DocSend Startup Index releases proprietary fundraising research on an ongoing basis focusing on identifying and predicting trends in venture fundraising. Most recently released are new findings on the pre-seed fundraising process. We sat down with Alex Lloyd, Managing Director of Accelerator Ventures to gather his reaction to the data.
Q: Our research found that a company’s competitive landscape was markedly more important in 2020 than years past (51% more important actually). Investors working with the DocSend Fundraising Network (DFN) also told us that this year they looked more closely at companies’ “why now?” slides. How has your lens shifted in the last year when reviewing startup pitches and thinking about the companies in your portfolio?
A: Truly understanding your competitors is crucial but the “why now” is just as key. For example, if you’re a travel company looking to raise money, it might not make sense for me to invest right now unless you’re bringing something unique to this market.
There’s a big bifurcation in the companies in my portfolio. I have companies that are doing well, but are not in growth mode—they’re at the break-even point. Sadly, I even have a company that has failed directly because of COVID. They were in the middle of a fundraise in Q1 last year and were not able to get funding.
Meanwhile, I have other companies that have brought their business 100% online and are seeing their sales double since a year ago. They’re even raising advanced capital at this point because there’s a lot of people looking to invest. Companies that benefit from people going online are getting an overwhelming amount of attention and funding. Many retailers who once might not have considered internet sales particularly important have brought these functionalities in-house. This is a shift that’s not likely to revert once we reach a new normal: if a company has moved more online and can keep its customers there, I think everybody stands to benefit. These companies have streamlined many processes and there’s not much sense in going back.
In short, COVID moved the online world more quickly into the future. Companies that got on board early with these permanent changes are poised to keep performing in a post-COVID world.
Q: We found that 90% of startups that successfully raised their pre-seed round had a product at least in the alpha stage. How important is it that founders have their product ironed out at the pre-seed stage?
A: Before COVID, a lot of investing was based on trusting the founding team. The number-one factor I look at is whether or not I believe the founding team can do what they say they can do. Are they really dedicated to it? You can still get a feel for the team via Zoom, but it’s different than meeting with them in person and really getting to know them.
This could be one of the reasons why we’re seeing people use proxies other than personal interaction to judge the team. One proxy would be “Is their product good?” or “Can they build the product.” If a team could get a demo or MVP out of the door, they might have a better chance at closing a round. With COVID, a lot of investors are looking to see more proof in the pudding.
Q: With remote work being the norm in 2020, we saw a notable shift in companies raising their pre-seed round outside of the Western US. Do you think the importance of being in Silicon Valley will continue to stand true? Have other areas emerged as potential hotspots?
A: Silicon Valley isn’t going away anytime soon. Being in Silicon Valley will continue to be a good thing because depending on what you’re doing, there are so many big companies there you want to do deals with and you can find the best talent there. However, it’s true that one thing that’s changed is that before COVID, you almost had to go there if you wanted to be one of the major players. Zoom and COVID broke that rule, and many top entrepreneurs and VCs now see that working remotely isn’t as hard of a barrier as people thought it was before.
It’s been encouraging to see how the pandemic has opened the doors to investing in other geographies. Miami is a great example of this. While I can’t tell if Miami will be successful in the long run, COVID has moved Miami 10 years into the future in terms of its tech scene. Before the pandemic, Miami was largely a no-go; now it’s a solid “maybe.”
Time will tell if it can attract the large companies and top talent it needs to become a tech center, but having recently moved here, I’m currently spending 10-20% of my time considering deals here in Miami, with the rest in the Bay Area, New York, and the Southeast. Compared to before, my time was 95% in the Bay Area.
Q: What do you think the future of fundraising will look like?
A: The future of fundraising is going to be a lot more distributed. As a founder, you might want to have your prime investor local, but you might take investors from a much broader area than you did before.
There aren’t any hard-and-fast rules about what’s going to come next. Investors will always invest first and foremost in a team and will look to make meaningful connections, whether these happen in person or remotely.
There’s probably going to be more peer-to-peer or distributed investing similar to what AngelList has done. They just launched rolling funds, which is a very interesting new way to raise money for investors. I think we’re going to see a lot of the innovation continue to happen at the seed and pre-seed levels. Every year, there are more and more options for entrepreneurs to get funding. Thirty years ago, VC firms numbered in the dozens and now there are hundreds. When I raised my first fund in 2008 there were probably ten other seed-stage funds; now there are hundreds of them. There are simply going to be more and more choices for entrepreneurs, especially those at the earliest stages.
VCs might not even be the right choice for many early-stage entrepreneurs crowdsourced fundraising might be more appropriate, for example. More choice drives more innovation, and this is why I’m particularly excited about the rolling funds AngelList is launching. I actually plan to focus on raising a rolling fund going forward. Unless you want to focus on a much larger fund and build the auditing or back-office infrastructure that comes with it, rolling funds are a great way for investors to have a low-touch system.
One of the things I haven’t liked about raising traditional funds is that because this fundraising happens so sporadically, it becomes an all-encompassing process that can distract you from your mission to help entrepreneurs and find good investments. Both of the funds I’ve raised required all-out sprints to close the fund. What’s great about rolling funds is that they’re an ongoing but much lighter process. If someone’s interested in investing with you and you’ve just closed a fund, you don’t have to wait two or three years to get them into your next fund. Instead, you can bring them in next month or next quarter. This is a much more lighter-touch process for a GP.
Q: What is the most creative (remote) pitch you’ve seen in 2020? Any memorable mistakes you’ve witnessed that founders should avoid?
A: While I don’t have a cat video moment, trying to stand out via Zoom can be difficult and it’s always top of mind. I actually met some entrepreneurs on a video call who happened to come down to Miami later. The first thing they said was “See, we’re not cats!”
Q: How can founders differentiate themselves over Zoom? Have virtual meetings changed the culture of fundraising?
A: I don’t think things change that much on Zoom—a good pitch is a good pitch. The things I like to see are three elements: the existing problem, how you’re going to fix it, and why it’s a big enough problem you can make a profitable company out of it.
I think humans learn and remember things through stories. Founders who mix these three elements together, tied in with a good story about why they started it or why it’s something they’re passionate about, are the best pitches I remember.
Zoom has made certain aspects of the meeting format easier, though. For example, it’s easier to end a meeting over zoom than it is when a founding team has flown across the country to see you. But virtual meetings can only take us so far: if you really need to close a deal, in-person contact may still be the best option.
One of my portfolio companies’ CEOs was recently trying to close with an investor who had second thoughts about his company’s valuation. When the investors called him and said they were passing on the deal, the CEO immediately offered to come over to discuss things in person since he was “in town” and could come by the following morning. In reality, he wasn’t in town and quickly jumped on a plane and flew to meet with the investors in order to close the deal! This kind of in-person connection is irreplaceable. Zoom meetings and virtual fundraising may become a larger percentage of investment deals in the future, but when it comes down to it people are going to travel when their company is on the line.
Q: And lastly, what kind of mindset should founders bring to today’s challenging climate?
A: It’s a good time to see the resilience of founders and their abilities to pivot, weather the storm, or rethink how they’re doing things. It can be hard to not be in constant growth mode and have to operate at a break even point where you can extend your runway and be ok with that. As an early-stage founder, your number-one priority is not running out of cash. As long as you have cash, you can keep trying things and finding new ways to succeed.