TikTok, Twitch and elsewhere. Together, we specialize in influence – understanding what’s popular, what’s trending and how to acquire more customers/fans of your product. Popular Investments: Moonpay Pearpop Beacons Check out Night Ventures’ Visible Connect Profile, to learn more! 5. Slow Ventures Location: San Francisco, California, United States About: Slow Ventures invests in companies central to the technology industry and those on the edges of science, society, and culture. Thesis: Slow Ventures invests in companies central to the technology industry and those on the edges of science, society, and culture. Investment Stages: Seed, Series A Popular Investments: Juice Stem Human Check out Slow Ventures’ Visible Connect Profile, to learn more! 6. Behind Genius Ventures (BGV) Location: Los Angeles, California, United States About: Behind Genius Ventures invests in pre-seed/seed stage companies centered around product-led growth. Co-Founded by two Gen Z investors: Joshua Schlisserman and Paige Doherty. Investment Stages: Pre-Seed, Seed Popular Investments: Decaf Impulse Maca Payments Check out BGV’s Visible Connect Profile, to learn more! 7. Crush Ventures Location: LA and NYC About: We formed Crush Ventures to focus on early stage investing at the intersection of media, culture, and commerce. To founders, we bring to bear our capital, operating expertise and powerful relationship network earned from two decades spent building Crush Music into a global powerhouse. Thesis: We invest in founders building the future of how talent will discover, engage, and monetize fans. Investment Stages: Pre-Seed, Seed RPopular Investments: Beacons Create O/S Splice Check out Crush Venture’s Visible Connect Profile, to learn more! 8. Freestyle Capital Location: California, United States About: Freestyle is an early-stage VC with $565M+ AUM & investments in 150+ tech co’s like Airtable, Intercom, Patreon, BetterUp and Snapdocs. Thesis: We are high-conviction, low-volume investors and invest in only 10-12 companies each year. This gives us the freedom to work closely with founders, and holistically support our companies. We typically lead Seed rounds with a $1.5M — $3M check. We make decisions efficiently and are 100% transparent with you along the way. We invest in founders building soon-to-be massive tech companies across many verticals. Investment Stages: Pre-Seed, Seed Popular Investments: Spot Change Grain Check out Freestyle’s Visible Connect Profile, to learn more! Top 8 Content Creation and Creator Economy Startups As venture capital continues to flow into the creator economy, numerous startups have emerged as leaders in facilitating content creation, distribution, and monetization. These companies are at the forefront of innovation, providing creators with the tools and platforms they need to succeed in a digital-first world. Related Resource: 7 Startup Growth Strategies 1. Caffeine Caffeine is a live-streaming platform that focuses on gaming, sports, and entertainment content. Founded by Ben Keighran and Sam Roberts, it went live in early 2018 and has quickly gained traction among users and creators alike. Caffeine distinguishes itself by emphasizing interactive and real-time engagement between broadcasters and their audiences, aiming to create a more dynamic and engaging experience than traditional broadcasting platforms. Location: Redwood City, California. Funding Rounds and Amount Raised: Caffeine has successfully raised significant funds through various rounds. In September 2018, it secured a $100 million investment from 21st Century Fox. As of 2019, the company had raised $146 million from investors across three rounds, including prominent names like 21st Century Fox, Andreessen Horowitz, and Greylock Partners​​. 2. Spotter Spotter is an innovative startup that has carved a unique niche within the creator economy, focusing on YouTube content creators. It offers a financial model that provides creators with upfront cash for licensing their existing or upcoming content. This approach is designed to assist creators in scaling their brands, funding ambitious projects, and growing their businesses more efficiently. Spotter’s model is likened to a venture capital investment but for the digital content creation space, aiming to secure a stake in the future success of these creators by investing in their content libraries​​​​​​. Location: Los Angeles, California. Funding Rounds and Amount Raised: A significant milestone was a $200 million Series D funding round led by SoftBank Vision Fund 2, part of a combined $755 million raised across this and other undisclosed rounds. This influx of capital has elevated Spotter's valuation to $1.7 billion. The company plans to invest $1 billion directly into its YouTuber partners to assist in their business growth. Spotter's total funding has reached $240.6 million, underscoring its robust financial backing and confidence from investors​​​​​​. 3. Jellysmack Jellysmack leverages machine-learning technology and data analytics to create and optimize video content for social media platforms. Founded in 2016, it aims to identify social video trends, optimize video performance, and uncover niche audience segments to build vibrant communities around content creators. Jellysmack is known for its innovative approach to the creator economy, helping creators amplify their reach and monetization across multiple platforms​​. Location: New York with additional offices in Los Angeles, Corte, Corsica, Paris, and London​​. Funding Rounds and Amount Raised: Jellysmack has secured $16 million in total funding. 4. Passionfroot Passionfroot provides a unified no-code platform for creators, focusing on simplifying their business operations. It offers tools for storefront management, CRM, collaborations, and cash flow, targeting younger millennial & GenZ creators and small media brands, particularly those involved in B2B monetization like sponsorships and ad placements. Location: Berlin, Germany. Funding Rounds and Amount Raised: Raised €3.4 million in a pre-seed funding round. 5. Stir Stir is a platform designed to help digital creators manage their revenue streams, analytics, and collaborations. It facilitates the sharing of funds among collaborators, aiming to streamline the financial aspects of content creation. The startup has introduced tools like Collectives for shared financial management among creators. Location: San Francisco, California. Funding Rounds and Amount Raised: Stir raised $4 million in a seed funding round with contributions from notable investors including Casey Neistat, YouTube co-founder Chad Hurley, and others​​. 6. Kajabi Kajabi, founded in 2010 by Kenny Rueter, is a SaaS platform designed for creators and entrepreneurs to create, market, and sell digital content. It has quickly risen to prominence as a tech unicorn, valued at $2 billion. The platform supports creators across various niches, offering tools for online courses, membership sites, and more, emphasizing its role in the booming creator economy. With a mission to empower digital entrepreneurs, Kajabi has facilitated over $3 billion in sales, serving thousands of users worldwide. Location: Irvine, California. Funding Rounds and Amount Raised: In November 2019, Kajabi received its first outside investment from Spectrum Equity Partners. A significant funding milestone was reached in May 2021 with a $550 million round led by Tiger Global, along with TPG Capital, Tidemark Capital, Owl Rock, Meritech Capital, and Spectrum Equity, catapulting Kajabi to a $2 billion valuation. 7. Linktree Linktree, launched in 2016 by co-founders Alex Zaccaria, Anthony Zaccaria, and Nick Humphreys, revolutionized the way individuals and businesses manage their online presence. Conceived as a solution to the limited link options on social media platforms, Linktree enables users to share multiple content links through one bio link, facilitating a centralized online presence. This technology startup quickly became a staple tool for influencers, creators, publishers, and brands, seeking to streamline their digital footprint. The platform's user-friendly interface and versatile application across various social media sites have propelled its growth, making it a critical tool in the digital arsenal of the modern internet user. Location: Melbourne, Australia, with additional operations in Darlinghurst, NSW, Australia​​. Funding Rounds and Amount Raised: Linktree has raised over a series of 4 rounds with a total of $176.2 million invested. 8. Sagespot SageSpot, established in 2020, emerges as a transformative player within the creator economy, offering a subscription-based social media platform. This innovative platform distinguishes itself by empowering creators to foster interest-based communities, enabling a direct monetization path through engaged and dedicated followers. By focusing on this model, SageSpot aims to rectify the monetization challenges creators face on legacy platforms, providing a more sustainable and creator-focused alternative for monetizing content and personal brands. The platform's focus on subscription-based models offers a promising alternative to ad-revenue dependency, potentially leading to a more sustainable and fulfilling creator-follower relationship. Location: New York. Funding Rounds and Amount Raised: $5.6 million led by Khosla Ventures. Related Resource: 7 Essential Business Startup Resources Looking for Funding? Visible Can Help- Start Your Next Round with Visible We believe great outcomes happen when founders forge relationships with investors and potential investors. We created our Connect Investor Database to help you in the first step of this journey. Instead of wasting time trying to figure out investor fit and profile for their given stage and industry, we created filters allowing you to find VC’s and accelerators who are looking to invest in companies like you. Check out all our investors here and filter as needed. After learning more about them with the profile information and resources given you can reach out to them with a tailored email. To help craft that first email check out 5 Strategies for Cold Emailing Potential Investors and How to Cold Email Investors: A Video by Michael Seibel of YC. After finding the right Investor you can create a personalized investor database with Visible. Combine qualified investors from Visible Connect with your own investor lists to share targeted Updates, decks, and dashboards. Start your free trial here and check out Visibles Fundraising page: https://visible.vc/fundraising Related resources: Valuing Startups: 10 Popular Methods Seed Funding for Startups 101: A Complete Guide The Ultimate Guide to Startup Funding Stages
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The Startup's Handbook to SAFE: Simplifying Future Equity Agreements
Simple Agreement for Future Equity (SAFE) is a financing tool for startups, offering a simpler, more flexible alternative to traditional equity or debt financing. Crucial in the startup ecosystem, SAFE agreements streamline the fundraising process, particularly for early-stage companies. They allow investors to convert their investment into equity at a later financing round, typically at a discounted price. This tool is significant in the startup landscape for its simplicity, efficiency, and founder-friendly nature, making it highly popular among early-stage startups. This guide will explore SAFE's definition, its role in early-stage funding, components like valuation caps and discounts, benefits for startups and investors, and alternatives to SAFE financing. The world of startup financing has been revolutionized by the Simple Agreement for Future Equity (SAFE), an innovative tool designed to simplify and streamline the fundraising process for early-stage companies. SAFE agreements, created by Y Combinator in 2013, offer startups a more accessible and founder-friendly alternative to traditional equity or debt financing methods. Understanding SAFE Agreements Definition and Origins A Simple Agreement for Future Equity (SAFE) is a financing instrument used by startups to raise capital without immediate equity exchange or debt. Developed by Y Combinator in 2013, SAFE agreements provide a more straightforward and flexible approach than traditional equity or debt financing and it was created as an alternative to the more complex convertible notes. SAFEs are a contractual agreement between a startup and an investor, where the investment is converted into equity at a future financing round, usually at a discounted rate or with a valuation cap. This innovation emerged from the need to streamline startup investments, minimizing the legal complexity and costs associated with traditional methods. A Simple Agreement for Future Equity (SAFE) is an innovative financing instrument utilized by startups to secure capital without an immediate exchange of equity or debt. Conceived by Y Combinator in 2013, SAFE agreements offer startups a more straightforward and adaptable approach in contrast to the intricacies of traditional equity or debt financing, providing an alternative to the complexities of convertible notes. Key Differences from Traditional Equity or Debt Financing SAFE agreements differ significantly from traditional equity and debt financing. Unlike equity financing, where investors immediately receive company shares, SAFE does not involve immediate stock issuance. This means there's no immediate equity dilution or valuation requirement. In contrast to debt financing, SAFE is not a loan; it doesn't accrue interest and lacks a maturity date, reducing the financial burden on the startup. These differences make SAFE particularly attractive to startups looking for a less complicated and more flexible financing option. Role in Early-Stage Startup Funding SAFE plays a critical role in early-stage startup funding. Its simplicity and flexibility make it an ideal tool for startups that are too young for a clear valuation but need funding to grow. By deferring valuation to a later stage, it allows startups to focus on growth rather than complex financial negotiations. Additionally, the investor-friendly nature of SAFE, such as potential for future equity at a discounted rate, makes it appealing to investors interested in high-risk, high-reward opportunities typical of early-stage ventures. Components of a SAFE Agreement Standard Terms Breakdown A SAFE agreement typically includes several key terms. The most crucial are the amount of the investment and the conditions under which it converts to equity. Other standard terms include the valuation cap, which sets a maximum company valuation for the conversion of SAFE to equity, and the discount rate, offering investors a reduced price compared to later investors. Additionally, a SAFE may specify whether it includes 'participation rights', giving investors the option to invest in future rounds to maintain their ownership percentage. Valuation Caps, Discount Rates, and Conversion Mechanisms Valuation Cap: This is the maximum valuation at which the investment can convert into equity. It protects investors from dilution in high-valuation future rounds, ensuring they receive more shares for their investment. Discount Rate: It provides investors a percentage discount on the price per share compared to the next financing round. This reward compensates for the early risk taken by the investors. Conversion Mechanisms: Conversion typically occurs during a priced equity financing round, a sale of the company, or an IPO. The terms dictate how the SAFE investment converts into equity - either at the valuation cap or the discounted price, whichever is more favorable to the investor. Related resource: Everything You Should Know About Diluting Shares Impact on Founders and Investors For founders, SAFEs offer a quick and straightforward way to secure funding without immediately diluting equity or establishing a company valuation. This flexibility allows founders to focus on growing the company with less financial and administrative burden. However, they must be mindful of the potential future equity given away, especially when multiple SAFEs are used. For investors, SAFEs provide a simpler alternative to convertible notes, with the potential for high returns if the company succeeds. The valuation cap and discount rate can significantly increase the value of their investment in a successful startup. However, there's a risk as SAFEs don’t guarantee returns and don’t provide immediate ownership or control over the company. Benefits of using SAFE for startups After understanding the key components of SAFE agreements and how they operate, it's essential to explore the numerous benefits they offer to startups. SAFE agreements are not just a funding tool but a strategic choice for early-stage companies navigating the complex world of startup financing. 1. Faster and Easier Fundraising Reduced Complexity and Legal Costs One of the primary benefits of using SAFE agreements for startups is the reduction in complexity and associated legal costs. Unlike traditional equity agreements, which often involve lengthy negotiations and extensive legal documentation, SAFEs are designed to be straightforward and concise. This simplicity not only accelerates the fundraising process but also significantly lowers the legal fees for both startups and investors. SAFE agreements are meant to be simple, standard, and fair for all parties involved, thereby reducing the need for extensive and expensive legal counsel. Related resource: SAFE Fundraising: When to Consider & Benefits No Need for Valuation Perhaps the most significant advantage of SAFEs for early-stage startups is the deferral of valuation negotiations. Traditional funding methods typically require a startup to set a valuation, which can be challenging and contentious, especially for early-stage companies with limited operational history. SAFEs circumvent this hurdle by postponing the valuation determination until a later funding round, usually when more information is available to accurately assess the company's worth. This aspect allows startups to secure funding more quickly, focusing on growth rather than getting entangled in complex and potentially contentious valuation discussions. 2. Flexibility and Investor-Friendliness Flexibility for Future Rounds SAFEs stand out for their adaptability, which is crucial in the dynamic environment of startup financing. They offer the flexibility to tailor terms such as discount rates and valuation caps to suit different investor preferences and anticipate various future funding scenarios. This flexibility is particularly beneficial for startups that may undergo several rounds of funding, each with unique conditions and requirements. As noted in resources, this adaptability makes SAFEs a versatile tool, capable of evolving with the company's funding needs. Non-dilutive Funding A significant advantage of SAFEs is their non-dilutive nature at the time of investment. Unlike immediate equity exchanges in traditional financing, SAFEs convert to equity only in a subsequent funding round. This feature means that the current ownership of existing shareholders remains undiluted until that point. For founders, this is crucial as it allows them to retain more control over their company in the early stages, as highlighted by startup-focused platforms like SeedInvest. Investor-Friendly Terms SAFEs often incorporate terms that are attractive to investors, making them a compelling option for those looking to invest in startups. Pro-rata rights, for instance, allow investors to maintain their percentage of ownership in future financing rounds. Valuation caps, another common feature, offer investors protection against overvaluation in future rounds. These investor-friendly provisions, as explained by Y Combinator, ensure that SAFEs are not only beneficial for startups but also provide fair and appealing terms for investors. 3. Aligned Incentives Shared Success One of the key advantages of SAFE agreements is the alignment of incentives between investors and founders, which is foundational for a successful startup journey. As both parties stand to benefit from an increase in the company's valuation at the time of future equity rounds, there is a mutual interest in the company's growth and success. This alignment, as discussed in resources from Y Combinator, creates a partnership dynamic where both investors and founders are equally motivated to increase the company's value, ensuring that their interests are in sync. Motivation for Growth SAFEs serve as a powerful motivational tool for founders. Since the conversion terms of SAFEs are typically more favorable at higher valuations, founders are incentivized to drive their company toward substantial growth and a successful exit. This motivation aligns perfectly with the startup's objective of maximizing value, as highlighted by startup financing experts. With SAFEs, the potential future rewards for founders increase with the company's valuation, encouraging them to pursue ambitious growth strategies and operational excellence. 4. Streamlined Process No Interest or Maturity Dates SAFEs offer a streamlined and less burdensome process for startups, primarily due to their lack of interest rates and fixed maturity dates. Traditional debt instruments typically accrue interest over time and have a set date by which the loan must be repaid or converted. In contrast, as outlined in resources like SeedInvest, SAFEs eliminate these complexities. This lack of interest and maturity dates simplifies the investment process, freeing startups from the pressures and administrative challenges associated with regular debt servicing or renegotiation at maturity. No Debt Obligations Another significant advantage of SAFEs is that they are not debt instruments. This distinction means that in the event of a startup's failure, there is no obligation to repay the investors, as would be the case with traditional loans. This feature, highlighted by experts at Y Combinator and other startup-focused platforms, significantly reduces the financial risk for founders. By not carrying debt on their balance sheets, startups can operate with more financial freedom and less stress, focusing their resources on growth and development rather than on managing debt repayments. 5. Early-Stage Suitability Ideal for Early-Stage Startups SAFEs are notably beneficial for early-stage startups, primarily due to their adaptability and minimal prerequisites. Early-stage companies often lack extensive financial history, making it challenging to secure traditional equity financing. As Y Combinator points out, these agreements are tailor-made for such companies. They provide a viable funding option without the need for a lengthy track record or established market presence, thus bridging the gap between nascent operations and potential investors. Minimal Financials Required Another advantage of SAFEs is the minimal financial documentation required. Unlike traditional financing methods that may demand detailed financial projections and comprehensive business plans, SAFEs operate with far less stringent requirements. This aspect, as highlighted by startup financing experts, makes SAFEs particularly accessible for early-stage companies that may not have the resources or data to produce extensive financial documentation. It allows startups to focus on growth and development rather than on preparing intricate financial models. 6. Attractive for Investors Potential for High Returns For investors, SAFEs represent an opportunity for substantial returns, especially if the startup experiences a successful exit. This investment model offers the potential for significant returns on investment, contingent upon the startup's future success. The prospect of acquiring equity at a lower price point than future investors makes SAFEs an attractive proposition for those looking to invest in high-potential startups. Flexibility and Potential Discounts SAFEs also provide investors with flexibility and the prospect of discounts on future equity. Investors can negotiate terms such as valuation caps and discount rates. This flexibility ensures that investors can tailor the terms of their investment to suit their risk profiles and investment strategies. The potential discounts on future equity rounds further enhance the attractiveness of SAFEs, providing investors with a strategic advantage in future financing scenarios. Alternatives to SAFE While SAFEs are a popular choice for startup financing, it's important for founders to consider other available options. Each alternative, from traditional equity financing to convertible notes and crowdfunding, offers unique benefits and fits different startup needs. Traditional Equity Financing Pros: Provides immediate capital injection, can offer higher valuations for established companies, and gives investors greater ownership and control. Cons: Complex and time-consuming process, requires detailed financial projections and legal documents, can be dilutive for founders and early investors. Convertible Notes Pros: Simpler and faster than traditional equity, offers lower valuation cap flexibility, and can convert to equity automatically upon certain events. Cons: May not be as attractive to some investors, can be dilutive for founders depending on conversion terms, and often includes interest accrual. Debt Financing Pros: Can be secured quickly and with minimal paperwork, doesn't dilute company ownership, and provides fixed interest payments. Cons: Requires repayment with interest, can burden the company with additional debt, and may not be ideal for high-growth startups. Revenue-Based Financing Pros: Provides funding based on future revenue, aligns investor returns with company performance, and doesn't involve immediate dilution. Cons: May not be suitable for companies with unpredictable revenue streams, can be expensive due to higher interest rates, and can give investors control over certain financial decisions. Crowdfunding Pros: Raises capital from a large pool of individual investors, generates marketing buzz, and builds community around the company. Cons: May be challenging to reach fundraising goals, can be time-consuming and require significant effort, and offers limited investor oversight and control. Grants and Public Funding Pros: Non-dilutive funding source, ideal for social impact or research-oriented ventures, and offers access to valuable resources and mentorship. Cons: Highly competitive and challenging to secure, often comes with specific eligibility requirements and restrictions, and may not provide ongoing financial support. Learn more about SAFE & Fundraising with Visible This guide has outlined the essential aspects of SAFE agreements, highlighting their role in simplifying fundraising and aligning investor-founder interests, especially for early-stage startups. However, navigating the intricacies of startup financing goes beyond understanding SAFEs. This is where Visible comes in. Visible offers a suite of tools designed to assist founders in managing investor relations, tracking key metrics, and streamlining communication with stakeholders. For more insights into your fundraising efforts, Visible is the go-to platform. Raise capital, update investors, and engage your team from a single platform. Try Visible free for 14 days. Related resource: A Complete Guide on Founders Agreements
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Fundraising
Customer Stories
[Webinar Recording] Lessons learned from raising Fund II with Gale Wilkinson from VITALIZE
"The most successful fund managers are going to be the ones who are really authentic to what is important to them and they make sure every attribute of their model reflects that authenticity." - Gale Wilkinson About the Webinar Markdowns and lack of LP distributions resulted in a challenging fundraising year for many VCs. The firms that did close new funds in 2023 had to put in extra work to stand out and foster confidence from new investors. Visible had the pleasure of hosting Gale Wilkinson from VITALIZE Venture Capital on Tuesday, January 30th to discuss what she learned while closing her second fund in Q4 of 2023. You can view the webinar recording below. Webinar topics This webinar was designed for people working in Venture Capital who want to learn more about the VC fundraising process. Webinar topics included: Overview of VITALIZE's fundraising process Pre-fundraising activities that made a difference How LP diligence differed between Fund I and Fund II How Gale leverages social media to build both her personal and professional brand Reviewing VITALIZE's fundraising pitch deck Advice for GP's raising in 2024 You can view the presentation deck here. Key Takeaways Expect raising your first and second fund to take 2-3 years Stay authentic to what's most important to you as a fund manager and what you're great at. Make sure every attribute of that model reflects your authenticity. Most GP decks are too long. Gale's advice --> Find out what about your story is most interesting and give enough information to make it extremely clear about who you are and what you do without going into confidential information.
founders
Fundraising
Understanding Contributed Equity: A Key to Startup Financing
Contributed equity is a cornerstone in the world of startups, serving as a vital mechanism for securing funding and fostering growth. This concept, crucial for founders and investors alike, involves the acquisition of a company's stock in exchange for capital, be it cash or other assets. Its significance lies not only in providing essential funds for a growing business but also in establishing a foundation for stakeholder relationships and future financial strategies. As we delve into the nuances of contributed equity, we aim to equip startup founders with the knowledge necessary to navigate this critical aspect of business growth effectively. What is Contributed Equity? Contributed equity represents the funds that investors infuse into a startup in exchange for ownership shares. This form of equity is distinct from other types, such as earned equity, which is typically accumulated through company profits or sweat equity. Contributed equity materializes when investors, whether angel investors, venture capitalists, or even friends and family, provide cash or other assets to a startup. In return, they receive shares, reflecting their ownership and stake in the company's future. Related resource: What is a Cap Table & Why is it Important for Your Startup Formula for Contributed Equity The formula for calculating contributed capital, also known as contributed equity, can be understood through two different approaches, depending on the financial information available and the context in which it is being calculated. Common Stock and Additional Paid-in Capital Approach: This method involves combining the value of common stock with the additional paid-in capital (APIC). Common stock is the par value of the shares issued by the company, while APIC represents the excess amount investors pay over the par value. The formula is: Contributed Capital = Common Stock + Additional Paid-in Capital For example, if a company issues shares at a par value and investors pay more than this amount, the extra paid is recorded as APIC. The sum of these two gives the total contributed capital. Total Equity and Retained Earnings Approach: Another way to calculate contributed capital is by subtracting retained earnings from the total equity of a company. The formula is: Contributed Capital (CC) = Total Equity (TE) − Retained Earnings (RE) This method is particularly useful when looking at the company's overall equity structure and understanding how much of the equity is contributed by shareholders as opposed to being generated by the company's operations. Both methods provide valuable insights into the financial contributions made by shareholders to a company's equity. The choice of method largely depends on the specific financial data available and the aspect of contributed capital that needs to be analyzed. Contributed Equity Example An example of contributed equity can be illustrated through the following scenario: Suppose a company, let's call it ABC Corp, decides to issue new shares to raise capital. ABC Corp issues 10,000 shares with a par value of $1 per share. However, investors are willing to pay $10 per share, valuing the entire issue at $100,000. In this scenario, ABC Corp will record $10,000 in its common stock account (reflecting the par value of the shares) and $90,000 in its Additional Paid-in Capital account (representing the excess over the par value). The total contributed equity, in this case, would be $100,000, which is the sum of the amounts in the common stock and Additional Paid-in Capital accounts. This example demonstrates how contributed equity is raised through the issuance of shares and how it is recorded on the company's balance sheet​​. In another illustrative example, XYZ Inc. decides to raise capital through the issuance of common and preferred stock. XYZ Inc. issues one million shares of common stock at $20 per share, resulting in $20 million being added to the company's contributed capital. In addition, the company issues 500,000 shares of preferred stock at $25 per share, amounting to $12.5 million. The total contributed capital raised from these issuances is $32.5 million. This capital is used for various company purposes like launching new products or expanding business operations. Common stockholders gain voting rights and the potential for capital appreciation, while preferred stockholders enjoy fixed dividends and priority in receiving returns​​. These examples illustrate how contributed equity is generated through the issuance of shares and how it impacts a company's financial structure. Contributed Equity Vs. Earned Equity Contributed equity and earned equity are two distinct types of equity that represent different sources of capital in a company. Contributed Equity: This is also known as paid-in capital. It refers to the capital that investors contribute to a company in exchange for shares. This type of equity can include funds raised from initial public offerings (IPOs), secondary offerings, direct listings, and the issuance of preferred shares. It also encompasses assets or reductions in liability exchanged for shares. Contributed equity is calculated as the sum of the par value of shares purchased by investors and any additional amount paid over this par value, known as additional paid-in capital​​. Earned Equity: Also known as retained earnings, this represents the portion of a company's net income that is retained rather than distributed as dividends. Earned equity accumulates over time and increases if the company retains some or all of its net income. Conversely, it decreases if the company distributes more in dividends than its net income or incurs losses. For new or low-growth companies that typically don't distribute dividends, earned capital can increase if the company is profitable​​. In summary, contributed equity reflects the investment made by owners and investors in the company, while earned equity indicates the company's profitability and the amount of profit retained in the business. Both types of equity contribute to the overall shareholder’s equity of a company​​. Types of Contributed Equity Transitioning to the various forms of contributed equity, it's important to understand the spectrum ranging from common stock to more complex instruments like warrants. Common Stock Common stock is a key component of contributed equity in a corporation, representing ownership and providing various rights to shareholders. Key features include: Voting Rights: Shareholders of common stock can vote on significant corporate decisions, such as electing the board of directors and approving corporate policies. Dividends: While not guaranteed, common stockholders may receive dividends based on the company's profitability, as decided by the board of directors. Capital Appreciation: Investors in common stock can benefit from the potential increase in stock value as the company grows. Residual Claim: In case of liquidation, common stockholders have claims to the company's assets after debts and preferred stock claims are settled. Risks: Common stock investment involves risks such as market volatility and potential loss in case of company bankruptcy. On the balance sheet, common stock is part of stockholders' equity and may include a par value, reflecting a nominal value assigned to the stock. The balance sheet also distinguishes between issued and outstanding shares, with the difference indicating treasury stock - shares reacquired but not retired by the corporation. Preferred Stock Preferred stock is a unique type of equity that combines elements of both stocks and bonds, offering benefits such as fixed dividend rates and greater claims on assets in liquidation compared to common stock. Unlike common stockholders, preferred shareholders typically don't have voting rights. The dividends of preferred stock are usually higher and prioritized over common stock dividends, providing more predictability for investors. Preferred shares are less volatile than common stocks but don't offer the same potential for capital appreciation. There are various types of preferred stock, including convertible, callable, cumulative, and participatory, each offering different benefits. Preferred stock is an appealing option for investors seeking stable dividend income but it lacks the growth potential of common stocks and the voting rights associated with them​​. Additional paid-in capital (APIC) Additional Paid-In Capital (APIC) is a crucial element in a company's financial structure, particularly in the shareholders' equity section of the balance sheet. APIC represents the amount investors pay over and above the par value of a company’s shares when they purchase them. This difference between the issue price and the par value, multiplied by the number of shares issued, constitutes the APIC. The significance of APIC in a company's financial structure is multifaceted: No Interest or Repayment Obligations: Unlike raising capital through loans or bonds, APIC does not require the company to pay interest or repay the principal amount. It is a more flexible and cost-effective way for companies to raise capital, especially for those not in a position to incur additional debt. Non-Dilution of Control: By raising capital through APIC, companies can avoid diluting the control of existing shareholders. This method involves issuing new shares to investors, but it does not necessarily affect the ownership stake or control of existing shareholders. Improved Financial Ratios: APIC can enhance a company's financial ratios, making it more attractive to future investors or lenders. A higher APIC relative to total equity can indicate financial stability and security. Increased Liquidity: APIC can enhance the liquidity of a company's shares, making them more appealing to investors. This is particularly significant for companies planning to go public or attract institutional investors. Facilitates Growth and Expansion: APIC provides companies with essential funds to explore new markets, invest in research and development, or acquire other companies. This access to capital is crucial for supporting growth and innovation. However, there are potential downsides to relying heavily on APIC. It can lead to the dilution of earnings per share and reduce earnings available to existing shareholders. In the event of a decline in the company’s share price post-APIC offering, there can be pressure from investors to enhance financial performance. Restricted Stock Units (RSUs) Restricted Stock Units (RSUs) are a form of stock-based compensation used to align employee incentives with shareholder interests. RSUs grant employees the right to receive a predetermined number of shares of the employer's stock, contingent upon meeting specific vesting requirements. These requirements can be time-based, performance-based, or event-based. Unlike stock options, RSUs don't provide the option to buy stock shares but instead promise actual shares or equivalent compensation once vested. The key differences between RSUs and direct stock grants are: Vesting Schedule: RSUs have a vesting schedule that dictates when the employee will receive the shares. This can be based on time with the company, performance metrics, or specific events like an IPO. The shares are not immediately available to the employee upon granting; they must meet the vesting criteria first. Taxation: RSUs are generally taxed as ordinary income when they vest, meaning the full value of the vested units is subject to tax at that time. In contrast, employee stock options have different tax treatments, depending on whether they are Non-Qualified Stock Options (NQSOs) or Incentive Stock Options (ISOs). Employee Incentives: RSUs provide a clear incentive for employees as they know the value of their grant and when they'll receive the shares. This clarity can be motivational, encouraging employees to contribute to the company's success over time to increase the value of their shares. Flexibility and Complexity: RSUs are generally more straightforward than stock options, which involve exercise prices and expiration dates. RSUs offer less flexibility but are easier for employees to understand in terms of value. The impact of RSUs on employee incentives is significant. They offer a stake in the company's future, potentially leading to substantial financial gain if the company performs well. This aligns the interests of the employees with those of the company and its shareholders, potentially driving better performance and retention. Stock Options Stock options, as a type of contributed equity, are an important tool used by companies to attract, motivate, and retain employees. They function by granting employees the right, but not the obligation, to purchase a specific number of company shares at a predetermined price (known as the exercise or strike price) within a set time frame. How Stock Options Work Granting of Options: Employees are granted stock options at a specific strike price, often the stock's market value on the grant date. Vesting Period: There is usually a vesting period during which the employee must remain with the company to be eligible to exercise the options. Exercising Options: After the vesting period, employees can exercise their options to purchase stock at the strike price. Potential Financial Gain: If the company's stock price increases above the strike price, employees can buy the stock at a lower price, potentially realizing a gain if they sell the shares at a higher market value. Benefits to Employees Financial Upside without Upfront Cost: Employees can benefit from the company's growth without needing to invest their own money upfront. Flexibility: They have the flexibility to exercise their options at potentially favorable times within the exercise period. Alignment with Company Success: Stock options align employees’ interests with those of the company and its shareholders, incentivizing performance and retention. Dilutive Effect on Shareholder Value Increased Share Count: When employees exercise stock options, new shares are created, increasing the total number of shares outstanding. Earnings Per Share Impact: This dilution can lower earnings per share (EPS), as the same amount of earnings is spread over a larger number of shares. Potential Impact on Stock Price: While dilution can have a negative impact on EPS and possibly the stock price, the extent of this effect depends on the number of options exercised and the company’s overall performance. Considerations for Companies Companies need to carefully manage the granting of stock options to balance the benefits of incentivizing employees and the potential dilution of existing shareholders' equity. Companies must communicate transparently with shareholders about the potential impact of stock options on dilution and earnings metrics. Warrants Warrants are a type of financial instrument that grants the holder the right, but not the obligation, to buy or sell an underlying asset, such as stocks, at a predetermined price before a specific expiration date. They are unique in their structure and offer several distinct features: Types of Warrants: There are primarily two types of warrants - call warrants and put warrants. Call warrants give the right to buy the underlying asset, while put warrants provide the right to sell it. Leverage: Warrants offer leverage, meaning a relatively small initial investment can give exposure to a larger amount of the underlying asset. This can amplify potential returns but also increase risk. Strike Price and Expiration Date: The strike price is the predetermined price at which the warrant holder can buy (call) or sell (put) the underlying asset. Warrants have a specific expiration date, after which they become worthless. The value of a warrant is influenced by the proximity of the underlying asset's price to the strike price and the time remaining until expiration. Risks and Volatility: Warrants are considered high-risk investments due to their derivative nature and sensitivity to market fluctuations. The value of warrants can change significantly with market conditions. Investment Strategies: Warrants can be used in various investment strategies, including speculation on the price movement of the underlying asset, hedging against portfolio risks, and leveraging to increase exposure. Trading and Liquidity: Warrants are traded on specific stock exchanges or financial markets, providing liquidity to investors. The market for warrants can vary, with some being more liquid than others. No Voting Rights or Shareholder Privileges: Unlike direct stock ownership, holding warrants does not confer voting rights or other shareholder privileges in the issuing company. The Role of Contributed Equity in Startup Financing Contributed equity plays a foundational role in startup financing, often serving as the initial capital that helps get a business off the ground. This form of equity involves funds raised through the issuance of shares to investors, typically without immediate repayment obligations, thus providing essential funding for early-stage companies. Comparing contributed equity with other financing options like venture capital, loans, and angel investing reveals distinct advantages and considerations for startups: Venture Capital (VC): VCs typically invest in early-stage companies, often after some proof of concept or customer base development. The investment size can range from a few million to tens of millions. VC firms often provide not just capital but also mentorship and network access. However, they usually acquire a substantial stake in the company, which can lead to significant dilution of the founders' shares. Angel Investors and Seed Funding: These investors are often the first external financiers in a startup, sometimes coming in even before the business generates revenue. Investments from angel investors or through seed funding are generally lower compared to VC, ranging from tens of thousands to a few million dollars. They typically take on higher risk for potentially higher returns and may offer valuable guidance and industry connections. Loans: Startup business loans are a debt financing option where repayment with interest is required. Unlike equity financing, loans do not result in ownership dilution. Banks may offer various products like venture debt or overdraft facilities, depending on the startup’s maturity and revenue. Loans, however, might not be as readily accessible to startups without significant assets or steady revenue streams. The choice among these options depends on the startup's stage, funding requirements, and long-term goals. Contributed equity is particularly advantageous for early-stage funding as it does not burden the company with debt repayments, allowing more flexibility for growth and innovation. This form of financing aligns investors' and founders' interests, as both parties stand to benefit from the company's success. However, it can lead to a dilution of ownership for the founders. Related resources: Corporate Venture Capital: A Strategic Partnership & Differences to Traditional VC Seed Funding for Startups 101: A Complete Guide Empower Your Startup Growth with Visible Contributed equity is an indispensable tool for startup growth, offering a flexible and strategic financing option. Founders can harness this power to build robust, investor-aligned companies. For those seeking to streamline their investor relations and reporting, Visible offers an intuitive platform to enhance transparency and foster investor confidence. Ready to empower your startup's journey? Try Visible for free for 14 days and elevate your investor engagement to the next level!
founders
Fundraising
The VCs Fueling the Future of Education: A Guide for EdTech Founders
Latest Funding and Market Trends in EdTech (2023 and Beyond) The EdTech sector presents a landscape of both challenges and opportunities. Founders need to be agile and adaptable, with a focus on the key growth areas of AI, mobile learning, and data analytics. Despite the current downturn in venture capital funding, the sector's long-term growth prospects remain promising, driven by technological advancements and a global push towards accessible, quality education. Funding and Investment Trends In 2023, the EdTech sector is witnessing a notable decline in venture capital funding. Investments in the second quarter stood at $707 million, contributing to a total of about $1.8 billion in the first half of the year. This represents a significant 58% drop compared to the same period in the previous year. The forecast for total VC funding in 2023 is projected to be around $3.5 billion, a decrease from $10.6 billion in 2022 and far from the record $20.8 billion in 2021​​. The current investment climate has moved away from the "golden age of mega rounds." The recent period marked the second consecutive quarter without funding rounds exceeding $100 million, known as mega rounds. This cooling trend is attributed to a shift in market conditions, including a return to in-person learning and the expiration of federal aid that had previously boosted remote learning​​. Related resource: Top 18 Revolutionary EdTech Startups Redefining Education Opportunities and Growth Prospects Despite the current slowdown, the long-term outlook for EdTech remains robust. Most forecasters anticipate continued substantial growth in the sector throughout the rest of this decade. This optimism is rooted in the belief that technology will continue to be a significant driver of global growth in education by reducing costs and expanding access to learning​​. AI, mobile learning, tutoring, and data analytics are emerging as focal points in the EdTech sector. Innovations in these areas are expected to drive growth, with AI becoming a crucial component for startups. Mobile learning is also gaining prominence due to its widespread accessibility. Tutoring services are evolving, often combining AI, mobile technology, virtual/augmented reality, and gamification to offer more engaging and personalized learning experiences​​. Implications for EdTech Founders Navigating the Changing Landscape: EdTech founders must adapt to the evolving investment landscape, which may involve seeking smaller and more frequent rounds of funding. With the shift in investment focus, there is an increased emphasis on sectors outside of K-12, particularly in areas related to training and worker upskilling​​. Leveraging Emerging Technologies: Founders should focus on leveraging emerging technologies like AI and mobile learning to create innovative solutions. There is a growing market for platforms that use big data and analytics to personalize learning. Additionally, developing solutions in the tutoring space, particularly those that address gaps in K-12 education, can be a fruitful direction​​. Exploring Alternative Funding Sources: With the decline in traditional venture investments, it's crucial for startups to explore alternative forms of funding. This could include government funding, foundation-led philanthropic investments, and other non-traditional financing options. Diversifying funding sources can help sustain innovation and support the growth of new ideas​​. Emerging Technologies in EdTech For EdTech founders, emerging technologies offer a plethora of opportunities to innovate and create impactful educational solutions. As AI and IoT continue to evolve, they will undoubtedly unveil new possibilities for enhancing learning experiences and educational outcomes. Embracing these technologies and integrating them into EdTech solutions will be key to addressing the evolving needs of learners and educators alike. AI-Driven Innovations Personalized Learning Experiences: AI's ability to tailor educational content based on individual learning styles and needs is more advanced than ever. Using complex algorithms, AI can analyze student performance data to create a uniquely personalized learning journey. This not only enhances student engagement but also improves learning outcomes. Intelligent Assessment Tools: AI is revolutionizing the way assessments are conducted. With advancements in natural language processing and machine learning, AI systems can now grade open-ended responses, provide real-time feedback, and even identify areas where students might need additional support. Automated Content Generation: AI is being used to develop educational content, from generating practice questions to creating interactive learning modules. This technology allows for the rapid creation of high-quality, dynamic content that can adapt to curriculum changes and evolving educational standards. AI Tutors and Assistants: AI-powered tutoring systems are becoming more sophisticated, offering students personalized guidance and support. These virtual tutors can answer questions, assist with problem-solving, and provide explanations, much like a human tutor but with the added benefit of being available 24/7. IoT in Education Smart Classroom Technologies: IoT is transforming traditional classrooms into smart learning environments. This includes the use of smart boards, IoT-enabled lab equipment, and connected devices that enhance interactive learning and provide real-time data to both students and teachers. Enhanced Learning Analytics: now it’s possible to gather extensive data on student engagement and classroom dynamics. This information can be used to optimize teaching strategies, classroom layouts, and even individualize student learning plans based on engagement levels and performance. Improved Resource Management: In educational institutions, IoT can help manage resources more efficiently, from tracking equipment usage to monitoring energy consumption. This not only reduces operational costs but also contributes to creating a more sustainable learning environment. Future Outlook: Trends and Predictions in EdTech The future of EdTech is marked by a landscape of continuous innovation and adaptation. For EdTech founders, staying abreast of these trends and predictions is crucial to developing solutions that meet the evolving needs of learners and educators. By embracing these changes and anticipating future needs, EdTech companies can not only contribute to the advancement of education but also thrive in a dynamic and growing market. Key Trends Shaping the Future Increased Adoption of AI and Machine Learning: AI and ML will continue to be at the forefront of EdTech innovation. They are expected to drive further personalization in learning, provide more efficient assessment tools, and enable the creation of dynamic, responsive educational content. Growth in Virtual and Augmented Reality: VR and AR are anticipated to gain more traction in the educational sector. These technologies will provide immersive and interactive learning experiences, making complex concepts more accessible and engaging. Rise of Microlearning and Bite-Sized Content: The trend towards microlearning is expected to grow. Short, focused learning sessions that fit into busy schedules are increasingly appealing, especially for continuous adult education and corporate training. Focus on Lifelong Learning and Upskilling: As job roles evolve rapidly, there will be a heightened focus on lifelong learning and upskilling. EdTech platforms that cater to professional development and career transitions will likely see increased demand. Expansion of Gamification in Education: Gamification will continue to be a key element in engaging learners. By making learning more fun and interactive, EdTech solutions can improve retention and motivation across various age groups and educational contexts. Greater Emphasis on Inclusive and Accessible Education: There will be a growing focus on making education more inclusive and accessible. This includes developing solutions for learners with disabilities and those in underserved communities. Predictions for Growth and Evolution Market Expansion: The global EdTech market is projected to continue expanding, driven by technological advancements and the increasing acceptance of digital learning solutions. Diversification of EdTech Solutions: Expect to see a broader range of EdTech products catering to different educational needs, including early childhood education, K-12, higher education, and adult learning. Integration with Traditional Education Systems: EdTech will increasingly complement and integrate with traditional education systems, bridging gaps and enhancing the overall learning experience. Adoption in Emerging Markets: Emerging markets will likely see a surge in EdTech adoption as internet penetration increases and digital devices become more affordable. Investment Shifts: While venture capital funding may fluctuate, investment in EdTech is expected to remain strong, with a shift towards more strategic and impact-focused funding. Key Players “In the future, entrepreneurs will sell knowledge over products.”- Ankur Nagpal founder of Teachable Source: CB Insights Pre-K Education: Learn With Homer– Raised a total of $93M and was then acquired. K-12 Education: Platforms like Kahoot! and Quizlet have brought an element of gamification to K-12 classrooms, making learning interactive and enjoyable. Meanwhile, EdTech platforms like Google Classroom and Canvas help manage classroom tasks and streamline communication between teachers, students, and parents. Other big players include Khan Academy a free world-class education platform and GoStudent for 1 on 1 tutoring. Higher Education: Tools like Coursera, edX, and Udemy are revolutionizing higher education. These platforms provide a wide range of courses from universities around the world, giving students access to quality education regardless of location. They also offer micro-credentials, which are becoming increasingly recognized by employers. Continuing Education and Adult Upskilling: LinkedIn Learning, Coursera provide professionals the opportunity to learn new skills, stay current in their field, and even transition to new careers. They offer a myriad of courses in fields ranging from business and tech to creative arts. Specialized Learning: Companies like Rosetta Stone and Duolingo make language learning accessible to everyone, while platforms like MasterClass provide expert-led courses in various domains, such as writing, cooking, acting, and more. Cohort-based Learning companies: EducateMe, Maven and and various boot camps such as LeWagon and Iron Hack for tech upskilling. “Microlearning” or Bite-sized Learning involves absorbing knowledge in small, digestible segments, usually less than 10 minutes in duration. This method addresses time constraints, a common hurdle for employee participation in workplace learning. It not only condenses learning periods, thus increasing student engagement but also promotes information retention through repetition. Several innovative microlearning platforms have adopted this approach some examples include GoodCourse and 7Taps. Companies Own Offerings: Google Classroom, Microsoft Teams for Education, and Apple’s educational resources. In the era of lifelong learning, the market for educational technology has expanded dramatically. As technology continues to evolve and integrate into the education sector, we can expect to see even more niche EdTech platforms arise to meet the diverse needs of learners. Unique Challenges Technological infrastructure, including reliable internet access, is still a hurdle in many parts of the world. Concerns regarding data privacy and security. User engagement and retention, particularly in the K-12 segment, require a fine balance between education and engagement. Articulating Unique Value Proposition for EdTech Founders As the EdTech marketplace starts to rapidly grow and is swarming with innovation, it is crucial for founders to effectively articulate the unique value proposition (UVP) of their startups. Your UVP is essentially the backbone of your business. Understanding and expressing your UVP is vital, particularly in the EdTech sector. This is because educational institutions, teachers, students, and parents – the primary stakeholders in EdTech – are looking for targeted solutions to specific challenges they face in the educational landscape. Whether it’s improving learning outcomes, enhancing teacher productivity, or increasing education accessibility, the ability to distinctly show how your solution addresses these challenges can make or break your fundraising efforts. Improving Learning Outcomes If your EdTech solution can improve learning outcomes, demonstrate this with data from pilot studies or user testimonials, showing how your product increases knowledge retention, improves grades, or develops specific skills. Highlight unique features of your product that facilitate these improved outcomes, such as AI-powered adaptive learning paths or gamified learning experiences. Enhancing Teacher Productivity EdTech is not only about students but also about empowering teachers. If your product can enhance teacher productivity, illustrate how it reduces their administrative burden, automates repetitive tasks, or assists in more efficient classroom management. Show how your product can help teachers spend more time doing what they do best—teaching and mentoring students. Increasing Education Accessibility In a world increasingly focused on equality and inclusion, EdTech solutions that increase educational accessibility have a powerful appeal. If this is your company’s strength, show how your product helps reach underprivileged communities, accommodates students with special needs, or allows flexible learning for those who can’t attend traditional classes. Concrete examples and stories will help your audience understand the real-world impact of your solution. EdTech Shower Thoughts First, a little flashback to the end of 2022- the value of 30 EdTech unicorns approached $100 billion, comparable to Fortune 500 companies like General Electric and American Express (that’s pretty impressive). According to research, students following personalized learning approaches significantly outperform their peers. AI helps to address the challenge of high student-teacher ratios, providing customized learning experiences. EdTech’s reach extends beyond traditional education, with remote work enhancing its importance in professional development. Automated identification of skill gaps and intelligent resource recommendations are seen as valuable to businesses and their employees. The potential impact of government funding on EdTech’s growth- the trend towards technology use in education might lead to a significant portion of the available $30 billion US government funding being allocated to EdTech. Learning Management Systems (LMS) is incredibly important in achieving scalability in EdTech. LMS not only helps manage large classrooms but also crucially harnesses data from personalized learning platforms, enabling educators to improve content and technologists to better understand user behavior. Resources EdTech VC connect profiles in our Fundraising CRM From Exploding Topics: 56 Fast-Growing Edtech Companies & Startups (2023) 12 Emerging Education Trends (2023-2026) $30B in government funding available to educators in the US HolonIQ: 2022 closed with 30 EdTech Unicorns around the world, collectively valued at $89B Accelerator- Imagine K12 (which is specifically focused on EdTech) Events: SXSW EDU, and Bett Show attract educators, and GSV Ventures hosts their annual ASU + GSV summit VCs Investing in the EdTech Space NewSchools Venture Fund About: “NewSchools Venture Fund is a is a national nonprofit venture philanthropy working to reimagine public education. Since our founding, in 1998, we have invested nearly $200 million in 200 education ventures. Our investments were instrumental in the creation of nearly 470 new schools with the potential to serve more than 200,000 students, and the development of ed tech products that serve more than 60 million students and their teachers.” Thesis: “We are the first venture philanthropy focused on K-12 education. As a nonprofit and intermediary funder, we raise charitable donations and then grant those funds to early-stage entrepreneurs who are reimagining public education. While we have a rigorous investment process, we seek educational and social returns, not financial ones.” Stage: Pre-Seed, Seed, Series A, Growth EdTech Notable Investments: ClassDojo, Handshake, and Uncommon Schools. EduCapital About: The largest European Edtech & Future of Work VC. Educapital invest’s in innovative European companies with the highest potential to scale and become European and global leaders. Thesis: We invest in Entrepreneurs shaping the future of education & future of work. Stage: Seed, Series A, Series b, Growth EdTech Lastest Investments: Tomorrow University of Applied Sciences, Edflex, Lunii Bonsal Capital About: We support tech-enabled, mission-driven startups and funds and leverage our experience as educators, venture capitalists, and ecosystem leaders to empower you to find the resources you need, so you can better serve your end user and customer. Thesis: Bonsal Capital is a mission-driven partnership, and supporting education has been a core driver since our founding in 1999. With decades of experience in education as investors, practitioners, and volunteers, our principals have authentically grown a partnership that seeks founders and leaders who want to make a positive impact with a product and/or service, and who keep prospective scale and sustainability at the forefront. We support the growth of companies focused on tech-enabled services in education, and we have invested in and partnered with more than 20 such companies over the past two decades, providing human and financial capital, as well as other resources, that have made a positive impact on tens of millions of end users. We believe that, by fostering education, we can make the world a better place and feel good about our place in it. Stage: Seed, Series A, Growth EdTech Notable Investments: Upswing, Nepris, and Everyday Labs Learn Capital About: LearnCapital is a venture capital firm focused exclusively on funding entrepreneurs with a vision for better and smarter learning. Thesis: “We back and build rapidly scaling tech-enabled companies that tackle the world’s biggest human-centered problems and help us all reach our full potential.” Stage: Seed, Series A, Growth EdTech Notable Investments: Udemy, Coursera, and Chegg. Emerge Education About: LearnCapital is a venture capital firm focused exclusively on funding entrepreneurs with a vision for better and smarter learning. Stage: Pre-Seed and Seed EdTech Notable Investments: Tomorrow University of Applied Sciences, Edurino, and Colossyan Owl Ventures About: “Founded in 2014, Owl Ventures is the largest venture capital firm in the world focused on the education technology market with over $2 billion in assets under management. The Silicon Valley-based firm was purposely built to partner with and help scale the world’s leading education companies across the education spectrum encompassing PreK-12, higher education, future of work (career mobility/professional learning), and “EdTech+” (intersection of EdTech and other major industries such as FinTech and healthcare).” Thesis: “We believe there is a digital revolution rapidly unfolding in education and workforce development. This revolution is creating a historic opportunity to invest in companies that are disrupting and improving the over $6 trillion global education market. The entire education and training sector is shifting rapidly as access to the internet and connected devices has flourished. Hundreds of millions of students and teachers around the world can now leverage innovative learning platforms.” Stage: We invest in companies at all stages from seed, early, growth, and later stages, globally. EdTech Notable Investments: MasterClass, degreed, Khan Academy, Schoology, and Knewton. Reach Capital About: Reach supports the most promising entrepreneurs developing technology solutions for challenges in early childhood, K-12, and higher education. Thesis: “Education is a critical engine for economic mobility. Alongside health, wellbeing, career development and healthy relationships, we are interested in all ideas that empower people to learn, grow and succeed — in school, at home, for work … wherever they go.” Stages: “early, and support you at every stage of your journey” EdTech Notable Investments: Guild Education, Classcraft, and Merit America. General Catalyst About: General Catalyst backs exceptional entrepreneurs who are building innovative technology companies and market leading businesses, including Airbnb, BigCommerce, ClassPass, Datalogix, Datto, Demandware, Gusto (fka ZenPayroll), The Honest Company, HubSpot, KAYAK, Oscar, Snap, Stripe, and Warby Parker. The General Catalyst team leverages its broad experience to help founders build extraordinary companies. General Catalyst has offices in Cambridge, MA, Palo Alto, CA and New York City. Thesis: General Catalyst is a venture capital firm that makes early-stage and growth equity investments. Stages: Seed, Series A, Series B, Growth EdTech Notable Investments: Chegg, Coursera, and Udacity. Kapor Capital About: Kapor Capital invests in early stage gap-closing tech enabled startups. Thesis: Kapor Capital invests in tech-driven early-stage companies committed to closing gaps of access, opportunity or outcome for low-income communities and/or communities of color in the United States. Stages: Pre- Seed, Seed, Series A, Series B Looking for Investors? Try Visible Today! Use Visible to manage every part of your fundraising funnel with investor updates, fundraising pipelines, pitch deck sharing, and data rooms. Raise capital, update investors, and engage your team from a single platform. Try Visible free for 14 days. Related Resource: EdTech VC connect profiles in our Fundraising CRM
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15 VC Firms Investing in Web3 Companies
15 VC Firms Investing in Web3 Companies In the evolving landscape of the internet, Web3 stands out as the next significant leap, offering a decentralized, blockchain-powered framework. Coined by Ethereum's co-founder, Gavin Wood, in 2014, Web3 embodies a trustless, permissionless internet that fundamentally alters digital interactions and transactions​​. This transformational technology has captured the attention of investors globally, as it heralds a new era of internet use where users regain control over their data and digital identities. For investors, Web3 companies represent a frontier in technological innovation, combining the promise of high-growth potential with the opportunity to shape the future of online experiences. Below we highlight 15 leading VC firms that are actively investing in this exciting new sector. Related Resource: 13 Generative AI Startups to Look out for 1. a16z/ Andreessen Horowitz Location: Menlo Park, California, United States About: Andreessen Horowitz was established in June 2009 by entrepreneurs and engineers Marc Andreessen and Ben Horowitz, based on their vision for a new, modern VC firm designed to support today’s entrepreneurs. Andreessen and Horowitz have a track record of investing in, building and scaling highly successful businesses. Thesis: Historically, new models of computing have tended to emerge every 10–15 years: mainframes in the 60s, PCs in the late 70s, the internet in the early 90s, and smartphones in the late 2000s. Each computing model enabled new classes of applications that built on the unique strengths of the platform. For example, smartphones were the first truly personal computers with built-in sensors like GPS and high-resolution cameras. Applications like Instagram, Snapchat, and Uber/Lyft took advantage of these unique capabilities and are now used by billions of people. Investment Stages: Pre-Seed, Seed, Series A, Series B, Growth Recent Investments: Dapper OpenSea Ripple To learn more about a16z, check out their Visible Connect Profile. 2. Sequoia Capital Location: Menlo Park, California, United States About: Sequoia is a VC firm focused on energy, financial, enterprise, healthcare, internet, and mobile startups. Thesis: We partner early. We’re comfortable with the rough imperfection of a new venture. We help founders from day zero, when the DNA of their businesses first takes shape. Investment Stages: Seed, Series A, Series B, Growth Recent Investments: Polygon Binance Bitmain To learn more about Sequoia Capital, check out their Visible Connect Profile. 3. Tiger Global Location: New York, New York, United States About: Tiger Global Management is an investment firm that deploys capital globally in both public and private markets. Investment Stages: Pre-Seed, Seed, Series A, Series B, Growth Recent Investments: PDAX | Philippine Digital Asset Exchange Devron Novi Connect To learn more about Tiger Global, check out their Visible Connect Profile. Related Resource: 12 New York City Angel Investors to Maximize Your Funding Potential 4. Coinbase Ventures Location: San Francisco, California, United States About: Coinbase Ventures is an investment arm of Coinbase that aims to invest in early-stage cryptocurrency and blockchain startups. Thesis: At Coinbase, we’re committed to creating an open financial system for the world. We can’t do it alone, and we’re eagerly rooting for the brightest minds in the crypto ecosystem to build empowering products for everyone. We provide financing to promising early stage companies that have the teams and ideas that can move the space forward in a positive, meaningful way. Investment Stages: Pre-Seed, Seed, Series A, Series B Recent Investments: Compound BlockFi Dharma To learn more about Coinbase Ventures, check out their Visible Connect Profile. 5. Paradigm Location: San Francisco, California, United States About: Paradigm primarily invests in crypto-assets and businesses from the earliest stages of idea formation through to maturity. Thesis: Paradigm is an investment firm focused on supporting the great crypto/Web3 companies and protocols of tomorrow. Our approach is flexible, long term, multi-stage, and global. We often get involved at the earliest stages of formation and support our portfolio with additional capital over time. We take a deeply hands-on approach to help projects reach their full potential, from the technical (mechanism design, smart contract security, engineering) to the operational (recruiting, regulatory strategy). Investment Stages: Pre-Seed, Seed, Series A, Series B, Series C, Growth Recent Investments: Chainalysis matrixport Fireblocks To learn more about Paradigm, check out their Visible Connect Profile. 6. Pantera Capital Location: Menlo Park, California About: Pantera Capital is the first institutional investment firm focused exclusively on bitcoin, other digital currencies, and companies in the blockchain tech ecosystem. Investment Stages: Seed, Series A, Pre-Seed, Early Stage, Series B, Series C, Growth Recent Investments: Ancient8 Stader Labs Offchain Labs To learn more about Pantera Capital, check out their Visible Connect Profile. 7. Ribbit Capital Location: Palo Alto, California, United States About: Ribbit Capital is a Silicon Valley-based venture capital firm that invests globally in unique individuals and brands who aim to disrupt the financial services industry. Founded in 2012 by Meyer “Micky” Malka, Ribbit believes the category is profoundly under-innovated and intends to support entrepreneurs who have already launched the businesses of the future. Ribbit has raised an inaugural $100M fund that will be aimed at driving innovation in lending, payments, insurance, accounting, tax preparation and personal financial management. Ribbit targets disruptive, early stage companies that leverage technology to reimagine and reinvent what financial services can be for people and businesses. The firm will mainly focus on investments in the U.S., Canada, Brazil, the United Kingdom, Germany, Italy, Spain, South Africa and Turkey. Investment Stages: Seed, Series A, Series B, Series C, Growth Recent Investments: Genesis Digital Assets Kavak Chipper Cash To learn more about Ribbit Capital, check out their Visible Connect Profile. Related Resource: 8 Active Venture Capital Firms in Germany Related Resource: 14 Venture Capital Firms in Silicon Valley Driving Startup Growth Related Resource: 10 Venture Capital Firms in Canada Leading the Future of Innovation Related Resource: 7 Prominent Venture Capital Firms in Brazil 8. Blockchain Capital Location: San Francisco, California, United States About: Blockchain Capital is a pioneer and the premier venture capital firm investing in Blockchain enabled technology companies. Investment Stages: Seed, Series A, Series B Recent Investments: Abra Securitize Anchorage To learn more about Blockchain Capital, check out their Visible Connect Profile. 9. Digital Currency Group Location: New York City, New York, United States About: At Digital Currency Group, we build and support bitcoin and blockchain companies by leveraging our insights, network, and access to capital. Thesis: We invest in companies that are accelerating the creation and adoption of a better financial system using blockchain technology and cryptocurrency Investment Stages: Seed, Series A, Series B Recent Investments: Trust Machines Livepeer Elliptic To learn more about Digital Currency Group, check out their Visible Connect Profile. 10. DWF Labs Location: Singapore About: DWF Labs is the global digital asset market maker and multi-stage web3 investment firm, one of the world's largest high-frequency cryptocurrency trading entities, which trades spot and derivatives markets on over 60 top exchanges. Investment Stages: Early Stage Venture, Initial Coin Offering, Late Stage Venture, Non Equity Assistance, Secondary Market, Seed. Recent investments: TRON Algorand Foundation Conflux To learn more about Digital Currency Group, check out their Visible Connect Profile. 11. CMT Digital Location: Chicago, Illinois. About: CMT Digital is a venture capital firm engaging in the crypto asset and Blockchain technology industry. The firm focuses on asset trading, blockchain technology investments, and legal and policy. Investment Stages: Pre-Seed Recent investments: CFX Labs ZetaChain Trident Digital Group To learn more about Digital Currency Group, check out their Visible Connect Profile. 12. NGC Ventures Location: Singapore About: NGC Ventures invests in early stage, web 3.0 infrastructure startups and projects. We identify projects with innovative ideas to today’s blockchain problems and work with them from ideation to strategy and market adoption. Thesis: We identify projects with disruptive innovation, aiming to solve problems with solutions that are characterized by simplicity, cost affordability, speed, uniqueness and a compelling product market fit. Investment Stages: Seed, Series A Recent investments: Polybase Smooth Labs Chainsafe To learn more about Digital Currency Group, check out their Visible Connect Profile. 13. Bixin Ventures Location: Beijing, Chaoyang About: Bixin Ventures invests in early-stage infrastructure projects that cultivate and facilitate mass adoption of open finance through permissionless and decentralized networks. Thesis: Bixin Ventures’ mission is to invest in and build crucial infrastructure that enables the future of open finance through permissionless and decentralized networks. Our investment team works alongside founders to provide guidance and expertise for growth in Asia. These actions reflect our priority to transform open finance into a truly global ecosystem. Investment Stages: Pre-Seed, Seed Recent investments: Sei Earn Network zCloak Network To learn more about Digital Currency Group, check out their Visible Connect Profile. 14. Spartan Group Location: Singapore and Hong Kong. About: Founded in 2017, Spartan Group is a leading player in the Web3 space. We are one of the most active venture investors and have backed some of the leading crypto companies and networks. We are also a leader in Web3 M&A deals and capital raises, leveraging our track record of working with world-class teams, deep expertise of the crypto industry, and unparalleled network to create collective value with exceptional founders. Investment Stages: Seed Recent investments: Wind Brine Fi DFlow To learn more about Digital Currency Group, check out their Visible Connect Profile. 15. Alchemy Ventures Location: San Francisco, California About: Alchemy is a developer platform that empowers companies to build scalable and reliable decentralized applications without the hassle of managing blockchain infrastructure in-house. It is currently faster, more reliable, and more scalable than any other existing solution, and is incredibly easy to integrate! Thesis: At Alchemy, our mission is to provide developers with the fundamental building blocks they need to create the future of technology. Through Alchemy Ventures, we'll be accelerating this mission by dedicating financing and resources to the most promising teams growing the Web3 ecosystem. Investment Stages: Pre-Seed, Seed, Series A, Series B, Series C Recent investments: Acctual Bastion Unstoppable Domains To learn more about Digital Currency Group, check out their Visible Connect Profile. Web3 Resources Web3 Report Q3 2021 – ConsenSys: The DeFi data, context, NFTs, tools, and trends that defined Web3 in Summer 2021. Coinbase Cloud is announcing a community for Web3 developers. Their forum for developers is live, searchable, and indexable. The Architecture of a Web 3.0 application ​​WEB2 vs WEB3 Twitter thread on Why Web3 Matters and What’s Next in Web3 Start Your Next Round with Visible These firms are not only financing the future of the internet but are also shaping the landscape of digital innovation. As the Web3 ecosystem continues to grow, staying on top of your business and connecting is key. Combine qualified investors from Visible Connect with your own investor lists to share targeted Updates, decks, and dashboards. Check out all our web3 investors here. After finding the right Investor you can create a personalized investor database with Visible. Combine qualified investors from Visible Connect with your own investor lists to share targeted Updates, decks, and dashboards. Start your free trial here. To help craft that first email check out 5 Strategies for Cold Emailing Potential Investors and How to Cold Email Investors: A Video by Michael Seibel of YC. Related resource: 14 Gaming and Esports Investors You Should Know
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How AI Can Support Startups & Investors + VCs Investing in AI
“94% of business leaders surveyed say AI is critical to success.” Deloitte In the dynamic landscape of the global marketplace, AI stands as a transformative force for startups, catalyzing growth, fostering innovation, and sharpening competitive edges. This technology is not just a tool; it's a game-changer, reshaping the way startups approach their business models, customer interactions, and market strategies. AI is not just a technological advantage for startups; it's a strategic asset that propels them into new realms of possibilities, fostering a culture of continuous innovation and competitive prowess in the global market. The Impact of AI on Organizational Structure and Team Development In this rapidly growing era of technological innovation, AI is reshaping the landscape of startups, indicating a new paradigm in organizational structure and team dynamics. AI is not merely a tool for operational efficiency but a transformative force that will redefine what it means to start and run a company. From changing how startups will hire to introducing flatter organizational hierarchies and fostering interdisciplinary collaborations, there will be many ways in which AI will influence startups to adapt, evolve, and thrive in the competitive global arena. Startups are likely to experience significant changes in their work dynamics, organizational structure, and team compositions in the following ways: Embracing AI Expertise: The infusion of AI demands a workforce proficient in data science, machine learning, and AI ethics, steering recruitment towards specialized talent. This trend not only reshapes job roles but also fosters a culture of continuous learning and adaptation. Redefining Leadership and Management: AI-driven automation and decision-making tools are leading to leaner management layers. Decision-making becomes more data-driven and decentralized, empowering teams to operate with greater autonomy. Cultivating Interdisciplinary Collaboration: The complexity of AI applications necessitates collaboration across disciplines, blending AI expertise with industry-specific knowledge. This leads to diverse, cross-functional teams where innovation thrives at the intersection of technology and domain expertise. Adapting to Flexible Work Models: AI's facilitation of remote working tools and processes enables startups to adopt more flexible, global workforces, breaking geographical barriers and tapping into a wider talent pool. Prioritizing Ethical AI Integration: As AI becomes integral to business operations, the need for roles focusing on ethical AI usage and governance becomes crucial, ensuring responsible and fair use of technology. Related resource: Top 15 Machine Learning Startups to Watch How Can AI Best Support Startup Operations? For startups, the key is to identify which areas are most crucial for their growth and how AI can be integrated to support those areas effectively. Proper implementation and ethical considerations are also essential to ensure that AI is used responsibly and efficiently. Here are some key areas where AI can significantly support startups: Market Research and Analysis: AI can analyze vast amounts of data to identify market trends, customer preferences, and competitive landscapes. This helps startups in making data-driven decisions and understanding their market better. Customer Service and Support: AI-powered chatbots and virtual assistants can provide 24/7 customer service, answering queries, and solving basic problems. This improves customer experience and frees up human resources for more complex tasks. Product Development and Innovation: Startups can use AI for rapid prototyping, predictive analytics, and to gain insights into how users interact with their products or services. This can accelerate the development cycle and lead to more innovative solutions. Marketing and Personalization: AI can tailor marketing campaigns to individual consumer behaviors and preferences, leading to more effective and targeted marketing strategies. Operational Efficiency: AI can automate routine tasks, manage inventory, optimize logistics, and streamline operations, leading to cost savings and increased efficiency. Data Security and Fraud Detection: AI algorithms can monitor for unusual patterns indicating fraud or security breaches, providing an added layer of security to the company's data. Talent Acquisition and HR: AI can streamline the recruitment process by screening candidates, analyzing resumes, and even conducting preliminary interviews, helping startups find the right talent more efficiently. Customization and User Experience: By analyzing user data, AI can help customize user experiences, making products or services more appealing and user-friendly. Networking and Collaboration: AI can suggest potential partnerships, identify networking opportunities, and even assist in collaborative projects by managing and analyzing large datasets. Below we’ll dive deeper into some of these areas and the existing solutions that can help assist your startup in streamlining these operations and delivering better outcomes. Related resource: Emerging Giants: An Overview of 20 Promising AI Startups Market Research Using AI Tools Startups using these solutions can gain deeper market insights, identify customer preferences and behaviors, understand competitive landscapes, and make informed, data-driven decisions for their business strategies. Poll the People: Utilizes OpenAI and Chat-GPT to combine human intelligence with AI, enabling data-driven decision-making through surveys and responses from over 500,000 panelists​​. SimilarWeb: Offers comprehensive insights into digital consumer behavior with advanced algorithms and machine learning. It helps in understanding website traffic, user demographics, engagement metrics, and competitive analysis for identifying industry trends and market opportunities​​. Latana: Specializes in brand performance tracking using AI and machine learning. It provides insights into brand awareness, perception, customer sentiment, and competitive positioning, using data from various sources including online surveys and social media​​. Tableau: An AI-powered data visualization and analytics tool, ideal for exploring, analyzing, and visualizing complex market research data. Its AI-driven features help uncover patterns, trends, and correlations in market data, with intuitive dashboards for effective communication of research findings​ AI Customer Service and Support Tools The tools can help with improved efficiency in handling customer queries, enhanced quality of customer interactions, faster resolution of issues, and overall better customer satisfaction. By leveraging these AI tools, startups can also reduce the workload on their human staff, allowing them to focus on more complex tasks. Uniphore: Provides a Conversational AI technology platform for delivering transformational customer service across various touchpoints. Startups can use this to improve customer interactions and automate responses​​. Gong.io: Utilizes natural language processing and machine learning to train and assist sales and customer service representatives, helping them in providing more effective customer service​​. Moveworks: Specializes in using AI to automatically resolve help desk tickets, which can significantly reduce response times and improve resolution rates​​. Observe.AI: Offers a Voice AI platform for call centers, enhancing customer calls with real-time feedback on customer sentiment and guidance for the best actions during calls​​. Amelia: Develops a Trusted AI platform that captures and transforms AI innovations, useful in creating more responsive and intelligent customer service experiences​​. Aisera: Provides an AI-driven service solution that automates operations and support for various domains like IT, HR, sales, and customer service, thus increasing efficiency and reducing manual effort​​. Dixa: Offers conversational customer engagement software, enabling real-time communication between brands and customers, enhancing the overall customer interaction experience​​. Glia: Creates digital-first platforms for companies to connect with customers using messaging, video, co-browsing, and AI, aiming to improve the digital customer service experience​​. Cresta: Develops an AI platform designed to improve the quality of customer services, by providing real-time assistance and information to customer service agents​​. Moogsoft: Delivers AI for IT Incident Management, automating operational tasks and helping teams become more effective in addressing customer issues​​. Marketing and Personalization AI Tools Using these tools, startups can aim for improved marketing efficiency, enhanced audience engagement, and better brand positioning. Jasper.ai: This AI tool, utilizing GPT-3, aids in creating high-quality ad copy, emails, landing pages, and social media posts. It provides customizable templates for various content frameworks, ensuring brand-appropriate and engaging copy. Desired outcomes include improved content quality, efficiency in content creation, and better engagement with target audiences​​. Beacons AI: Offers an AI Outreach Tool for generating personalized and compelling pitch emails to brands. This simplifies the task of brand outreach, making it an efficient process for startups aiming to establish partnerships or collaborations​​. Rapidely: Uses GPT-4 technology for social media content creation. It includes features like a Monthly Calendar Generator and Carousel Maker, enhancing social media management and engagement. Startups can expect to achieve streamlined content creation and improved social media presence​​. Flick: An AI Social Media Assistant that aids in brainstorming, writing, and scheduling social media content. It helps in generating on-brand captions and ideas, managing hashtags, and scheduling posts, leading to more effective social media marketing​​. DeepBrain AI: Specializes in AI video creation, allowing the conversion of text to video with photo-realistic AI avatars. This tool can significantly reduce video production time and costs, ideal for creating engaging video content for marketing purposes​​. Brandwatch Consumer Intelligence: Provides AI-powered consumer intelligence and social media management solutions. It generates actionable insights for understanding consumer behaviors and trends, assisting startups in making data-driven marketing decisions​​. Brand24: An AI social media monitoring tool that tracks real-time feedback about a company. It helps in managing brand reputation and analyzing marketing campaign effectiveness, crucial for maintaining a positive brand image​​. GrowthBar: Utilizes GPT-3 AI for content generation, especially useful for SEO, blogging, and meta descriptions. This tool assists in creating optimized content, enhancing a startup's online visibility and search engine ranking​​. The Future AI Plays in How VCs Invest “We found that the best performance, nearly 3.5 times the industry average, would result from integrating the recommendations of the humans on our investment team and the machine-learning model. This shows what I strongly believe—that decision-making augmented by machine learning represents a major advancement for venture-capital investing.” – Veronica Wu VCs are already using AI in a variety of ways but say it’s still necessary to use human judgment when it comes to decision-making. In an interview with McKinsey Veronica Wu says, “we combined machine learning, which produces insights we would otherwise miss, with our human intuition and judgment. We have to learn to trust the data model more, but not rely on it completely. It’s really about a combination of people and tools.”. In the fast-evolving landscape of venture capital, the integration of AI and platforms like Visible is creating a synergy that significantly enhances investment strategies and operational efficiencies. This combination presents a powerful toolset for VCs, enabling smarter, data-driven decisions and streamlined processes. Here's how VCs can leverage AI, both generally and specifically in conjunction with Visible: Enhanced Due Diligence and Data Analysis: AI's ability to sift through and analyze extensive data sets enables VCs to conduct more thorough due diligence. This deep data analysis covers market trends, startup performance metrics, and competitor analysis, providing a comprehensive investment picture. Predictive Analytics for Identifying Opportunities: AI's predictive capabilities are pivotal in forecasting market trends and identifying burgeoning sectors. This foresight allows VCs to stay ahead, investing in startups with high growth potential before they become obvious choices. Optimized Portfolio Management: AI algorithms continually assess market conditions and offer insights for portfolio rebalancing. This dynamic management approach ensures that VC portfolios are aligned with changing market realities, optimizing returns. Streamlining Deal Flow Management: AI streamlines the deal flow process, efficiently sorting through potential investments. This not only saves time but also ensures that VCs focus on the most promising opportunities. Accurate Risk Assessment: AI provides sophisticated risk assessment models, evaluating potential investments against various market and economic indicators. This results in a more nuanced understanding of investment risks and potential returns. Additional Resources CBInsights: Generative AI Bible 13 Generative AI Startups to Look out for AI Meets Your Investor Updates Using AI Prompts to Write Your Next Investor Update Top VCs Investing in AI Startups Alpha Intelligence Capital Locations: San Francisco, Paris, Hong Kong, Singapore, Dubai About: Alpha Intelligence Capital (AIC) is an entrepreneurs-led, entrepreneurs-invested, family of global venture capital funds. AIC invests in deep Artificial Intelligence/Machine Learning (AI/ML) technology-based companies. To us, AI is the science of self-learning software algorithms that execute tasks otherwise typically performed by humans, or that substantially augment human intelligence. Thesis: AIC invests in deep Artificial Intelligence/Machine Learning (AI/ML) technology-based companies Investment Stages: Series A, Series B, Series C Recent Investments: Aidoc Proscia ZeroEyes Check out Alpha Intelligence Capital’s Connect Profile, to learn more! Air Street Capital About: Air Street Capital is a venture capital firm investing in AI-first technology and life science companies. We invest as early as possible and enjoy iterating through product, market and technology strategy from day 1. Thesis: AI-first technology and life science companies. Investment Stages: Pre-Seed, Seed Recent Investments: Athenian Valence Discovery V7 Labs Check out Air Street Capital’s Connect Profile, to learn more! Two Sigma Ventures Location: New York, United States About: Two Sigma Ventures invests in companies run by highly driven people with potentially world-changing ideas. Thesis: 1. Startups across all industries need to be data driven and getting really good at deriving value from data will continue to be critical 2. VCs can be way more supportive of founders. Our model is to utilize the 1700 mostly technical employees of Two Sigma Investments to assist companies with data science, engineering, recruiting, BD, etc. Investment Stages: Seed, Series A, Series B, Series C, Growth Recent Investments: Cajal Neuroscience Xilis Remote Check out Two Sigma Ventures Visible Connect Profile, to learn more! DCVC (Data Collective VC) Location: Palo Alto, California, United States About: Data Collective is a venture fund with a unique team of experienced venture capitalists, technology entrepreneurs and practicing engineers, investing together in seed and early stage Big Data and IT infrastructure companies. Investment Stages: Seed, Series A, Series B Recent Investments: Smartex Samsara Eco ZwitterCo Check out DCVC’s Visible Connect Profile, to learn more! 1984 Ventures Location: San Francisco , California, United States About: 1984 Ventures is an early-stage venture capital firm proptech, fintech, healthcare, marketplace, SaaS, e-commerce, and consumer. Thesis: Looking for companies from pre-revenue to 100k+ in MRR Investment Stages: Pre-Seed, Seed Recent Investments: Relevize Collaborative Robotics SyIndr Check out 1984 Ventures Visible Connect Profile, to learn more! Wing VC Location: Palo Alto, California, United States About: Wing is a purpose-built venture capital firm founded by two industry veterans with a different perspective on what it takes to create enduring companies. Thesis: Invest before it’s obvious, Partner for the long term, Focus on business Investment Stages: Pre-Seed, Seed, Series A Recent Investments: Deepgram Supernova HeadsUp Check out Wing VC’s Visibles Connect Profile, to learn more! Zetta Venture Partners Location: San Francisco , California, United States About: Zetta Venture Partners is the first focused fund committed to delivering exceptional returns from the high-growth analytics market. Thesis: AI & Infrastructure (B2B only) Investment Stages: Pre-Seed, Seed Recent Investments: EnsoData VideaHealth Pimloc Check out Zetta Venture Partners Visible Connect Profile, to learn more! M12 Location: Redmond, Washington, United States About: Is the new name for Microsoft Ventures; it invests in AI & machine learning, big data & analytics, business SAAS, cloud infrastructure, emerging technologies, productivity & communications, security. M12 ran a $2m competition for female founders (applications closed in September 2018) Investment Stages: Series A, Series B, Growth Recent Investments: Valence Security RapidSOS Insite AI Check out M12’s Visible Connect Profile, to learn more! True Ventures Location: Seed, Series A, Series B About: True Ventures is a Silicon Valley-based venture capital firm that invests in early-stage technology startups. Investment Stages: Seed, Series A, Series B Recent Investments: Almond Avidbots Chameleon.io Check out True Ventures Visible Connect Profile, to learn more! AME Cloud Ventures Location: California, United States About: AME Cloud Ventures invests in seed to later-stage tech companies that build infrastructure and value chains around data. Investment Stages: Seed, Series A, Series B Recent Investments: Meez Haven Kojo Check out AME Cloud Ventures Visible Connect Profile, to learn more! Greycroft Location: New York, United States About: Greycroft is a venture capital firm that focuses on technology start-ups and investments in the Internet and mobile markets. Investment Stages: Pre-Seed, Seed, Series A, Series B, Growth Recent Investments: Ostro Frame AI FrankieOne Check out Greycroft’s Visible Connect Profile, to learn more! Hyperplane Venture Capital Location: Boston, Massachusetts, United States About: Hyperplane Venture Capital is an investment firm focused on exceptional founders building machine intelligence and data companies. The company was founded by Brendan Kohler and Vivjan Myrto in 2015; and is headquartered in Boston, Massachusetts. Investment Stages: Seed, Series A, Series B Recent Investments: Relevize Givebutter Nurse-1-1 Check out Hyperplane Venture Capital’s Visible Connect Profile, to learn more! Morado Ventures Location: Palo Alto, California, United States About: Morado Ventures is focused on high-growth, seed-stage technology companies, with particular emphasis on “Data-fueled” businesses. Thesis: At Morado we invest in Passionate Entrepreneurs with unique expertise working on hard technological problems with software and hardware. Investment Stages: Pre-Seed, Seed, Series A Recent Investments: Metrist Everest Labs Headroom Check out Morado Ventures Visible Connect Profile, to learn more! Gradient Ventures Location: Mountain View, California, United States About: We help founders build transformational companies. Specialties include; Artificial Intelligence, Deep Learning, Neural Nets, Machine Learning, Data Science, Virtual Reality, Augmented Reality, Venture Capital, Startups, and Community Investment Stages: Pre-Seed, Seed, Series A Recent Investments: Payload Butter The Coterie Check out Gradient Ventures Visible Connect Profile, to learn more! Wing Location: Menlo Park, California, United States About: Wing is a purpose-built venture capital firm founded by two industry veterans with a different perspective on what it takes to create enduring companies. Thesis: Invest before it’s obvious, Partner for the long term, Focus on business Investment Stages: Seed, Series A, Series B Recent Investments: Deepgram HeadsUp Supernova Check out Wing’s Visible Connect Profile, to learn more! BootstrapLabs Location: San Francisco, California, United States About: BootstrapLabs, a leading Silicon Valley based venture capital firm focused on Applied Artificial Intelligence, and the first VC firm to focus solely on AI since 2015 – with over 30 investments in AI-first companies and today investing from the 3rd AI-focused seed fund ($115M). Investment Stages: Seed Recent Investments: Southie Autonomy Rabot Pryon Check out BootstrapLabs Visible Connect Profile, to learn more! East Ventures Location: Tokyo, Japan About: Founded in 2009, East Ventures is an early-stage sector-agnostic venture capital firm. The firm has supported more than 170 companies in the Southeast Asian region that are present across Indonesia, Singapore, Japan, Malaysia, Thailand, and Vietnam. Investment Stages: Early Stage, Growth Recent Investments: Klar Smile The Parentinc Wagely Check out East Ventures Visible Connect Profile, to learn more! Hyperplane Location: Boston, Massachusetts, United States About: Hyperplane Venture Capital is an investment firm focused on exceptional founders building machine intelligence and data companies. The company was founded by Brendan Kohler and Vivjan Myrto in 2015; and is headquartered in Boston, Massachusetts. Investment Stages: Pre-Seed, Seed Recent Investments: Relevize Nurse-1-1 Butlr Technologies Check out Hyperplane’s Visible Connect Profile, to learn more! Streamlined Ventures Location: Palo Alto, California, United States About: We are a seed-stage investment firm rooted in the belief that the founders of companies are the true heroes of entrepreneurial value creation in our society. We are passionate about working with visionary founders to help them create exceptional companies and help them capture as much of that value for themselves as possible – they deserve it! If we stay true to our beliefs and we are good at what we do, then we will benefit too. Our style of engagement with all our stakeholders focuses on low ego behavior, mutual respect and clarity of thought. We seed invest in visionary founders who are building the next generation of transformational technology companies. Investment Stages: Seed, Series A Recent Investments: Hoken Fursure Ratio Check out Streamlined Ventures Visible Connect Profile, to learn more! Looking for Funding? We can help We believe great outcomes happen when founders forge relationships with investors and potential investors. We created our Connect Investor Database to help you in the first step of this journey. Instead of wasting time trying to figure out investor fit and profile for their given stage and industry, we created filters allowing you to find VCs and accelerators who are looking to invest in companies like yours. Check out all our investors here and filter as needed. To help craft that first email check out 5 Strategies for Cold Emailing Potential Investors and How to Cold Email Investors: A Video by Michael Seibel of YC. Related Resource: All-Encompassing Startup Fundraising Guide After finding the right Investor you can create a personalized investor database with Visible. Combine qualified investors from Visible Connect with your own investor lists to share targeted Updates, decks, and dashboards. Start your free trial here. * The author generated this text in part with GPT-3, OpenAI’s large-scale language-generation model. Upon generating draft language, the author reviewed, edited, and revised the language to their own liking and takes ultimate responsibility for the content of this publication
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Fundraising
Liquidation Preference: Types of Liquidation Events & How it Works
In the intricate world of venture capital and private equity, liquidation preference is a pivotal concept that dictates financial outcomes during critical junctures like company sales or bankruptcies. Our article delves into the nuances of this key mechanism, exploring how it prioritizes investors' returns over common stockholders and its impact in various low-return scenarios. We'll guide you through the five primary types of liquidation preferences, each with distinct implications for investment returns and company dynamics. Particularly crucial for startups, understanding liquidation preferences is essential for navigating future funding and maintaining financial health. Join us as we unravel the complexities of liquidation preference, a crucial element in balancing the risk-reward equation in business finance. Liquidation Preference Defined Liquidation preference is a key term in venture capital and private equity, defining the order and magnitude of payments to investors in events like company sale or bankruptcy. This provision in preferred stock agreements prioritizes the return of capital to investors before any distribution to common stockholders. It's an essential mechanism in venture capital contracts to safeguard invested capital, especially in scenarios yielding low returns. For example, in a real-life scenario, if a company with a liquidation preference clause is sold, preferred investors are entitled to receive their investment amount before any payouts to common stockholders. This ensures that in a liquidity event such as a company sale, the downside risk to preferred investors is minimized, as they are guaranteed a return on their investment before others. However, if preferred stock converts to common stock in a qualified initial public offering (IPO), the liquidation preference often ceases to apply, aligning the interests of all shareholders​. The Importance of Liquidation Preference The importance of liquidation preference in venture capital and private equity cannot be overstated. Primarily, it provides financial security to investors by ensuring they recover their investment before any payouts to common shareholders in the event of a liquidation, such as a company sale or bankruptcy. This makes investing in high-risk ventures more attractive, as it reduces the potential losses in scenarios where the company does not perform as expected. Additionally, liquidation preference can influence company strategies and decision-making. It can impact negotiations during funding rounds, as terms can significantly affect how proceeds are divided in a sale or liquidation event. Moreover, for entrepreneurs and common shareholders, understanding liquidation preference is crucial in assessing how much control and financial benefit they retain in their company after external funding. In essence, liquidation preference is a key element that balances the risk and reward equation for both investors and company founders, making it an indispensable part of venture capital and private equity deals. Related resource: 5 Ways to Make Investor Communication Better The 5 Primary Types of Liquidation Preference As we delve deeper into liquidation preferences, it's important to understand that there isn't a one-size-fits-all approach. This financial tool comes in various forms, each with its unique characteristics and implications for investors and company founders. We will explore five primary types: Single or Multiple, Non-Participating and Participating, Participation Caps, Seniority Structures, and Dividend Preferences. Each type represents a different way of structuring payouts in liquidation events, offering distinct advantages and considerations. In the following sections, we'll break down these categories, providing clarity on how each operates and their potential impact on investment returns and company dynamics. 1.) Single or Multiple Single and Multiple liquidation preferences are two common structures used in venture capital and private equity to determine the payout order and amount to investors in a company's liquidation event. A Single liquidation preference, typically set at 1x the original investment amount, means that an investor with this preference gets paid back their full investment amount before any shareholders lower in the priority stack receive their payouts. This is the most common type of liquidation preference and is seen as a standard protective measure for investors​​. A Multiple liquidation preference, on the other hand, is less common and involves a multiple greater than 1x, such as 2x or 3x. In this scenario, an investor with, for instance, a 2x liquidation preference would be paid back double their original investment amount before any other shareholders receive anything. While it offers greater protection for the investor, high multiple liquidation preferences can become contentious in subsequent funding rounds and may negatively impact the ability of founders and employees to see a return, as these groups are pushed lower in the preference stack​​. For an example of a Single liquidation preference, consider a scenario where an investor invests $1 million for a 25% stake in a company that is later sold for $2 million. With a 1.0x Non-Participating Liquidation Preference, the investor would receive $1 million from their 1.0x preference, ensuring the recovery of their full investment. In this case, the remaining $1 million would be distributed to the common shareholders​​. An example of a Multiple liquidation preference is more complex and less common. For instance, if an investor has a 2x liquidation preference and invests the same amount in a company with the same sale price, they would be entitled to receive double their investment (i.e., $2 million) before any payouts to common shareholders. However, in this example, since the sale price is only $2 million, there would be nothing left for common shareholders after fulfilling the investor's 2x liquidation preference. This highlights how a multiple liquidation preference can significantly impact the distribution of proceeds, potentially leaving common shareholders with little to no return. 2.) Non-Participating and Participating Non-Participating Liquidation Preference allows investors to choose between receiving their initial investment back (usually at a 1x multiple) or converting their preferred shares to common shares and receiving a proportionate share of the sale proceeds. In other words, they can either get their initial investment back or participate in the profits like common shareholders, but not both. Participating Liquidation Preference, on the other hand, enables investors to receive their initial investment back (again, usually at a 1x multiple) and then also participate in the remaining distribution of proceeds as if their shares were common stock. This means they first recover their investment and then also get a share of any remaining proceeds. For example, if a company with a Non-Participating 1x Liquidation Preference is sold, and an investor's initial investment was $1 million, they would have the choice to either take back their $1 million (if the sale proceeds allow) or convert their shares to common and take their share of the total sale proceeds. In contrast, with a Participating 1x Liquidation Preference in the same scenario, the investor would first take their $1 million and then also receive a portion of the remaining proceeds as if they were a common shareholder. 3) Participation Caps Participation Caps in liquidation preference set a limit to how much preferred investors can receive in liquidation events, essentially capping their payout. This cap is usually expressed as a multiple of the original investment. For instance, in a capped participation preference scenario, an investor may have a cap set at 2x or 3x the original investment. This means they will participate in the liquidation proceeds on a pro-rata basis until their total proceeds reach this set multiple. After reaching this cap, they no longer receive additional proceeds, and the remaining funds are distributed to other shareholders. For example, suppose a venture capital firm invests $5 million in a company with a capped participating preference set at a 3x cap. If the company is later sold or liquidated, the VC's payout preference would be capped at $15 million (3 times the $5 million investment). In this scenario, the investor will first receive their $5 million preference and then share in the remaining proceeds until their total proceeds equal $20 million. After reaching this cap, the remaining funds are distributed to other shareholders, such as co-founders​​​​​​. This cap serves as a safeguard to prevent preferred shareholders from over-dominating the payout distribution, thus ensuring a fairer distribution among all shareholders, including founders and common shareholders. 4) Seniority Structures Seniority Structures in liquidation preference determine the order in which investors are paid in the event of a company's liquidation based on the seniority of their investment. This structure can vary, but generally, it prioritizes the most recent investors over earlier ones. A common form of seniority structure is Standard Seniority, where the liquidation preferences are honored in reverse order, starting with the most recent investment round. For instance, Series B investors would receive their liquidation preferences before Series A investors. Another form is Pari Passu Seniority, where all investors are treated equally regardless of their investment round, meaning they all receive a part of the liquidation proceeds proportionate to their initial investment. Lastly, there's Tiered Seniority, a hybrid model where investors are grouped within their funding rounds, and within each tier, payouts follow the pari passu model​​. An example of how seniority structures work can be illustrated as follows. Assume a company has received investments from seed investors who committed $2 million and Series A investors who committed $1 million, each with a 1x liquidation preference. If the company's assets after a sale amount to only $1 million, according to Standard Seniority, the Series A investors would receive the entire $1 million, leaving the seed investors with nothing. This example demonstrates the "last in, first out" principle, where investors who funded the business in its later stages, perhaps during more challenging times, are paid out first​. 5) Dividend Preferences Dividend Preferences refers to the rights of preferred stockholders to receive specific dividends before common stockholders. These dividends are usually set at a fixed amount or rate and are prioritized over dividends to common shareholders, especially in liquidity events. This clause ensures that preferred stockholders not only get priority in the distribution of dividends but also in the accumulation of those dividends if the underlying asset faces a liquidity event. For example, participating preferred stockholders with Dividend Preferences might be entitled to a set dividend rate, in addition to having a liquidation preference. In a scenario with a 2x liquidation preference, these stockholders would receive twice the amount of capital they initially invested in the company in the event of a liquidity event, provided there are sufficient funds to meet this requirement. Additionally, they have the right to convert their participating preferred shares into common stock if they choose to do so​​. This type of preference is significant in providing an extra layer of financial security to preferred stockholders, ensuring they receive their due dividends in addition to any capital returns in the event of a company's sale, merger, or other liquidity events. How Liquidation Preference Works As we've explored various types of liquidation preferences, it's clear that they play a critical role in shaping the outcomes for investors and company founders in liquidity events. Essentially, liquidation preference determines the order and amount in which different shareholders are paid in the event of a company sale, merger, or bankruptcy. This system prioritizes the returns for preferred shareholders, often venture capitalists, over common shareholders, such as employees and founders. The preference can be structured in multiple ways, each having distinct implications on the distribution of proceeds from a liquidation event. Understanding how these preferences work is key to grasping the dynamics of venture capital and private equity investments, as they significantly influence the financial returns for all parties involved in a company's journey. The Best Liquidation Preference For Startups Determining the best liquidation preference for startups depends on various factors including the company's stage, the nature of the investment, and the interests of both investors and founders. Generally, a simpler liquidation preference, like a 1x non-participating preference, is often considered favorable for startups. This type ensures investors get their investment back in a liquidation event, but doesn't excessively dilute the payouts to founders and other common shareholders. A 1x non-participating preference is balanced, offering protection to investors without overly penalizing common shareholders. This type of preference is vital for early-stage startups where future funding rounds might require more attractive terms to new investors, and excessive liquidation preferences can make follow-on funding difficult or unattractive. However, the "best" preference can vary. For more established startups with a clearer path to profitability or exit, different structures might be more appropriate. It's crucial for startups to consider how liquidation preferences might impact future funding and the company's overall financial health. Consulting with financial and legal experts is advisable to determine the most suitable liquidation preference for a startup's specific circumstances. Related resource: What Are Convertible Notes and Why Are They Used? Visible: The Ultimate Resource for Founders We've explored liquidation preference, a key aspect of venture capital and private equity that shapes the financial outcomes in events like company sales or bankruptcies. This mechanism ensures that investors' capital is prioritized over common stockholders, especially in low-return scenarios. We've examined the five primary types of liquidation preferences – Single or Multiple, Non-Participating and Participating, Participation Caps, Seniority Structures, and Dividend Preferences, each with its implications on investment returns and company dynamics. The choice of liquidation preference is crucial for startups, influencing future funding and overall financial health. Overall, liquidation preference is an essential tool in balancing risk and reward for investors and founders in the complex world of business finance. Let Visible help you succeed- raise capital, update investors, and engage your team from a single platform. Try Visible free for 14 days.
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Fundraising
9 Tips for Effective Investor Networking
Raising funding for a business is challenging. At Visible, we like to look at the fundraising process similarly to a traditional B2B sales and marketing process — like a funnel. At the top of the funnel, you are finding potential investors via cold outreach and warm introductions. In the middle of the funnel, you are nurturing potential investors with meetings, pitch decks, updates, and other communications. At the bottom of the funnel, you are working through due diligence and hopefully closing new investors. Related Resource: A Step-By-Step Guide for Building Your Investor Pipeline Building relationships with leads is crucial to success for both a sales and fundraising funnel. Investors are typically investing hundreds of thousands or millions of dollars so building a relationship with investors will help them build conviction. Having a game plan for networking with potential investors can set you up for fundraising success. Check out our tips for networking with potential investors below: The Importance of Networking for Investors According to Brett Brohl of Bread and Butter Ventures, the average early-stage fundraise should take around five months. This means that investors are trying to deploy hundreds of thousands or millions of dollars within just a few months of meeting founders. In order to better your odds of fundraising success, this means that you need to start networking and building relationships with investors in advance of a fundraise. This will help investors build conviction and move quickly when it does come time to raising capital Key Benefits of Effective Networking Founders have to take on countless roles and responsibilities when starting their business. For many founders, fundraising can turn into a full-time job — on top of their other daily responsibilities. By investing in networking throughout the year, you will be able to build momentum when it is time to “actively fundraise.” You will have already formed relationships with investors and will allow them to build conviction quickly so you can get back to your day-to-day. Check out a few key benefits of networking with potential investors below: Momentum when it comes time to fundraise. By networking with potential investors you’ll be able to speed up your fundraise as you’ve already built relationships. Introductions to other investors. Most investors will pass on a potential investment. However, they can make introductions to other investors that might be a fit for your business. Building out your network. The startup world is a tight-knit circle. Forming relationships with investors will allow you to grow your network and find introductions to peers, potential customers, hires, etc. Related Resource: 6 Helpful Networking Tips for Connecting With Investors Breaking Down the 9 Effective Networking Tips Networking might be easier said than done for many founders. Finding an introduction or way to network with potential investors can be challenging. Check out our tips for how you can effectively network with potential investors below: 1. Attend relevant investment seminars Investors are typically involved with different events in the venture capital space. Many are geared towards helping founders network with investors. If you are located in/near a larger city, chances are you will be able to find local events that are full of local investors and VCs. 2. Cultivate a strong online presence Venture investors typically have a strong online presence. One of the best ways to network with potential investors is by having an online presence yourself. You can start by following ideal investors and slowly start to engage with them. 3. Prioritize genuine relationships over quantity There are thousands upon thousands of investors. However, not every investor will be a good fit for your business. We recommend identifying your needs and building a list of “ideal investors” for your business. By focusing on building relationships with these investors, you’ll be able to make sure you are spending time on investors that will be beneficial to your business. 4. Stay updated with industry trends Investors seek to stay in the know when it comes to different industries and verticals. By staying up to date with your industry or focus area, you will improve your odds of being able to offer investors something of value and start building your relationships. 5. Master the elevator pitch If attending different networking events or seminars it is important that you have a plan for how to engage with investors. An aspect of this is likely having your elevator pitch dialed. A shaky or uncertain elevator pitch will be seen as a red flag to many potential investors. 6. Join investor groups and associations As we previously mentioned, the startup and VC world is a tight-knit community. There are countless investor groups and associations — some based in a specific region or city and others based on a vertical or market. Investor groups are a great opportunity to network with investors and peers who are a good fit for your business. Most will host different events and workshops that will allow you to further deepen relationships. 7. Leverage technology for networking In recent years there has been a rise in different technologies to help founders and investors connect. These tools typically include investor profiles that surface their firm’s vital information (some support profiles for startups as well). Related Resource: How Startups Can Use an Investor Matching Tool to Secure Funding Visible Connect, our free investor database, enables startup founders to filter and find the right investors for their business. We use the data and information that is crucial to finding the right investor — like check sizes, investment focus, investment geography, etc. From here, you can add investors directly to your Visible Pipeline to keep tabs on your fundraising conversations and actions. Give it a free try and find the right investors for your business using Visible Connect. 8. Consistent follow-ups Fundraising can be a long and arduous process. Investors are incentivized to move slowly and wait as more data and information about your company and market becomes available. It is critical to stay persistent and continuously follow up with potential investors. At Visible, we recommend adding potential investors to your monthly investor updates to keep them in the loop with your progress. Check out a template to nurture potential investors here. Related Resource: How To Write the Perfect Investor Update (Tips and Templates) 9. Mentorship and being mentored One of the best ways to network with potential investors is to seek out advice and mentorship from them. Going in with a true intent to learn from their experiences is a great way to hone your skillset and build a strong relationship — with them and their network. Related Resource: Startup Mentoring: The Benefits of a Mentor and How to Find One Find Out How Visible Can Help You Connect With the Right Investors As we mentioned at the beginning of this post, a venture fundraise often mirrors a traditional B2B sales and marketing funnel. Just as a sales and marketing team has dedicated tools, shouldn’t a founder that is managing their investors and fundraising efforts? Use Visible to manage every part of your fundraising funnel with investor updates, fundraising pipelines, pitch deck sharing, and data rooms. Raise capital, update investors, and engage your team from a single platform. Try Visible free for 14 days.
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Fundraising
Types of Venture Capital Funds: Understanding VC Stages, Financing Methods, Risks, and More
Venture Capital (VC) plays a pivotal role in the entrepreneurial ecosystem, fueling the growth of innovative startups and established companies alike. This comprehensive guide delves into the various stages of venture capital funding, from early seed investments to late-stage and bridge financing. It also explores exit strategies and offers real-world examples to elucidate the VC landscape. Whether you're an aspiring entrepreneur or an investor, understanding these facets of venture capital is key to navigating the complex world of business finance. An Overview of the Three Principal Types of Venture Capital Funding Venture capital funding, a critical catalyst for business growth and innovation, encompasses more than just the three principal types: early-stage financing, expansion financing, and acquisition/buyout financing. Within these broad categories lie several specialized types of funding, each tailored to different stages of a company's lifecycle and specific needs. Seed financing, for instance, caters to businesses at the idea or concept stage, providing the initial capital to get off the ground. Startup financing then takes over, helping slightly more established businesses that are ready to market their product or service. First-stage financing supports those in the early stages of selling their products. As businesses grow, they may seek second-stage financing for expansion, or bridge financing to cover short-term needs while preparing for a significant event like an IPO. Third-stage (mezzanine) financing is often used for further expansion or to prepare a company for acquisition or IPO. In the acquisition/buyout category, acquisition financing helps businesses acquire specific assets or other companies, while management (leveraged buyout) financing is used to buy out a company's existing owners. Each of these funding types comes with its own set of criteria, risks, and opportunities. The following sections will delve deeper into these various forms of venture capital funding, providing insights into what they entail, who typically funds them, the risks involved, potential exit strategies, and real-world examples to illustrate these concepts in action. This comprehensive exploration aims to provide a clear understanding of the intricate landscape of venture capital funding. Related resources: A Quick Overview on VC Fund Structure How To Find Private Investors For Startups Early Stage Financing Early-stage financing is provided to companies to set up initial operations and basic production. This type of financing supports activities such as product development, marketing, commercial manufacturing, and sales. It's intended for companies in the development phase, which are typically beyond the seed stage and require larger sums of capital to start operations once they have a viable product or service​​. Early-stage companies are generally defined as having tested their prototypes, refined their service model, and prepared their business plan. They might be generating early revenue but are usually not profitable yet​​​​​​. An example of a business that would seek early-stage financing is a tech startup that has developed a working prototype of a new software or hardware product. This company would have validated its product idea, perhaps through initial customer feedback or small-scale deployments, and now requires funding to scale up its production, enhance its product features, and expand its market reach. Regarding the overall market related to early-stage financing, the trends in 2023 indicate a mixed picture. While venture capital investment in Q3 2023 remained flat, with VC-backed companies raising $29.8 billion, which is comparable to the $29.9 billion raised in Q2 2023, there is a continued interest in certain areas like generative AI. Although economic uncertainty and the overhang from existing money in the market have limited investor appetite, early-stage companies are expected to experience more success in fundraising compared to companies trying to raise funds in later-stage rounds​​. However, the fund formation has continued to decline since the highs of Q1 2022, and Q3 2023 ranked as the lowest quarter for fund formation since Q3 2017. Expansion Financing Expansion stage financing is a type of funding used to scale businesses and expand their market share. This stage is typically reached when a startup is growing, the product is selling, and the company is generating significant revenue. It characterizes a new phase of development, often involving expansion into new markets and distribution channels, and can also be used for external growth through mergers and acquisitions​​. This stage of financing is usually pursued after a company has moved past the startup and early stages of its business life cycle​​. An example of a business that would seek expansion financing is a tech startup that has successfully launched a product in a local market and is now looking to expand its reach nationally or internationally. Such a company might use expansion financing to enter new markets, scale up operations, increase production capacity, or diversify and differentiate its product lines. The overall market trend related to expansion financing, the venture capital landscape saw a slight increase in deal count and invested capital in Q3 2023 compared to Q2 2023. Cooley reported 225 venture capital financings in Q3 2023, representing $6.8 billion in invested capital, an increase from 221 financings and $6.4 billion in the previous quarter. This upward trend began in Q2 2023 and ended the steady decline observed from Q4 2021 to Q1 2023. However, this increase in deal count was more pronounced in early rounds, with mid-stage rounds (which include expansion stage) showing a decrease, and late-stage rounds remaining consistent with the previous quarter​​. Despite these upward trends in deal numbers and amounts raised, the percentage of down rounds increased to 27% of deals for Q3 2023, up from 21% in Q2 2023. This marks the highest percentage of down rounds and the lowest percentage of up rounds since 2014, indicating a challenging environment for raising funds at higher valuations​ Acquisition/Buyout Financing Acquisition/buyout financing refers to the capital sources obtained to fund the purchase of a business, comprising a mix of debt and equity in the capital structure. It is specifically used in transactions where a business, usually by a private equity firm or a financial sponsor, is acquired with debt constituting a significant portion of the financing​​​​. The use of leverage (borrowed capital) is a key characteristic of this type of financing, especially in leveraged buyouts (LBOs), where the acquired company's assets are often used as collateral for the loans. An example of a business that might seek acquisition/buyout financing is a medium-sized enterprise in a mature industry, with stable cash flows and strong market presence, looking to acquire a competitor or a complementary business to consolidate market share, expand product lines, or enter new markets. Regarding the overall market trend for acquisition/buyout financing, it has faced significant challenges over the past year, akin to the most prolonged challenges since the 2008–2009 financial crisis. Factors like rising interest rates, geopolitical tensions, and recession fears have led to a sustained downturn in deal activity, which bottomed out in the first quarter of 2023. However, since then, there has been a cautious return to deal-making, and M&A activity seems to be stabilizing, although the pace of recovery varies across regions and sectors​​. According to BCG in 2023, M&A activity was significantly subdued compared to the frenzy observed in 2021 and early 2022. Through the end of August 2023, there was a 14% decline in deal volume and a 41% drop in deal value compared to the same period in 2022​​. Additionally, private equity and venture capital sectors experienced dramatic declines in deal activity, with existing investments facing sharp devaluations and numerous "down rounds" for VC-backed companies​​. This trend indicates a more cautious approach in acquisition/buyout financing, influenced by broader economic uncertainties and tighter financing conditions. What About Seed Financing, Bridge Financing, and the Other Types of Venture Capital Funding I’ve Heard About? VC funding is not a one-size-fits-all approach; it encompasses a diverse range of types beyond the principal categories of early stage, expansion, and acquisition/buyout financing. These include specialized forms such as seed financing, which nurtures business ideas into reality, and bridge financing, which provides interim support in critical business phases. In the following sections, we'll explore in detail: Types of Early Stage Financing: This includes seed financing, startup financing, and first stage financing, each addressing different needs of nascent businesses. Types of Expansion Financing: Here, we'll look at second-stage financing, bridge financing, and third-stage (mezzanine) financing, crucial for businesses in their growth phase. Types of Acquisition/Buyout Financing: Covering acquisition financing and management (leveraged buyout) financing, this section addresses the needs of businesses looking to expand through acquisitions. Each of these sections will delve into the specifics of what each financing type entails, who typically provides and receives the funding, associated risks, potential exit strategies, and real-world examples. Types of Early-Stage Financing Seed Financing Seed financing, the earliest stage in the capital-raising process for startups, is fundamental for getting a business off the ground. It is used for several initial operations, including market research, prototype development, and covering essential expenses like legal fees. This form of financing is typically equity-based, meaning investors provide capital in exchange for an equity interest in the company. Startups that receive seed funding are at their inception stage, and have a business idea or concept/ prototype. These businesses are typically pre-revenue and are seeking funds to turn their ideas into a viable product or service. Seed financing is often sourced from family members, friends, or angel investors, who are pivotal in this stage due to their ability to provide substantial capital. Some VCs or banks may shy away from seed financing due to its high risk. It's considered the riskiest form of investing, as it involves investing in a company far before it generates revenue or profits. That being said there are also many VCs that focus solely on investing at the seed stage. The success of a seed investment heavily depends on the viability of the startup's idea and the management's ability to execute it. If this is strong then the likelihood of finding seed funding from any investor is strong. Related resource: List of VCs investing at the Seed stage from our Connect investor database Seed financing is considered the riskiest form of investing in the venture capital spectrum. The primary risk stems from investing in a business far before it has proven its concept in the market, often without a clear path to profitability. This high risk, however, is balanced by the potential for significant returns if the startup succeeds. Exit strategies for seed investors might include acquisition by another company or an Initial Public Offering (IPO), but these are long-term outcomes. Another exit strategy could be the sale of shares during later funding rounds to other investors at a higher valuation. Despite its risky nature, seed financing can yield high returns. A famous example is Peter Thiel’s investment in Facebook. In 2004, Thiel became Facebook’s first outside investor with a $500,000 contribution for a 10% stake, eventually earning over $1 billion from his investment (source). Related resource: Seed Funding for Startups 101: A Complete Guide Startup Financing Startup financing refers to the capital used to fund a new business venture. This financing is essential for various activities, such as launching a company, buying real estate, hiring a team, purchasing necessary tools, launching a product, or growing the business. It can take the form of either equity or debt financing. Equity financing, often sourced from venture capital firms, provides capital in exchange for partial ownership, whereas debt financing, like taking a loan or opening a credit card, must be repaid with interest​​. Startup financing is commonly funded by angel investors, venture capital firms, banks, and sometimes through government grants or crowdfunding platforms. These entities typically fund startups that exhibit high growth potential, innovation, and a solid business model. Startups that receive funding usually have a unique business idea or a promising market opportunity. They are often in their early stages but have moved past the initial concept phase and have a detailed business plan and, in some cases, a minimum viable product (MVP). Investing in startups is inherently risky, given that about 90% of startups fail. The risks include market risks, where even a great idea may fail if there's no market for it or due to unforeseen changes in the market. The potential for high returns is counterbalanced by the high probability of failure​​​​. Common exit strategies for equity financing include acquisition by another company or an Initial Public Offering (IPO). Acquisition allows access to resources and can lead to economies of scale and diversification. An IPO provides access to capital for further growth or debt repayment. However, these strategies come with challenges like integration issues, financial risks, and regulatory hurdles​​​​​​. A classic example of successful startup financing is Airbnb. In its early stages, Airbnb raised funds from venture capital firms and angel investors, which helped it scale its operations globally and eventually led to a successful IPO in 2020. First Stage Financing First-stage financing, often referred to as Series A funding, is a pivotal moment for startups, marking their first significant round of venture capital financing. This phase is crucial for companies that have moved beyond the seed stage, demonstrating initial market traction and a working prototype of their product or service. The primary uses of Series A funds include further product development, bolstering marketing and sales efforts, and expanding into new markets. The funding for first-stage financing often comes from a variety of sources. Initially, startups might rely on funds from family, friends, or angel investors. As they progress, professional investors like venture capitalists or angel investors become significant sources of capital during the seed round, which is typically the first formal investment round in a startup​​​​. As for who gets funded, it's generally startups that have moved beyond the initial concept stage and are ready to ramp up their operations. This involves increasing production and sales, indicating that the company's business model is being validated​​. Typical exit strategies for investors within a 5-7 year timeframe include: IPO (Initial Public Offering): Offering shares on a stock exchange, providing liquidity and potential high returns. Acquisition: Selling the company to another entity for an immediate exit and payout. Secondary Offering: Selling shares to private equity firms or institutional investors for liquidity. An example of a company that successfully went through first-stage financing, specifically Series A funding, is YouTube. In 2005, YouTube raised $3.5 million in its Series A funding round, with venture capitalists as the primary investors. This funding was crucial in helping YouTube expand its services and grow its user base, ultimately leading to its position as a major player in online video and social media​ Types of Acquisition/Buyout Financing Acquisition Financing Acquisition financing is a process that involves various sources of capital used to fund a merger or acquisition. This type of financing is typically more intricate than other forms of financing due to the need for a blend of different financing methods to optimize costs and meet specific transaction requirements. Various alternatives available for acquisition financing include stock swap transactions, equity, all-cash deals, debt financing, mezzanine or quasi-debt, and leveraged buyouts (LBOs). Acquisition financing is used to fund the purchase of another company or its assets. It can be utilized for several purposes, including: Expanding a company's operations or market reach. Acquiring new technologies or products. Diversifying the company’s holdings. Eliminating competition by buying out competitors. The financing for acquisitions comes from multiple sources, each with its own characteristics and implications: Stock Swap Transaction: This involves the exchange of the acquirer's stock with that of the target company. It's common in private company acquisitions where the target's owner remains actively involved in the business. Equity: Equity financing is typically more expensive but offers more flexibility, especially suitable for companies in unstable industries or with unsteady cash flows. Cash Acquisition: In an all-cash deal, shares are swapped for cash, often used when the target company is smaller and has lower cash reserves. Debt Financing: This is a preferred method for many acquisitions, often considered the most cost-effective. Debt can be secured by the assets of the target company, including real estate, inventory, or intellectual property. Mezzanine or Quasi Debt: This is a hybrid form of financing that combines elements of debt and equity and can be converted into equity. Leveraged Buyout (LBO): In an LBO, the assets of the acquiring and target companies are used as collateral. LBOs are common in situations where the target company has a strong asset base and generates consistent cash flows​​. Acquisition financing is typically sought by companies looking to acquire other businesses. This includes large corporations expanding their market share, medium-sized businesses seeking growth through acquisition, or even smaller firms aiming to consolidate their market position. Risks in acquisition financing vary based on the type of loan, its term, and the amount of financing. The risks include: Type of Financing Provider: The wrong type of financing provider can pose significant risks, especially if the loan is collateralized, as in the case with most bank loans. Pressure from Lenders: Banks can exert pressure for repayment, particularly if they view the company primarily as asset collateral rather than focusing on future cash flow growth. Capital Shortage Post-Acquisition: Acquiring companies need additional capital post-acquisition for growth, and being capital-short can be a significant risk​​. Exit strategies for investors or owners in acquisition financing might include: Increasing personal salary and bonuses before exiting the company. Selling shares to existing partners upon retirement. Liquidating assets at market value. Going through an initial public offering (IPO). Merging with another business or being acquired. Selling the company outright​​. A prominent example of acquisition financing is Amazon's acquisition of Whole Foods Market. In 2017, Amazon acquired Whole Foods Market in a $13.7 billion all-cash deal. This acquisition allowed Amazon to expand significantly into physical retail stores and further its goal of selling more groceries. The deal involved Amazon paying a premium of about 27% over Whole Foods Market's closing price, indicating a substantial investment in future growth prospects Management (Leveraged Buyout) Financing A Management Buyout (MBO), a type of leveraged buyout (LBO), is a corporate finance transaction where a company's management team acquires the business by borrowing funds. This usually occurs when an owner-founder is retiring or a majority shareholder wants to exit. The management believes that they can leverage their expertise to grow the business and improve operations, generating a return on investment. Lenders often favor MBOs as they ensure business continuity and maintain customer confidence. Financing for MBOs can come from various sources: Debt Financing: This is a common method where management borrows from banks, though banks may view MBOs as risky. Seller/Owner Financing: The seller may finance the buyout through a note, which is paid back from the company’s earnings over time. Private Equity Financing: Private equity funds may lend capital in exchange for a share of the company, with management also contributing financially. Mezzanine Financing: This is a mix of debt and equity that enhances the equity investment of the management team without diluting ownership​​. Risks associated with MBOs include: Interest Rate Risk: High interest rates on financing agreements can be a challenge. Operational Risk: Business efficiencies anticipated may not materialize, causing operational problems. Industry Shock Risk: An unexpected industry shock can adversely affect the success of the MBO​​. Exit strategies for MBOs typically align with general business exit strategies and may include: Increasing personal salary and bonuses before exiting. Selling shares to partners or through an initial public offering (IPO). Liquidating assets. Merging with or being acquired by another business. Outright sale of the company. A classic example of an MBO is the acquisition of Dell Inc. by its founder, Michael Dell, and a private equity firm, Silver Lake Partners, in 2013. The deal valued at about $24.4 billion, involved Michael Dell and the investment firm buying back Dell from public shareholders. This buyout was funded through a combination of Dell's and Silver Lake's cash along with debt financing. The MBO aimed to transition Dell from a publicly traded company to a privately held one, allowing more flexibility in restructuring the business without public market pressures. ​ How to Obtain Venture Capital Funding Obtaining venture capital funding is a multi-step process that requires preparation, strategic networking, and clear communication. Here’s a guide on how companies can navigate this process. Present Your Idea With a Compelling Business Plan When presenting a business plan, start by tailoring your presentation to align with the VC firm's interests, emphasizing aspects of your business that resonate with their investment philosophy. Creating a visually appealing slide deck, complete with graphs, charts, and infographics, can help make complex data more accessible and keep your audience engaged. Practice is key, so rehearse your presentation multiple times to refine your message and improve delivery. During the presentation, begin with an attention-grabbing story or statistic and then provide a structured walkthrough of your business plan. Be prepared for a Q&A session afterward and handle questions confidently and honestly. Remember, if you don’t know an answer, it’s perfectly acceptable to acknowledge it and offer to provide the information later. Following the presentation, be proactive in providing any requested additional documents and maintain open lines of communication for future discussions. Key components of a business plan: Executive Summary: A concise overview of your business, including the mission statement, product/service description, and basic information about your company’s leadership team, employees, and location. Company Description: Detailed information about what your company does and what problems it solves. Explain why your product or service is necessary. Market Analysis: Provide a robust market analysis that includes target market segmentation, market size, growth potential, and competitive analysis. Organizational Structure and Management Team: Outline your company’s structure and introduce your management team, highlighting their experience and roles in the success of the business. Products or Services: Detailed description of your products or services, including information about the product lifecycle, intellectual property status, and research and development activities if applicable. Marketing and Sales Strategy: Explain how you plan to attract and retain customers. This should include your sales strategy, marketing initiatives, and a description of the sales funnel. Financial Plan and Projections: This is critical for VC firms. Include historical financial data (if available) and prospective financial data, including forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. Funding Request: Specify the amount of funding you are seeking and explain how it will be used. Also, discuss your plans for future funding. Exit Strategy: Describe the exit strategies you might consider, such as acquisition, IPO, or selling your stake in the business. This shows investors how they might reap a return on their investment. Your business plan is a reflection of your vision and capability, so ensure it is clear, concise, and compelling. It should effectively communicate the potential of your business and be able to capture the interest and confidence of the VC firm. Attend an Introductory Meeting to Discuss Project Details The introductory meeting with a VC firm is a pivotal moment for entrepreneurs seeking funding. Its purpose extends beyond mere information exchange; it's an opportunity to make a compelling first impression, establish the credibility and potential of your business idea, and assess the compatibility between your company's goals and the VC’s investment philosophy. During this meeting, several critical details will be discussed: Business Model: You will explain how your business intends to make money, focusing on its sustainability and profitability. Market Opportunity: Discuss the potential market size and how your company plans to capture and grow its market share. Competitive Landscape: Outline your key competitors and what sets your company apart from them. Financial Needs: Clearly state how much funding you need, what you will use it for, and your company’s valuation. Future Vision: Share your long-term vision for the company, including potential growth areas and exit strategies. Examples reinforcing the importance of this meeting include: Tech Startup: A tech startup might use this meeting to showcase their innovative technology, provide evidence of scalability, and present market research supporting the demand for their solution. For instance, a SaaS company could illustrate their recurring revenue model and discuss their rapid user growth and engagement metrics. Biotech Firm: A biotech company might focus on their cutting-edge research, its impact on healthcare, and the path to regulatory approval and commercialization. They could discuss clinical trial results or partnerships with medical institutions. Retail Business: A retail entrepreneur might discuss their unique brand positioning, market penetration strategies, and plans for online-offline integration. They could highlight customer loyalty data and plans for expanding their digital footprint. These examples underscore the significance of the introductory meeting as a platform to demonstrate the potential for growth, showcase the strength and expertise of the team, and articulate the viability of the business model. This meeting is not just an informational session; it's a strategic opportunity to begin building a relationship with potential investors. Remember, the goal of this meeting is to leave a lasting, positive impression that paves the way for further discussions and potential investment. It's as much about selling your vision and team as it is about presenting your business plan. Account for Business-Related Queries and Perform Due Diligence The due diligence phase is a critical part of the VC investment process. It's a comprehensive evaluation undertaken by potential investors to assess the viability and potential of a startup before they commit to an investment. This phase allows investors to confirm the details presented by the startup and to understand the risks and opportunities associated with the investment. During this phase, a wide range of information will be requested, covering various aspects of the startup's operations, finances, legal standings, and market position. Some key areas include: Financial Records: Detailed examination of financial statements, cash flow, revenue projections, burn rate, and historical financial performance. This also includes an analysis of the startup’s business model and profitability potential. Legal Documents: Review of legal documents such as incorporation papers, patents, intellectual property rights, legal disputes, and contractual obligations with suppliers, customers, or partners. Market Analysis: Assessment of the startup’s market, including size, growth potential, competitive landscape, and the company's market share and positioning. Product or Service Evaluation: Thorough evaluation of the product or service, including its development stage, technological viability, scalability, and competitive advantages. Customer References and Sales Data: Verification of customer references, sales records, and customer retention data to assess market acceptance and satisfaction. Management and Team Interviews: Interviews with key team members to evaluate their expertise, commitment, and ability to execute the business plan. Operational Processes: Review of internal processes, including supply chain management, production, and delivery mechanisms, to assess operational efficiency and scalability. Examples of Due Diligence Activities Customer Reference Checks: Investors may directly contact a few customers to gauge their satisfaction and understand the value proposition of the startup’s product or service. Product Evaluations: Technical assessment of the product to understand its uniqueness, technological soundness, and compliance with industry standards. Business Strategy Review: In-depth discussions about the startup’s business strategy, including market entry strategies, growth plans, and risk management. Management Interviews: Personal interviews with the CEO, CFO, and other key executives to assess their leadership and operational capabilities. Market and Industry Analysis: Engaging market experts or conducting independent research to validate the startup’s market analysis and growth projections. Due diligence is vital for both investors and startups. For investors, it mitigates risk by providing a clear picture of what they are investing in. It uncovers potential red flags that could affect the investment's return. For startups, this phase is an opportunity to demonstrate transparency, build trust, and potentially receive valuable insights from experienced investors. Related resource: Valuing Startups: 10 Popular Methods Review Term Sheets and Approve or Decline Funding A term sheet is a critical document in the venture capital funding process. It's a non-binding agreement outlining the basic terms and conditions under which an investment will be made. A term sheet serves as a template to develop more detailed legal documents and is the basis for further negotiations. It typically includes information about the valuation of the company, the amount of investment, the percentage of ownership stake the investor will receive, the rights and responsibilities of each party, and other key terms such as voting rights, liquidation preferences, anti-dilution provisions, and exit strategy. During the term sheet review, negotiations are a fundamental part. It's a give-and-take process where both the startup and the VC firm discuss and agree upon the terms of the investment. These negotiations are crucial as they determine how control, risks, and rewards are distributed between the startup founders and the investors. Areas of negotiation can include: Valuation: Determining the company's worth and consequently how much equity the investor gets for their investment. Ownership and Control: Deciding on the percentage of ownership the investor will have and how much control they will exert over company decisions. Protection Provisions: Negotiating terms that protect the investor’s interests, such as anti-dilution clauses, liquidation preferences, and board representation. Vesting Schedules: Discuss how the founder’s shares will vest over time to ensure their continued involvement in the business. Negotiations require both parties to compromise and agree on terms that align the interests of both the investors and the founders. Once the term sheet is accepted and signed by both parties, it leads to the drafting of detailed legal documents that formalize the investment. The actual disbursement of funds typically occurs after these legal documents are finalized and signed, a process that can take several weeks to months, depending on the complexity of the terms and the due diligence process. The funds are generally made available in a single tranche or in multiple tranches based on agreed-upon milestones or conditions. It's important for startups to understand that a term sheet, while not legally binding in most respects, is a significant step in the funding process. It sets the stage for the formal legal agreements and the eventual receipt of funding. The clarity, fairness, and thoroughness of the term sheet can set the tone for a successful partnership between the startup and the venture capital firm. Raise Capital and Keep Investors in the Know with Visible As a founder, it's essential to remember that venture capital is not the only measure of success. The true value of your venture lies in the problem it solves, the impact it creates, and the legacy it builds. Venture capital can be a powerful catalyst, but your vision, tenacity, and ability to execute are what will ultimately define your journey and success. Let Visible help you succeed- raise capital, update investors, and engage your team from a single platform. Try Visible free for 14 days.
founders
Operations
Fundraising
Deal Flow: Understanding the Process in Venture Capital
The deal flow process is arguably the most important operational functions at a VC firm. From an outsider's perspective, the way a VC firm runs its deal flow process can be mysterious. It’s the secret recipe that helps VC firms find and invest in the best-performing startups resulting in the biggest returns for their LPs. In this article we’re breaking down the deal flow process: what it is and why it matters. Defining deal flow in venture capital Deal flow is defined as the process investors run to attract potential investments, narrow down those opportunities, and then make a final investment decision. How a venture capital firm runs this process, and the quality of investments in their deal pipeline, is what separates great investors from the rest of the pack. The process of building great deal flow is similar to a sales funnel. Investors want a lot of leads (potential investments) coming to them at the top of their funnel to increase their odds of finding winners. What’s most important though is the quality of those leads. Too much inbound interest from startups that are not aligned with the fund’s thesis is overwhelming and distracting for investors. This is why it’s important for startups to do their research before reaching out to an investor. Similarly, it’s why investors often consider companies that come to them from a referral more credible opportunities -- those companies have already been pre-vetted by someone in their network. Ultimately, investors care about both volume and quality when building their deal flow pipeline. Maximizing the number of high-quality leads ensures investors are spending their time reviewing opportunities that can actually result in an investment. Why startups should be familiar with the deal flow process It’s important for startups to be familiar with the deal flow process so they can engage with the right type of investors, in the right way. When startups fundraise with a solid understanding of the deal flow process they can save themselves time and increase their likelihood of securing funding. According to a survey from more than 900 VC’s, investors are most likely to source a deal from the following channels: 30% - former colleagues or work acquaintances 30% - VCs initiating contact with entrepreneurs 20% - other investors 10% - cold outreach from startups 8% - existing portfolio companies What this means for startups is they shouldn’t rely on cold outbound alone. They’re more likely to stand out to an investor if they can get a warm intro from a personal connection, another relevant investor, or even from a current portfolio company. Founders should invest more time deepening relationships in their networks as opposed to a spray-and-pray cold outbound approach. A great way for founders to strengthen their relationships with their networks is to send out monthly communications to keep their potential investors, friends, and colleagues engaged. Get started sending regular updates with Visible. If a company is going to send a cold outreach to an investor it’s important to understand just how much inbound interest investors receive on a weekly basis. It’s reported that small VC firms receive about 30 inbound messages from startups per week while larger firms can receive more than 200 (source). Here's what this means for startups: Don’t be discouraged if an investor doesn’t respond to your cold outreach; they’re busy making their way through all the other inbound interest from the week Your pitch deck needs to be clear, concise, and compelling Make sure you research the investor in advance and are confident your company fits their investment thesis; otherwise, you’re wasting multiple people's time Related resource: Pitch Deck 101: How Many Slides Should My Pitch Deck Have? It’s also important for startups to understand that investors only invest in about 1% of the companies that go through their pipeline. While this may sound daunting, this advice from VC investor Krittr highlights the optimistic mindset founders should take. “This is the first thing that is important to understand — VC firms want you to succeed. We want you to get the money, and grow. All we want is a strong enough reason to give you the money. Remember this, this mindset shift does wonders.” Stages of the deal flow process in venture capital The deal flow process is commonly broken down into seven phases with a decreasing number of companies making it to the next phase. During this process, investors are collecting more information and building conviction about whether a company is a fit for their firm or not. A more in-depth breakdown of each step can be found below. 1. Sourcing Sourcing is the process of VCs finding potential investment opportunities. To source deals investors will do things like attend networking events (demo days, pitch competitions, industry conferences), research market activity, and meet with other VCs or incubators/accelerators to discuss deal opportunities. 2. Screening During the screening process, investors will rely on basic assets such as pitch decks to determine which opportunities are worth digging into on a deeper level. Share your deck with confidence and track engagement rates with Visible. 3. First meeting When investors believe the company has the potential to be a good investment opportunity based on their initial pitch deck, they will be invited to join a first meeting with the firm. At this stage, investors are trying to better understand the dynamics of the leadership team, whether the company has a competitive advantage, and the market health of the specific sector. This may lead to additional follow-up meetings where more in-depth questions are asked by the investment team. Learn more about preparing for the first meeting. 4. Due diligence If the investment team has built conviction on a company based on the initial meetings they will kick off a more thorough due diligence process. During this phase, the VC is trying to gain an in-depth understanding and evidence of the company’s financial, technological, legal, and market opportunities and risks. Here is a breakdown of the topics investors evaluate at this stage Market - The size of the market, level of maturity, predicted growth and trends, competitive activity, and regulatory changes Business - How does the product work, what are the early customer metrics indicating (CAC, Churn Rate, Average Order Size, MRR, Annual Run Rate, Cash Runway, Gross Sales, CLV), how is the team structured, what does the company operations look like Technical - Does the company have any intellectual property or patents Financial due diligence - Analyzing financial statements, unit economics, and performance rations Legal due diligence - Is the company complying with local and federal regulations 5. Investment Committee The next phase of the deal flow process is when the investment committee reviews all the due diligence information, listens to the company present another time, asks additional questions, and then votes on whether to move forward with the investment opportunity. The investment committee is usually comprised of the General Partners who have worked on the deal, some independent investment committee members, and possibly experts in the field. It is during this meeting that the firm decides whether or not to invest in the company. The VC Krittr explains that VCs can have different motivations for choosing to invest in a particular company. VC motivations can include: Conviction that this company will return 10x their investment (the VC power law) Balancing risk in the portfolio construction Building the right co-investing relationships Building a relationship with a great founder even if success may not come from this particular company Publicity or staying true to the firm's thesis/mission As a startup, it is beneficial to identify what is motivating the VC so you can leverage your strengths and build a good relationship with the VC. 6. Term sheet and negotiation Once the VC has decided to invest in a company they will give the startup a term sheet and negotiation begins. VCs and startups negotiate terms until both parties agree on key items such as: Deal size and ownership percentage - how much equity founders are willing to give to investors Cash flow rights - the financial upside that gives founders incentives to perform Control rights - the board and voting rights that allow VCs to intervene if needed Liquidation rights - the distribution of the payoff if the company fails and has to be sold Employment terms, particularly vesting - which gives entrepreneurs incentives both to perform and to stay at the company Pro rata rights - allows investors to retain their initial ownership percentage by participating in future financing rounds The goal of a term sheet negotiation is for both founders and VCs to feel fairly rewarded when the company succeeds, and protected if the company is missing milestones. (Source) Related resource: 6 Components of a VC Startup Term Sheet Related resource: Navigating Your Series A Term Sheet 7. Capital Deployment The final stage in the deal flow process process is the actual transaction of capital from the venture capital firm to the startup's bank account. Key metrics venture capitalists track in the deal flow process To ensure a Venture Capital firm is running an efficient deal flow process they measure success based on a few key metrics. Volume - Investors measure how many new companies are added to their deal flow pipeline each week. It’s an indication of their brand recognition in the industry and awareness among founders. Relevance - VCs not only care about the number of investment opportunities that land in their inbox but also how relevant the deals are. If they are seeing a high number of irrelevant deals the VC may need to strengthen their branding and messaging to attract the right type of founders. Conversion rates - It’s important for investors to track how many companies are making it to each stage within their pipeline so they can identify any areas of inefficiency. For example, they may have too many deals making it to the first meeting stage and as a result, they may need to set up a more formal application process for companies to go through. Diversity - Investors measure the diversity of the deals they are evaluating to understand and remove bias from their deal flow processes. For example, if they’re mostly receiving referrals or inbound interest from a certain demographic, the firm likely needs to work on diversifying their network as a whole. Related resource: Improving Diversity at Your VC firm Find the right investors for your startup with Visible Understanding the venture capital deal flow process is fundamental if startups want to make a great impression while fundraising. Demonstrating an understanding of each of the seven phases of the deal flow process is a sure way to impress investors. Additionally, understanding what is required from startups at each step will help founders prepare for their next fundraise. Visible helps over 3,500+ startups with their fundraising process.
founders
Fundraising
How Startups Can Use an Investor Matching Tool to Secure Funding
Raising capital for a startup is challenging. At Visible, we like to look at the fundraising process similarly to a traditional B2B sales and marketing process — like a funnel. At the top of the funnel, you are finding potential investors via cold outreach and warm introductions. In the middle of the funnel, you are nurturing potential investors with meetings, pitch decks, updates, and other communications. At the bottom of the funnel, you are working through due diligence and hopefully closing new investors. In order to give yourself the best odds of raising capital, you need to have a healthy “top-of-funnel” filled with qualified investors. There are a number of different ways and sources you can use to find investors for your fundraise. Check out how an investor matching platform can help below: What is an Investor Matching Platform? An investor matching platform is a tool that founders can use to find qualified investors for their business. On the flip side, investors can use an investor matching platform to find qualified deal flow for their business. An investor matching platform typically involves profiles for both investors and founders with firmographic information. These are used to help founders find investors that are a fit for their business. Related Resource: How To Find Private Investors For Startups Benefits of Using an Investor Matching Tool The average founder has 48 investors in their Visible Pipeline. Many VCs and thought-leaders recommend that founders target 100+ investors over the course of a fundraise. Check out the number of investors a founder should expect to target below: In order to fill your fundraising pipeline with 48+ investors, it is important to have plenty of opportunities to find potential investors. Related Resource: A Step-By-Step Guide for Building Your Investor Pipeline This is where an investor matching tool can help. Check out more benefits of an investor matching tool below: 1. Wider access to potential investors As we’ve mentioned above, a fundraise typically requires a list of 48+ investors. A matchmaking tool can be a great resource to help find the right investors for your business. In the past, most founders have had to look to their immediate network for introductions to potential investors (or cold email) — a matchmaking tool allows you to widen your pool of potential investors. 2. Time and resource savings Finding potential investors can be a time consuming process. You need to identify your needs, find the investors that fit your needs, then find an introduction or write a personalized cold email. With a matchmaking tool, you can quickly find investors investors that are the right fit for your business using filters. 3. Data-driven matching Finding investors is similar to finding the right leads for your sales and marketing team. In order to find the right investors, you need to use data and criteria to find the investors that are a fit. With Visible Connect, our free investor database, you can filter investors using fields and data, such as the following: Investor check size minimums and maximums Investor stage focus Investor sector/vertical focus Investor fund size Investor geographic focus 4. Streamlined communication and negotiation Some investor matching tools have communication built directly into the platform. This allows for quick introductions and a quick yes/no from potential investors. While this can save time and streamline communication this can also come with downsides. For example, potential investors have the ability to pass on your business with little explanation or knowledge. 5. Increased credibility Some investor matching tools require a vetting process for both founders and investors. This leads to increased credibility and ensures both parties that they are talking to a credible person. 6. Community and networking opportunities A fundraise requires conversationsn with many investors, peers, and leaders in the space. While most investors will pass on your business it can lead to an increase in your network. For example, some investors might pass on your business because it is too early stage, this is an opportunity for you to build a relationship with this investor over time. How to Get the Most Out of an Investor Matching Platform For many investor matching tools, you will get out of it what you put into it. You’ll want to approach it with a plan for your fundraise that can be used when finding potential investors. Check out a few examples to make sure you’re getting the most out of your investor matching platform below: Related Resource: 20 Best SaaS Tools for Startups Define your needs First things first, you should define what you are looking for out of a fundraise and start to build out what your “ideal investor” looks like. This typically means identifying the criteria you’d want out of your investor — check size, stage focus, vertical focus, etc. Build a strong profile If your investor matching tool requires a founder/company profile, make sure it is built out. For many investors, this will be their look into your business and how you operate. If your profile is half built out, they will assume you are not taking it seriously. Proactively engage with investors Investors receive hundreds of emails and messages from potential investors every month. Chances are that your initial messagse could get lost in the shuffle. Make sure you are proactive and have a plan to follow up as needed. Be transparent If you are using an investor matching tool, chances are this will be your first interaction with many of the investors. In order to build trust, you need to start the relationship with transparency. Be honest about where your business is at, what you’re looking for out of potential investors, etc. Keep your information up-to-date As we mentioned above, your profile will be a potential investors first look into your business and how you operate. Make sure that your information is up-to-date and relevant. If an investor sees that your information is months or quarters old, they will question how you operate. Match With the Right Investors With Visible As we mentioned at the beginning of this post, a venture fundraise often mirrors a traditional B2B sales and marketing funnel. Just as a sales and marketing team has dedicated tools, shouldn’t a founder that is managing their investors and fundraising efforts? Use Visible to manage every part of your fundraising funnel with investor updates, fundraising pipelines, pitch deck sharing, and data rooms. Raise capital, update investors, and engage your team from a single platform. Try Visible free for 14 days.
founders
Fundraising
13 Generative AI Startups to Look out for
The technological landscape has been dynamically evolving with the surge of AI, leading to the inception of numerous startups that harness AI's potential to innovate and disrupt industries. These ventures are redefining creativity and productivity, crafting systems that can generate anything from realistic images to sophisticated code, mimicking human ingenuity. They are crafting intelligent systems that can create content, solve complex problems, and generate ideas, ushering in an era where AI is not just a tool, but a creator and innovator. Generative AI startups are not only grabbing headlines but also attracting substantial investments, reflecting the confidence and excitement surrounding their potential to transform every sector they touch. Let's delve into some of the most groundbreaking generative AI startups that are redefining the tech industry. Related resource: CBInsights Generative AI Bible Related resource: How AI Can Support Startups & Investors + VCs Investing in AI Related resource: AI Meets Your Investor Updates 1. OpenAI OpenAI is an artificial intelligence research laboratory consisting of the for-profit OpenAI LP and its parent company, the non-profit OpenAI Inc. It aims to promote and develop friendly AI in such a way as to benefit humanity as a whole. OpenAI's research has led to the development of some of the most advanced AI models in the world, including GPT-3, DALL-E 2, and InstructGPT. These models have been used to create a variety of innovative products and services, including AI-powered content generators, image editors, and chatbots. Its work is centered on advancing digital intelligence in a way that can scale to solve complex problems in a variety of domains, from healthcare to economics. The utility of OpenAI's products stems from their ability to automate complex tasks, process large amounts of data efficiently, generate human-like text, and more, which can significantly impact various industries by enhancing productivity, innovation, and problem-solving capabilities. Year founded December 2015 Founders The list of founders of OpenAI includes: Elon Musk, who has since left the company. Sam Altman, previously president of Y Combinator. Greg Brockman, formerly the CTO of Stripe. Ilya Sutskever, a leading expert in machine learning. Wojciech Zaremba, a researcher with expertise in robotics. John Schulman, a researcher in machine learning and robotics. Funding OpenAI has secured over $300 million in funding in April from prominent backers including Sequoia Capital, Andreessen Horowitz, Thrive, and K2 Global, at a valuation of $29 billion. Additionally, a major investment from Microsoft, closed in January, was reported to be around $10 billion. OpenAI, with Microsoft holding a 49% stake, has projected optimistic financial prospects, expecting to reach $1 billion in revenue in 2023. This anticipated financial success underscores the company's significant impact and innovation in the field of artificial intelligence. Related resource: Top 15 Machine Learning Startups to Watch 2. Chohere Cohere is a Canadian startup that specializes in large language models and generative AI for enterprise use. Founded by a team with roots in Google Brain's transformative research on machine learning architectures, Cohere has quickly positioned itself at the forefront of AI innovation. The company's mission is to empower businesses with AI-driven solutions that enhance chatbots, search engines, content creation, and data management. Cohere's strength lies in its sophisticated language models capable of understanding and responding to text with nuanced comprehension. Their multilingual model breaks language barriers, extending advanced text processing to over 100 languages. By integrating their technology with major platforms like Oracle and Salesforce, Cohere is embedding AI deeply into business operations, automating tasks from copywriting to content moderation. The company's commitment to responsible AI development is underscored by its adherence to international guidelines and its nonprofit arm dedicated to open-source AI research. With its cloud-agnostic platform and strategic partnerships, Cohere not only competes with giants like OpenAI but also paves the way for generative AI's future in the enterprise realm. Year founded 2019 Founders Aidan Gomez Ivan Zhang Nick Frosst Funding Cohere's journey in securing financial backing has been marked by significant milestones. In September 2021, the company proudly announced a $40 million Series A funding round led by Index Ventures, with the added bonus of Index Ventures partner Mike Volpi joining Cohere's board. This round was notable for contributions from Radical Ventures, and respected AI experts such as Geoffrey Hinton, Fei-Fei Li, Pieter Abbeel, and Raquel Urtasun. The momentum continued into February 2022, when Cohere announced a substantial $125 million Series B funding, spearheaded by Tiger Global. The company's financial trajectory reached new heights in June 2023 with a Series C funding round that brought in an additional $270 million. This round saw participation from notable investors including Inovia Capital, Oracle, Salesforce, and Nvidia, elevating Cohere's valuation to an impressive $2.2 billion. 3. Hugging Face Hugging Face, Inc. stands as a unique blend of a French-American company and an open-source community, primarily known for its development and contribution to machine learning technologies. Based in New York City, the company has gained acclaim for its Transformers library, which is pivotal in natural language processing. By emphasizing community collaboration and accessibility, Hugging Face has created a platform that encourages users to share and showcase machine learning models and datasets. Hugging Face's journey from a chatbot app developer to a machine learning platform highlights its adaptability and commitment to innovation. Notable achievements include the launch of the BigScience Research Workshop and the introduction of BLOOM, a groundbreaking multilingual large language model. The company's acquisition of Gradio and collaborations with industry giants like Graphcore, Amazon Web Services, and others further showcase its expanding impact. Through its Transformers library and Hugging Face Hub, the company provides versatile resources for machine learning, catering to a variety of needs in text, image, and audio tasks. Its services have become essential for developers seeking efficient, collaborative, and innovative AI solutions. Year founded 2016 Founders Clément Delangue Julien Chaumond Thomas Wolf Funding Hugging Face's financial journey reflects its growing influence in the AI sector. In March 2021, the company raised $40 million in Series B funding. This was followed by a significant Series C round in May 2022, where it achieved a $2 billion valuation. The funding milestones continued with a substantial $235 million Series D round in August 2023, catapulting the company's valuation to $4.5 billion. This round was led by Salesforce, with notable contributions from Google (GV), Amazon, Nvidia, AMD, Intel, IBM, and Qualcomm, underscoring the tech industry's confidence in Hugging Face. 4. Inflection AI Inflection AI is at the cutting edge of developing machine learning and generative AI hardware and applications. The company's flagship product, the Pi chatbot, represents a leap in AI-driven personal assistants. Named for "personal intelligence," Pi is designed not just to assist but also to provide an emotionally supportive experience. The chatbot aims to engage users with kindness, diplomacy on sensitive topics, and a sense of humor, setting it apart from other chatbots like OpenAI's ChatGPT. This focus on emotional intelligence in AI marks a significant step towards more human-centric technology. Year founded 2022 Founders Reid Hoffman Mustafa Suleyman Karén Simonyan Funding In June 2023, Inflection AI made a remarkable financial achievement by raising $1.3 billion. The company, led by former DeepMind leader Mustafa Suleyman, has achieved a valuation of $4 billion, with its recent $1.3 billion funding round drawing major backers like Microsoft (M12), Nvidia, and high-profile tech billionaires Reid Hoffman, Bill Gates, and Eric Schmidt. With this funding, Inflection plans to expand its computing power and further develop Pi, as well as potentially offer APIs for selected partners. CEO Mustafa Suleyman envisions continued rapid fundraising, opting for strategic investors over traditional venture capital to leverage their experience and network. This aggressive growth strategy underlines Inflection's ambition to be a frontrunner in creating advanced AI models and applications. 5. Jasper Jasper AI stands out in the artificial intelligence landscape as a powerful platform focused on enhancing copywriting and content creation, especially in the marketing sector. Launched in January 2021 in Austin, Texas, Jasper has evolved into a vital tool for creating diverse digital content, ranging from blog posts and social media ads to product descriptions. As a "wrapper" for ChatGPT, it utilizes the OpenAI API, making it a robust solution for businesses and enterprise clients. Jasper's AI-driven approach simplifies the content creation process, offering an 'AI copilot' for marketing. This includes AI insights, campaign management tools, and content scheduling, all seamlessly integrated into the content production workflow. Its technology leverages models from Cohere, OpenAI, and Anthropic, although it's acknowledged to sometimes produce inaccurate information due to the 'hallucinations' typical in large language models. Apart from text generation, Jasper also provides an API for customer-facing applications and has expanded into AI-generated artwork with "Jasper Art," utilizing DALL·E 2 technology. These features make Jasper an all-encompassing platform for creative and marketing needs. Year founded 2021 Founders Dave Rogenmoser Chris Hull John Phillip Morgan Funding Jasper AI has attracted significant investment since its inception, raising a total of $143 million. A notable funding milestone was a $125 million investment round, which placed the company's valuation at $1.5 billion. Despite facing challenges like employee layoffs in July 2023, Jasper continues to innovate and release new products, indicating a strong position in the AI content creation market. This financial backing and continued product development underscore Jasper's commitment to maintaining its status as a leading AI content generation platform. 6. Synthesis AI Synthesis AI is pioneering synthetic data technologies to enable more capable and ethical AI. The platform leverages the power of deep learning and CGI to create photorealistic and perfectly labeled synthetic data for computer vision and perception AI applications. This synthetic data can be used to train AI models more effectively and efficiently, without the need for expensive and time-consuming human-annotation. Synthesis AI's products and services have the potential to revolutionize the way AI models are developed and deployed. By using synthetic data, businesses can develop better models at a fraction of the time and cost of traditional approaches. This can lead to faster innovation and more cost-effective AI solutions. In addition to its commercial applications, Synthesis AI's technology also has the potential to make AI more ethical and responsible. By using synthetic data, companies can avoid the risks associated with collecting and using real-world data, such as privacy violations and bias. Year founded 2019 Founders The company was founded by Yashar Behzadi, PhD, an experienced entrepreneur with a proven track record of success in building transformative businesses in AI, medical technology, and IoT markets. Funding Synthesis AI has raised over $10 million in funding from leading venture capital firms such as Andreessen Horowitz and Khosla Ventures. 7. Anthropic Anthropic has quickly gained recognition for its work in developing general AI systems and large language models. Founded by former OpenAI members, including the siblings Daniela and Dario Amodei, Anthropic stands out as a public-benefit corporation closely aligned with the effective altruism movement. The company's ethos revolves around ethical AI development, emphasizing safety and responsible innovation. Anthropic's flagship project, Claude, is a chatbot akin to OpenAI's ChatGPT but with a distinct focus on safety, trained on principles from human rights documents and corporate policies. This approach, termed "Constitutional AI," aims to ensure the chatbot upholds values like freedom, equality, and brotherhood. Besides Claude, Anthropic is also known for its interpretability research in AI, particularly in transformer architectures. Year founded 2021 Founders Daniela Amodei Dario Amodei Funding By late 2022, the company had raised $700 million, with significant contributions from Alameda Research and Google Cloud. In May 2023, a further $450 million was raised in a round led by Spark Capital. The company's funding milestones continued with substantial investments from major tech players: in September 2023, Amazon announced an investment of up to $4 billion, making it a minority stakeholder and primary cloud provider. The following month, Google committed an additional $500 million, with plans to invest $1.5 billion over time. As of July 2023, Anthropic had raised a total of $1.5 billion, positioning it as a significant contender in the AI industry with a valuation bolstered by these strategic partnerships. 8. Lightricks Lightricks has emerged as a leader in developing mobile apps for video and image editing, most notably its highly popular selfie-editing app, Facetune. Based in Israel, the company has expanded to employ approximately 600 people and boasts over 680 million app downloads as of 2023. Lightricks has distinguished itself by integrating generative AI capabilities into its products, making it a frontrunner in the mobile editing space. Lightricks' suite of products is diverse and innovative. Facetune, its flagship app, has consistently ranked among Apple's top downloaded and paid apps. Other notable apps include Photoleap for general image editing, Videoleap for video editing, and Popular Pays for influencer marketing and content creation. The company also offers a range of other tools such as Lightleap, Motionleap, Beatleap, Artleap, Seen, and Boosted, each catering to different aspects of digital content creation. The company's business model revolves around the freemium approach, offering subscriptions and free versions of their apps. This strategy, adopted early in the app industry's shift towards subscriptions, has played a crucial role in Lightricks' financial success and market penetration. Year founded 2013 Founders Zeev Farbman Nir Pochter Yaron Inger Amit Goldstein Itai Tsiddon Funding Lightricks' journey in securing funding has been marked by several successful rounds. The company received its first funding of $10 million in 2015, led by Viola Ventures. In November 2018, it raised $60 million, followed by a significant $135 million in Series C funding in July 2019, which implied a valuation of $1 billion. By September 2021, Lightricks achieved a valuation of $1.8 billion with an additional $100 million in primary and $30 million in secondary Series D funding. The total funding raised by the company amounts to $205 million, supporting its growth and innovation in the competitive field of mobile app development. 9. A121 Labs AI21 Labs, based in Tel Aviv, is a company at the forefront of Natural Language Processing (NLP) technology. Founded in November 2017, AI21 Labs focuses on developing AI systems capable of understanding and generating natural language, making strides in how machines interact with human language. The company's flagship product, Wordtune, is an AI-based writing assistant that offers context-aware suggestions for paraphrasing and rewrites. Launched in October 2020, Wordtune quickly gained recognition, even being named one of Google's favorite extensions in 2021. Following this success, AI21 Labs launched AI21 Studio and the Jurassic-1 NLP system, enhancing their portfolio with advanced language processing capabilities. In 2023, AI21 Labs introduced Wordtune Spices, a generative AI tool designed to enrich textual content with a variety of expressive and stylistic options. This innovation further positions the company as a leader in AI-driven language enhancement tools. Year founded 2017 Founders Yoav Shoham Ori Goshen Amnon Shashua Funding AI21 Labs' journey in fundraising reflects its growth and the market's confidence in its NLP technology. The company's initial seed funding round in January 2019 raised $9.5 million. This was followed by a series of successful funding rounds: $20 million from Walden Catalyst and a $25 million series A round led by Pitango in November 2021. In July 2022, AI21 Labs secured $64 million in a series B funding round, with contributions from Ahren and other notable investors. The company's most recent financial milestone is the closing of a $155 million Series C financing round in August 2023, which included investments from prominent tech giants like Google and Nvidia, as well as previous participants. This significant investment underscores the industry's belief in AI21 Labs' potential to revolutionize the field of natural language processing. 10. Tabnine Tabnine has focused on developing a platform that enhances the software development lifecycle with generative AI. Its flagship product, Tabnine Chat, serves as an AI code assistant, offering functionalities similar to ChatGPT but specifically tailored for coding. This tool allows developers to write code more efficiently and access information about their codebases more easily. Tabnine sets itself apart from competitors like GitHub Copilot and Amazon CodeWhisperer by offering more control and personalization, with options for on-premises deployment or via a virtual private cloud. Another advantage Tabnine claims is reduced legal risk, as it uses AI models trained on code with permissive licenses or on customers' in-house codebases. The success of Tabnine is evident in its user base — over a million users and 10,000 customers — and its planned growth. The funds from this Series B round will be invested in expanding Tabnine's generative coding capabilities and building out its sales and global support teams. The company expects to grow its team to 150 employees by the end of the year, a significant increase from its current size of around 60. This expansion indicates Tabnine's commitment to advancing its technology and strengthening its market position in the AI coding sector. Year founded 2013 Founders Dror Weiss Eran Yahav Funding Tabnine has recently secured a significant financial milestone. In a recent Series B funding round, Tabnine raised $25 million, led by Telstra Ventures with contributions from Atlassian Ventures, Elaia, Headline, Hetz Ventures, Khosla Ventures, and TPY Capital. This investment round brings Tabnine's total funding to $55 million. 11. Rephase.ai Rephrase.ai is at the forefront of video creation technology, offering a unique AI-powered visual dubbing tool. This innovative platform is designed to transform any text into a video of a person realistically speaking that text. Utilizing advanced generative AI tools, Rephrase.ai is adept at learning and mimicking facial features corresponding to spoken audio. It can then generate photorealistic faces that sync perfectly with any new text or audio input. The versatility of Rephrase.ai's technology makes it an invaluable asset across various sectors. It enables clients to create engaging training videos, personalize sales videos, bring characters to life in AR/VR environments, and give a human-like appearance to digital assistants. This technology opens up new possibilities in video production, allowing for more personalized, dynamic, and cost-effective content creation. Year founded 2019 Founders Ashray Malhotra Shivam Mangla Nisheeth Lahoti Funding As of the latest funding round on September 15, 2022, Rephrase.ai successfully raised $10.6 million in a Series A round. To date, Rephrase.ai has accumulated a total of $13.9 million over the course of four funding rounds from investors including Red Ventures, Silver Lake, AV8 Ventures, Lightspeed India, and Techstars. This funding trajectory highlights the company's consistent growth and the increasing interest from venture capitalists and investors in their cutting-edge video creation technology. 12. Midjourney Midjourney, a San Francisco–based independent research lab, has developed a notable generative artificial intelligence program and service that specializes in generating images from natural language descriptions. Comparable to OpenAI's DALL-E and Stability AI's Stable Diffusion, Midjourney entered open beta in July 2022 and has quickly gained traction for its innovative capabilities. Led by David Holz, co-founder of Leap Motion, Midjourney enables users to create artwork through Discord bot commands. The platform is particularly popular among artists for rapid prototyping and concept visualization, offering a new dimension to creative expression. It's also found applications in the advertising industry and architecture, where it assists in creating custom ads, special effects, and mood boards. Midjourney continually improves its technology, releasing updated algorithm versions that enhance image quality and artistic stylization. The platform's unique approach allows for a more 'opinionated' artistic expression, making it a valuable tool for professionals seeking to rapidly prototype and visualize concepts. Year founded 2022 Founders David Holz Funding As of August 2022, Midjourney was reported to be profitable, a significant achievement for a startup in the generative AI space. The company's funding details have not been explicitly mentioned, but its profitability indicates a strong financial foundation with no financial backing so far. 13. Gridspace Gridspace is reshaping how businesses understand and manage customer communications. The company specializes in AI-driven solutions that analyze voice conversations in real-time. Gridspace's technology is adept at processing and interpreting large volumes of speech data, turning them into actionable insights. This capability is invaluable for customer service and support, where understanding customer needs and responding effectively is crucial. The platform excels in areas such as speech recognition, natural language processing, and conversation analytics. By using Gridspace, businesses can improve customer experience, enhance compliance monitoring, and gain deeper insights into customer interactions. This makes it a potent tool for companies looking to leverage AI to improve communication strategies and customer engagement. Year founded 2012 Founders Anthony Scodary Evan Macmillan Nico Benitez Funding Gridspace has raised $20.2M over three rounds. Looking to raise money for your startup? Try Visible today The substantial investments and rapid growth seen across these startups are a testament to the potential and promise of AI in transforming various industries. As these companies continue to evolve and push the boundaries of what's possible, they underscore the transformative power of AI in driving progress and innovation. No matter the series, size, or timing of your round, Visible is here to help. With Visible, you can manage every stage of your fundraising pipeline: Find investors at the top of your funnel with our free investor database, Visible Connect Track your conversations and move them through your funnel with our Fundraising CRM Share your pitch deck and monthly updates with potential investors Organize and share your most vital fundraising documents with data rooms Resources: How To Find Private Investors For Startups The Ultimate Guide to Startup Funding Stages 10 VC Firms Investing in Web3 Companies Manage your fundraise from start to finish with Visible. Give it a free try for 14 days here.
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