[PreMoney SF 2015] SoftTech VC >> Jeff Clavier, "Fund-Raising The Roof: How To Raise Enough Capital To Avoid Getting Cru$$$hed By The New Series A"

What I Learned Seed Investing Over the

Last 10 Years

Jeff ClavierManaging Partner, SoftTech VC

Pre-Money Conference - Jun '14

Last Year

How to Fund-Raise the Roof?

How To Raise Enough Capital To Avoid The Series A Crunch



Brief bio

• Jeff Clavier (@jeff)– French born– C/C++ & Distributed

Computing Hacking– CTO at Financial Services

startup in 1989– Acquired by Reuters in

1993– “Traditional” VC in the

Valley since 2000– Angel/Seed Investing

since 2004

• SoftTech VC (@softtechvc)– 11 years old– 165 investments– 40+ exits– $2.5B in follow-ons

How we built our footprint

SoftTech VC I($1M, 24 deals)

Goal: Build initial deal access and reputation as a value-added investor

By: Hustling, Blogging, Networking, Investing personal capital

SoftTech VC II($15M, 65 deals)

Goal: Establish “institutional” angel model

By: Focusing on access as we defined investment strategy, syndicating, building brand and top dealflow

SoftTech VC III($55M, 55 deals)

Goal: Execute on a refined, repeatable seed strategy

By: Building ownership in a select group of companies, and expanding the footprint of the firm

SoftTech VC IV($85M, 45 deals)

Goal: Iterate on Fund III’s model, expanding post-seed when appropriate (Seed Prime, Series A)

By: Building and maintaining 7% to 10% ownership through initial rounds of financing


2004 2007 2011 2014

“Super-Angel” “Super-Angel” Fund

Micro-VC Funds


$85M SoftTech VC IV Primer

• 45 seed deals over 3 years• $500K to $1M+ per initial

investments– $35M = 45 deals @ $750K– $50M for Series As/Bs– Heavy recycling (120%)

• Geos: SF/SV, NY, SoCal, Can• Target ownership: 7 to 10%• Always syndicating with

peer micro-VCs and angels

• Sectors

• New Areas: VR/AR, drones, AI/robots,…

The 2014 Funding Ecosystem


Pre-Seed

< $500

K

• Bootstrapping/Friends and family• Pre-Seed Funds and pre-order/crowdfunded campaigns• Incubators and Accelerators (YC, Techstars, AngelPad, 500 Startups, SeedCamp)

Seed

$1.2 to

$2.5M

• Syndicates of micro-VC firms, angels and (potentially) traditional VCs• AngelList and Crowdfunding services as alternative or “fill up” opportunity

Series A

$5M tp

$15M

• One traditional VC, with micro VCs investing pro-rata and adding strategic angels• Family Offices, Strategics, Micro-VCs + Crowdfunding pools as alternative

Series B

$10M to

$20M

• Another traditional VC (or two), with insiders coming in for pro-rata• Same mix as Series A for alternatives

Growth

$20M to

$100M+

• Mix of traditional/growth VCs, PE firms, hedge funds. In parallel, secondary transactions.• Alternative: direct co-investments from LPs, hedge/mutual funds, cash rich corporates

The 2015 Funding Ecosystem


Pre-Seed

< $500

K

• Bootstrapping/Friends and family• Pre-Seed Funds and pre-order/crowdfunded campaigns• Incubators and Accelerators (YC, Techstars, AngelPad, 500 Startups, SeedCamp)

Seed

$1.5 to $3

M

• Syndicates of micro-VC firms, angels and (potentially) traditional VCs• AngelList and Crowdfunding services as alternative or “fill up” opportunity

Series A

$5M tp

$15M

• One traditional VC, with micro VCs investing pro-rata and adding strategic angels• Family Offices, Strategics, Micro-VCs + Crowdfunding pools as alternative

Series B

$10M to

$30M

• Another traditional VC (or two), with insiders coming in for pro-rata• Same mix as Series A for alternatives

Growth

$20M to

$100M+

• Mix of traditional/growth VCs, PE firms, hedge funds. In parallel, secondary transactions.• Alternative: direct co-investments from LPs, hedge/mutual funds, cash rich corporates• SPVs (Special Purpose Vehicles) coming in all over the place


Zooming in on Seed Stage(s)

• Pre-Seed: the old “Friends & Family” round– Team = founders, Stage = Concept, Runway = 12 months+– Size = $500/750K, Investors = Angels, Pre-Seed Funds

• Seed: the first Institutional Round– Team = founders + few engineers, Runway = 18/24 months– Stage = early data: usage, acquisition, (some) revenues– Size = $1.5/$3M, Investors = Syndicate of Seed VCs + others

• Seed Prime/Extension: backup to a failed Series A– Stage = some data/validation, not enough to raise a Series A– Investors = Seed Prime Funds + insiders


What’s Happening at Seed Stage?

• Startup costs have dropped 10X, but Operating Costs have increased 2/3X (in Silicon Valley)

• Traction proof needed to raise Series A trending higher as # of candidates is increasing

• 10X increase in capital available at Seed stage forced larger rounds to make room for investors

• Branded firms, and some new ones, have ownership targets due to portfolio concentration and fund size

• Way too much capital chasing seed deals = sellers market (good) but support is not uniformly good


Our Advice to Seed Entrepreneurs

• Figure out burn required to achieve the typical Series A hurdles in your sector

• Typical runway is 18 to 24 months• Research via your network and

CrunchBase/AngelList which funds are potential leads

• Build a strong round foundation with Seed funds as leads, based on value add and expertise – and complement with useful angels/other sources

• Avoid “party rounds” at all cost – no one cares


What That Means For Investors


What That Means For Investors (& LPs)

• Have a clear portfolio construction strategy:– How many deals, of which size over which period?– Do you plan to follow on in Series A? Series B?

• Only Major investors are typically given these rights

• Have a clear appeal for entrepreneurs:– Experience, expertise, network, track record– Area(s) where you can add value

• Will you lead/co-lead? Take a board seat?• Figure out how much ownership “you’re

worth”


How much ownership are you “worth”?

• The size of your fund and your portfolio construction will dictate your ownership needs– A $1B exit should return at least half of your fund

• Capital being a commodity, round construction would ideally be built based on “value add”– Entrepreneurs will reference you, better have delivered on the

goods with your existing portfolio• If you claim the lead position, and aren’t prepared or fit

to take the board seat = BFP– Committing involvement, time, advice, additional capital, etc.

Beating the Series A/B Crunch

• Have a clear “Hot or Not” map for sectors you invest in, and understand runway implications for the Not’s

• Early on establish and validate hurdles to clear in order to get the next round

• Pre-market early with the “most likely/best fit” group of investors

• Understand that the Seed round unlocks the A, and the A unlocks the B



Statistics from the last 18 months

• Raised $550M in 35 follow-on rounds across Fund II, III and IV– Average Series A: $9M– Average Series B: $19M

• Fund IV closed 24 rounds for a total of $20M– Average $800K ($500K to $1.2M)– Average ownership: 7.5%.– 10 board seats


Reserve Planning

• Why invest in follow-on rounds?– Avoid costly dilution of a position at low valuation– “Double down on winners” and increase dollars invested to

maximize returns• Planning to follow-on in one round? Reserve 50%. Two?

Reserve 75% - but take into account your expected loss rate– SoftTech’s model is 20% failure before A, 10% post A– Of Fund IV’s $85M, $50M and recycled capital will go to

reserves


Recycling does matter… a lot

• Say you have a $50M fund, and you need to deliver a 4X gross return. About 25% will go to management fees and costs.

• To produce a $200M total return, you’d need a 5.5X performance if you don’t put “fees in the ground”– 200 / (50 * (1 – 25%)) = 5.5

• Recycling means that you don’t distribute all proceeds back to LPs– Standard 120% recycling clause means 50% of proceeds are re-invested

• Cashflow/distribution optimization is tricky since early exits are impossible to plan for

Good luck, and thank you!

www.softtechvc.com@softtechvc


http://www.softtechvc.com/

Investor Relations

[PreMoney SF 2015] SoftTech VC >> Jeff Clavier, "Fund-Raising The Roof: How To Raise Enough Capital To Avoid Getting Cru$$$hed By The New Series A"