Angel funding, seed investing and generally focusing on earlier stage investing is a huge business in the world of startups these days — it helps investors get in early to the most promising companies, and (because of the smaller size of the checks) allows for even the less prolific to spread their bets.
There was a time when it was immensely difficult for a founder to get a first check, not least because there were fewer people writing them. However, Jeff Clavier was an exception to that rule.
As the founder of Uncork Capital (formerly known as SoftTech VC), he has been in the business of angel and seed investing for 16 years, popularizing the opportunity and highlighting the need for more support at this stage — well before it was cool. You could say he was early to early stage.
Clavier said that at the end of 2019, it was estimated that there were more than 1,000 firms focusing on seed investing in the market, but by the end of this year, there will be about 2,000. “Don't ask me whether it makes any sense because when I started 16 years ago, I didn't think would be a big deal,” he said. “But certainly that creates a bit of a conundrum for founders to try and understand.”
As of now, Clavier has made nearly 230 investments and counting.
TechCrunch Early Stage, our virtual conference highlighting that stage of startup life, was the perfect venue to hear from him on all things seed investing and building startups today. Below are some highlights, a link to the video and a pitch deck he put together for the chat. Questions were edited for space and clarity.
Not all VCs are created equal (so know who you are pitching)
First thing to understand is that not all VCs are created equal. There are a bunch of different firms, tons of them out there, and you as a founder need to understand what are the specifics of your pitch opportunity, how to match with the right firm, and to figure out what stage of “early” you happen to be.
Startups can be super early, or mid-stage, which is typically what we refer to as pre-seed. Then there's the seed stage, where you have developed a product, with a demo. And there is post-seed, where you have product but are not quite ready to raise a Series A. So who are the firms that can actually be the right fit for me at those different stages? The qualification part of the targeting is really important. Especially in a COVID environment when you can’t spend the same kind of time with each other.
It’s useful for founders to try and understand investors better, maybe asking a couple of questions like, "When is the last time you made a brand new investment at seed stage?" And "How has your investment process changed as a result of COVID?"
For investors, you want to understand how you're going to evolve your process to cope with the fact that you don't spend time with those founders face-to-face. Some firms are still struggling with that.
At Uncork, we’re now past the point of portfolio triage that we had in the first few weeks of of the pandemic. What was surprising to me was the speed and velocity at which some deals actually.
Find an investment lead
Another thing that is important at seed stage is to understand the difference between the leaders and followers in the investment. Unfortunately for founders, you're going to have a lot of people trying to very quickly come to a decision and say, "Oh, I'm gonna invest $100,000, $200,000, whatever," in your round. But unfortunately, it's really not useful at all to have a bunch of followers and no leads. And so as part of your targeting, you really want to think about which firms are going to write the larger check, set the terms and help me, the entrepreneur, put the round together.
If you work with a lead investor that has a very strong brand, then that will make your life much easier.
You want to have everything lined up: pitch deck, the backup slides, the references that investors will ask you for, which allow them to try and figure out who you are and how you work, with input from people that you've worked with. I won't go too much into detail of the pitch deck because this is something that has been written about a lot but those are typically the questions that you want to highlight in the deck. You want to have clear answers around how much you would like to raise.
Prepare for your remote pitch
Having a remote pitch is a new thing, but we’re all doing it, via Zoom.
Even though there are many solutions, my advice is use Zoom because everybody uses Zoom. Everybody's used to Zoom, people have Zoom installed… Don't try and pitch from your phone — that’s horrible. Use a computer and if you can, have a fixed connection because Wi-Fi is the enemy. Make sure that you have a proper light environment, and turn off all notifications so that you don't have Slack notifications coming in the middle of the conversation.
If you have it, go through the deck, but then some VCs prefer stories. In any case, don’t have them browse your deck, share your screen and take control of the conversation. It's very hard, but try and make eye contact through the camera.
Don't do what someone did to me a couple of weeks ago: They literally opened and shared the screen and so the calendar and their inbox with some emails from other VCs [were visible] … And if you're pitching as a team, which you should because we're trying to get to know the founders, try and figure out either the way you're going to pitch or the cues you're going to use to have the conversation involve everyone because you don't want to have someone not being involved at all. So rehearsing is very important.
Practice the pitch to previous investors, friends who have been on the entrepreneurial side, friends who are on the investor side and try and get all their feedback together and rehearse until it feels right. Do this in the same environment where you’ll do the actual pitch.
Introductions matter more than cold emails
Introductions are also very important. Sometimes people will say, "Well, I'm just getting going and I don't know how to get introduced." The introduction is typically an important step for founders. It's figuring out who is someone in their network who knows me, who can vouch for them with me and essentially, use the credibility I have for the person, and introduce them on their behalf.
As for email, I do read every single one I get. But to date, there's only two cold emails that have led to an investment at Uncork. So just think about two investments out of 227 were cold emails and the rest was introduction. So it's worth trying to figure out who knows people who know the VCs you want to try and connect to are so you can get those intros working.
Run fundraising like you might run your sales or CRM
Fundraising is basically a sales job. So like any CRM, you want to be able to track that figure out, who has said what, what the pushback was, what the questions were, so you can really be on point with your follow-ups.
And be quick. If someone says, "Oh, send me this information, send me your references, send me your deck." Literally, you should send that within a couple of hours of the meeting so that you can show that you're on top of the ball, and that you're good at following up because what we're trying to assess when you pitch us is how good are you at selling your product?
Make sure you track everything … [and] update the pitch as you get feedback from people.
What if we do all of this, and it still doesn’t work?
If it never works, and nobody bites maybe you want to rework the pitch entirely.
Maybe you want to think about what you should be doing. Some companies will pitch to a few firms and get three term sheets and they will say, "Oh, this fundraising thing was easy," but, they're really the exception.
Most companies will pitch 50 firms and get one yes. And that's what matters: to get one VC saying yes, to get to the next stage. It really only takes one investor to give you the push and the runway to get to the next round.
I still remember Udemy pitching a bunch of people at seed stage many years ago and no one would bite. Then one, Keith Rabois, said yes, and suddenly the company was funded because everyone followed Keith’s lead. The other day I saw that they were raising $3 billion. So it just took one person, Keith, to give them the momentum.
What is the impact on future fundraising if we received funds from either a crowdfunding site or an accelerator?
It's good if it's an incubator that we have respect for in the sector that the company's involved in, that’s the difference. The days of, "Oh, I have raised $5 million on whatever crowdfunding site for my product," used to be exciting until a lot of the companies that were doing that failed. So these days it is, like, whatever. But I think it's part of the funding ecosystem. So we're more interested in the reasons why you picked doing YC or TechStars or others. Consumer hardware has become a very, very challenging category to get financed. Because there's been so many failures, and also, we've had a hard time translating traction through crowdfunding to actually building big companies.
What kind of diligence questions do startups need to be prepared to answer?
Since it's early stage, you don't have much around customers and customer attraction and customer numbers. But if you have we'll try and understand both the financial side. So unit economics, how much you spent to get those customers, how much you're spending to service them. And have you lost customers or, why are they using this product? Things like that. What's the competitive environment?
Has the shift to virtual pitching increased or decreased your due diligence?
Probably [increased]. I’ve been doing this for 20 years. So after awhile you develop some kind of a feel for things. It's really hard to get the feel for things to translate online, right? So spending a bit more time on reference checks and trying to essentially use people we know, who know those founders, as proxies for us to figure out how they're gonna behave and what if something challenging happens because it does. At the same time, because the velocity of deals has increased, it’s been challenging to take more time where there's pressure to take less.
How do you feel about pitching with materials other than slide decks?
I think everything works, it's really up to you. I like decks. I never take notes. So I always listen to the founder telling me the story and giving you a pitch deck. So the pitch deck is really useful to just get key data points and make sure everything is covered because then I can get back to it. If everything is just a story I can live with it. I would say be good at both is probably the way to think about it.
How much typically do you give up in equity if you're taking a $2 million seed round?
It really depends, [but] I would say the standard these days is … $2 million [at] 20% dilution plus the option pool would be kind of a standard deal. But if you're earlier than that, then maybe 25% two on six. If ever you're a repeat founder with a track record or a very impressive founding team, you may be able dilute less, but what most founders will do is typically choose to dilute 20-ish percent and increase the size of the round if they can get a higher valuation.
What is the best way to get an introduction to an investor?
Just mind your network, LinkedIn is your best friend. I have a large, extensive network. So do most VCs. And so there's always a bunch of people who are connecting you and us, right? The key challenge is to understand who knows us really well. So you have to make some kind of a bottom up and top-bottom approach. The bottom up is who is in your network who could know me and the top to bottom is who are the founders I work with who may be reachable to you. Because for us, strong signals are founders because our founders know us the best and if ever, they say, "Oh, you have to spend time with that person" then we will. [Also] co-investors, people we trust who we've co-invested with a lot. The problem is that there are a lot of people who know us. And I'm pretty good at only accepting LinkedIn invitations from people I actually have met face-to-face. I may have to revise that now because people are online, but you need to assess who's out there who will vouch for you with me, and that I will pay attention to. And that takes a bit of time.
What's your view on markets like Africa, now that we’re in this virtual world. Are you casting the net wider?
We are really looking at the U.S. market at Uncork. It is a messy market, and you can build a multibillion dollar company on the U.S. market. Eventually they will open up to other geographies. We used to focus on founders in Silicon Valley, New York, Boston. But a couple of years ago, we started telling our entrepreneurs, it's so expensive to build a startup in Silicon Valley. Just think about building remote-friendly companies. Think about hiring talent wherever it is, so it doesn't have the same cost. San Francisco is incredibly expensive, and people just leave companies after a year or two. So think about cost of hiring and cost of retention.
We have recently invested in a company called neo.tax where one of the founders is actually in Egypt. So we're thinking much more broadly about geographies. But in terms of focus, our market focus is on the U.S.
What is the likelihood of getting pre-seed funding without a technical co-founder, but a very well-thought through idea or pitch?
That’s where figuring out the firm's service is important. Some people will say I really want to see someone who can build that and will try and assess execution capabilities. But I've recently done a pre-seed investment with a repeat founder [where] he doesn't really have a technical co-founder yet, but I know we can hire because he's done it four times. So it's a massive idea, I’m super excited, and I know we will be able to attract the talent he needs because he's done it before.
I funded my startup myself and proceeded to launch a minimal viable product. What optics does that send to an investor?
That's a massive commitment, right? You put your own time and money behind it. I invested some of my own money for three years before launching SoftTech and that was my commitment to the world that I was going to do it no matter what, and so, it sends a very strong message.
In the last four investments you made during the COVID-19 period, how long did it take you to get comfortable?
We always have a very large funnel, so we typically fund like 1% of what we see. I don't remember the number of meetings but probably four to six, with the founders or about the founders. Because there's multiple people on the team as well. It’s a bunch of hours spent during a very short period of time, because they were all compressed decision times, like a few days compared to a couple of weeks maximum. Those were pretty intense days where we just spent all our time focusing on those companies.
We all just need to be comfortable with the process that we follow to assess those opportunities online. And if I can't get comfortable, then I will pass.
For a machine-learning healthcare SaaS startup still developing its prototype, do you suggest we pitch for seed money?
Well, then you just go back to why is this relevant? What's going to be the return on investment for the target users or customers of that startup? What are they replacing? Why is it 100x better and make the make the argument and the pitch of why this makes a ton of sense. And then we'll assess it. And we'll either say yes, because we trust the founders or no, because we don't agree with their assessment.
How long on average is an initial pitch?
Oh, it's 10, 12, 15 slides. I always allocate 50 minutes. So 50 minutes to an hour, I would say think about 25 to 30 minutes and then a bunch of questions, and I always ask a bunch of questions along the way. And the hour has gone by very quickly.
What are you doing to overcome challenges for minority founders?
We welcome minority founders and 30% of our portfolio is women. We're working very, very hard on getting people of color in the portfolio. We will work very hard to figure out how to stretch the network. It’s harder, but that doesn’t mean that it's an excuse for us not to do those.