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How F7 Ventures Challenges the Fundraising Status Quo

Our investment strategy goes beyond tackling issues of demographics and diversity in the startup world. In our careers, we’ve learned that startups tend to make a lot of mistakes at the very earliest stages, but those mistakes don’t always manifest until a couple years later.
f7 Ventures team

f7 Ventures is a group of seven female investors with more than 140 combined years of experience at some of the fastest-moving tech companies in the world. Our founding team met when we were executives and operators at Facebook, and we came to the VC world after we all had careers at FAANG companies and other hyper-growth startups. When we decided to launch f7 we were initially motivated by the lack of women on the fundraising side of the table and the low percentage of funding invested in female founders. Taking on this gender gap was our call to action and what brought us back together after our time at Facebook and other startups. But we soon realized that addressing this challenge wasn’t enough: it wasn’t long before we expanded our mission to include underrepresented founders of all kinds.

Our investment strategy goes beyond tackling issues of demographics and diversity in the startup world. In our careers, we’ve learned that startups tend to make a lot of mistakes at the very earliest stages, but those mistakes don’t always manifest until a couple years later. Decisions that founders (even repeat founders) make early on can have dire consequences down the line. We felt that bringing our operating experience to bear on the earliest stages of a startup’s life could really change companies’ trajectories for the better. Over two years of investing we’ve found both of our initial hypotheses to hold true: we’ve been able to positively influence early-stage companies and find talented underrepresented founders at the top of the funnel.

f7 Ventures focuses on companies at the pre-seed and seed stages. We are targeting a close of our new fund in the next few months. For our first fund (fund 0), we invested in 19 companies, 70% of which are led by underrepresented founders. We were initially aiming for a target of 50% but we realized that with our differentiated networks we could achieve a deal flow with far more diverse founding teams than is usually the case in traditional venture networks. This is particularly important because diverse teams drive a 30% increase in the multiple on invested capital (MOIC).

The Democratization of VC

Lots of people talk about the democratization of funding today. This has opened up exciting possibilities but has also made the marketplace extremely crowded. In order to stand out, it’s crucial both to hit conventional fundraising benchmarks but also to be entirely differentiated. Paradoxically, your fund needs to measure up successfully against traditional criteria and be entirely singular, unlike any other fund out there.

Micro-funds are proliferating nowadays: these are $1M-$10M funds. Many target the same limited partners (LPs) outside their personal networks, so the competition for LP attention is intense. LPs are talking to hundreds of funds every quarter. But “democratization” doesn’t mean that anybody with $10,000 to spare can participate. There are still SEC rules about having a maximum of 99 investors in a more traditional fund, for example. VC is certainly democratizing, but there’s still a ways to go before we can call it fully democratized.

Rolling funds are another increasingly popular tool that has opened up the VC space to new investors. Rolling funds raise continuously and are always open to new investors, who usually subscribe to a fund once a quarter. Alongside the ease of access to becoming an investor and the fact that rolling funds can market their fundraise, another upside is that VCs can deploy capital much quicker than they can in a more traditional format. One downside, however, is that with the quarterly investing model LPs can end up under-diversified. For example, what happens if all an LP’s money goes to only one company in a given quarter? There is also a concern in the market that rolling funds may result in more investors who aren’t committed for the long haul. f7 decided not to go this route and is committed to building a longstanding firm and brand in venture that founders and LPs can trust over multiple funds.

Overall, we commend the steps that have been taken to open up VC to more investors and different voices–you have to start somewhere. One thing we still want to see in the evolution of VC is how investors will manage to make the jump from a micro-fund or rolling fund to a much larger fund. From our perspective, it’s still quite challenging to have the traditional conversations with LPs and raise a fund over the $10M mark. While many LPs do focus on emerging managers they rarely have fund 1 in mind; it’s much more common to see LPs willing to bet on managers raising funds 2 or 3. Although people are getting opportunities to showcase their strong networks and get good deal access, there’s still more work to be done to break down some of the hurdles in traditional LP fundraising.

Raising Efficiently Today

One of these hurdles is obvious: easy access to capital. It’s no secret that you’re able to raise more efficiently if you can leverage personal relationships that broaden your access. You’re trading on that relationship and your own reputation, especially for your first fund, because you need to convince people to take a bet on you. It can’t be overstated that VCs who have a strong network in place can raise more efficiently. Those who are starting out without a network will need to prioritize creating solid relationships, which will make the fundraising process take longer.

More generally, we’ve seen that institutional investors are more risk-averse and require a multi-year relationship before joining a fund. At f7 we have ongoing conversations with these kinds of investors knowing that they’re interested in, say, a fund 2. The goal is to nurture a relationship that will pay off in time by investing in meaningful conversations now.

The key points of efficiency we’re seeing are people we’ve worked with who have come into wealth and are happy to bet on us. It’s similar to a founder getting an investment from an angel who already knows them. This is why it’s common to hear of fund 1s being composed nearly entirely of high net-worth individuals and perhaps just one institution. It’s simply much easier to raise efficiently when you can trade on individual relationships.

Pushing Back Against “Pattern-Matching”

Creating these relationships can be challenging for underrepresented investors and founders alike. This is the kind of problem that f7 has set out to tackle. We’re looking to challenge some of the “pattern-matching” and selection bias in traditional fundraising models. It’s common to talk about biases in the general partner (GP)-startup founder relationship. GPs can often seek out highly specific criteria in founders, scrutinizing everything from the schools they attended to the business networks they’ve established. But we see similar biases in the LP-GP relationship: underrepresented investors might find their past performances more closely scrutinized than investors with more traditional backgrounds. It’s easy to invest in someone who reminds you of yourself. However, we’re hoping to change the conversation and encourage the kind of risk-taking that brings different investor profiles to the fundraising table.

It can be easy to get caught up in the pattern-matching game, though. We’ve noticed ourselves modifying our behavior and pitch at times to be more effective. For instance, we’ve found ourselves asking whether our deck is too “feminine” when pitching to LPs. We’ve also had to lead pitches by insisting that although our focus is on a unique and diverse network, we are first and foremost outcomes-driven. The fact that diverse founding teams produce better outcomes isn’t taken for granted, so we’ve found ourselves leaning heavily on the performance data to convince LPs that our strategy is sound.

When making investment decisions, we’ve worked hard to fine-tune our process so that the kinds of questions we ask founders are consistent across all conversations. Likewise, our diligence process is the same for any founder we’re investing with, regardless of background. There’s often more art than science in early-stage investing, but these are areas where we can consciously push back against pattern-matching and biases–even our own! We won’t hesitate to call ourselves out and question our own assumptions in investment decisions. It’s important to keep ourselves honest because we’re all bringing biases to the table, even as a firm that’s working hard to reduce the effects of bias in fundraising.

The Future of VC Fundraising

Democratization is an ongoing process. VC is evolving, and we hope it continues on this path. It’s easy to see how patterns and habits are reproduced over time, to the benefit of only a few, and we want to continue seeing more people participate in meaningful ways. It’s encouraging to see ongoing efforts to continue opening up the VC world. We are seeing more rolling funds, syndicates, and special purpose vehicles pop up, all in an attempt to innovate around traditional structures.

We’re also seeing more efforts to get diversity into funds and bring more diverse founders to the table, and these efforts have to continue. Diversity and inclusion (D&I) mandates also promise to reduce bias in the marketplace. It seems like every LP we talk to is creating an emerging manager mandate or D&I mandate if they don’t already have them in place. We expect to see more work along these lines going forward, which is unequivocally good news.

Going forward, we need growth on all ends of the spectrum. We’ll continue to see strong growth in micro-funds and emerging managers as well as increasingly open access to capital. For early-stage founders, this growth will enable them to get more operators with diverse perspectives and forms of expertise around the table.

At the same time, we need to find ways to support emerging fund managers as they grow into larger-scale investors. To be able to invest in later rounds you obviously need to raise more capital and write bigger checks: we can’t have a world where all the underrepresented managers are writing small checks for pre-seed and seed rounds. We have to enable these managers to grow and lead rounds so that they populate the entire ecosystem across all stages.

Finally, we can expect to see innovations in how funding happens and what exits look like. The venture ecosystem currently supports a very specific path for companies, and we’d love for venture to be able to support multiple paths for high-growth, impactful companies in the world. It all comes down to welcoming more perspectives in venture and encouraging new voices to drive innovation.

To continue to explore these topics, read DocSend’s first-ever research on trends in VC fundraising.