In my last post, I mentioned that community-driven capital raising is here to stay. With the right tools, it'll make all the difference. After active membership in a dozen founder communities and with a 360 degree perspective of the early-stage venture ecosystem, I'll go one step further and state that:
Community-curated capital is here to win, and with better tools, it'll make all the difference.
I dive into what community-curated capital means in Part 2 and beyond. Start with Part 1 for the latest landscape for equity-based, early-stage funding options.
Part 1 | OH, THE (CAPITAL) OPTIONS
The options listed below are no longer pre-venture or alternative to venture — in 2022, they are simply options.
The introduction and industry acceptance of the SAFE, originally templated by YC for pre-seed (even seed) rounds, combined with looser accreditation standards, and the introduction of Reg CF by the SEC has expanded options for founders raising early capital.
New Face of Friends & Family Rounds
Historically, capital raised directly from friends and families helped founders get started. However, historically overlooked founders are speaking up to explain that turning to their immediate friends and family for their "first investment dollar" may not be an option.
Today, founders are substituting this classic round by pooling wins from pitch competitions, programs explicitly designed to be founders' "first check," and leveraging city innovation budgets.
"Early investments in women, people of color, and other underrepresented groups building exceptional tech startups is key to creating a more prosperous and equitable future," explains Daniel Acheampong, GP at Visible Hands.
Geography-specific funds such as Chicago-based LongJump and Fifth Star also recognize the trillion-dollar opportunity to be first check investors in companies founded by historically overlooked groups.
City innovation programs like Tulsa Remote and TechRise by P33 also help replace friends & family rounds through pitch competitions or relocation-incentivized stipend/investments.
Venture backable startups are moving away from traditional crowdfunding platforms like Kickstarter or Indie-Go-Go. Instead of promising early backers in-kind items in exchange for a return on their dollar, founders are excited to offer ownership in the company via equity-based "crowdfunding" alternatives.
As a result, community rounds have made quite the splash this year. This 'potpourri round' enables founders to raise from friends, family, early customers, partners, and more to jumpstart their raise or forgo institutional capital altogether.
Platforms such as WeFunder, Republic, SeedInvest champion and guide founders through raising a community around. Effectively leveraging these platforms requires excellent storytelling and activation of a company's existing community. Typically, once the founders have raised a certain amount of capital on their own from their community, platforms start marketing the startup to their audience.
Founders who have already identified their community of investors can leverage tools such as Party Round and AngelList RUV. These tools make it easy to complete the transaction without managing the back office burden of hundreds of documents and thousands in legal fees.
If you have built an active community of early believers, adopters, or customers you want to bring along on the journey, consider raising a community round.
Everyone's an Angel Investor
A decade ago, the title of angel investor denoted clout and wealth, whether inherited or acquired. After the introduction of Reg CF and the SEC's 'accreditation' definition update in late 2020, having sufficient "knowledge and expertise" is all it takes.
Today, it is possible to raise up to $5M by pooling $1k-$10k checks from unaccredited friends, family, or 'strangels,' folks you may not directly know but who invested a small amount after coming across your profile on an equity crowdfunding website.
Founders may also reach out to members of Angel communities such as Angels.VC or The Council for more exposure.
Amy Slawson, Angel Investor and Founding Member of Angels.VC shares, "strategic angel investors investing personal funds will often be selective to the industries or founder demographics that they are extremely passionate about, offering not only capital but support, expertise, and valuable perspective."
The value of a strategic angel investor cannot be overstated; they're willing to go to bat for founders in ways a traditional institutional fund may not be able to. Increasingly, early-stage founders are starting their rounds with angels or even closing "angels only" rounds before considering investments from institutional investors.
Introduction of Investment DAOs
In simple terms, DAO's are virtual communities with shared bank accounts. Investment DAO's, specifically, deploy the capital they've pooled together into startups with an expectation for a return. Prominent DAOs are investing alongside traditional institutional investors. In some cases, they are 'taking allocation' in rounds away from these investors.
Arthur Zubkoff, Strategy Lead at Global Coin Research, explains that they "strive to offer much more than just capital. Apart from 'GCR Signature Offerings' (e.g., private dinners, AMAs, PR services, and more), we ensure that we bring a perfect blend of community, research, and engagement to the table."
These non-monetary benefits entice founders to explore this type of investment. An investment from OrangeDAO, for example, comes with a YC alumni stamp of approval and their support. Accepting an investment from Komorebi Collective is a statement to level the playing field for women and non-binary folks in crypto. Popular investment DAO, SeedClub, has backed 30+ projects.
Investment DAOs, though new to many, are a viable option for founders to consider today. Their impact on the early-stage venture capital ecosystem should not be ignored.
Curriculum Capital is capital that comes with an array of programming, education, network expansion opportunities, or lifestyle experiences.
Programs such as YCombinator, Techstars, 500 Startups, Antler, Human Ventures, ODX, Launch House, and Primary VC Fellowship all fall under this umbrella.
Some curriculum capital organizations invest upfront, then engage founders in a time–based 'acceleration' experience. Other programs are membership first with an opportunity to secure capital based later.
Early-stage founders can be a part of several curriculum or community capital programs, often simultaneously. Founders give up significant equity in exchange for programming, network expansion, fundraising support, and clout that comes with being a part of these communities—more on this in part two.
Finally, there are and will always be traditional venture capital funds. I could break this category down further by naming established funds, emerging funds, and solo-GP-led funds.
Regardless, these funds' are not funded by just the personal General Partner's (GP) money. Limited Partners (LP) such as ultra-high net worth individuals, pension funds, sovereign wealth funds, and family offices invest a portion of their capital into VC funds to diversify their investments. VC funds' primary fiduciary duty is to manage and grow their LPs' capital.
Since these funds have significant AUM, they can typically write bigger checks. Emerging managers may write smaller checks at earlier rounds.
Small or big, established or emerging, all institutional VC funds are investing heavily into platform, community, and brand to differentiate themselves, given the competitive nature of venture capital today.
Part 2 | CONNECTION IS THE NEW CURRENCY
Initially, I was going to title this section "the evolution." But, evolution is a slow process that takes place over a long period. What's happening in the venture industry is not an evolution. The shift is dramatic. Every single person in the industry is feeling it.
Gone are the days where accepting venture capital dollars meant taking a check, giving up a board seat, and negotiating expensive rounds. Also gone are days when a VC with the best paper terms wins a seat in the round, no questions asked.
Capital is still the foundation for venture. But there is a new type of currency that's beating out capital today: connection.
In 2022, founders weigh their odds and over-index on 'How helpful will this investor be to me?' 'Do I want them on my cap table?' 'Do they have a strong network?' 'Will they be able to make the intros I need?
This attitude is reaching beyond fundraising. Early-stage founders are asking these questions when choosing their bank, lawyers, and even which development agency they should partner with.
Companies supporting (and selling to) founders realize the loyalty creating a meaningful connection fosters for their brand. Take Silicon Valley Bank, Brex, Mercury, Pipe, or Vouch, for example. In the last 12 months, these companies have increased support for helping their clients close their funding rounds. Where they're not directly facilitating fundraising, they're fostering community.
Whether we're talking about venture, a SaaS tool or a service selling to founders, increasing connection capital is on everyone's mind. Everyone is doubling down on a tangential product - connection as a service.
Part 3 | COMMUNITY IS THE MOST VALUABLE CURRENCY
If connection is the new currency. Then, the community is the most valuable type.
Founders and investors join communities not because they're excited about adding a line item on their resume. Instead, they're joining communities because of the access it brings. Access to deal flow, access to talent, access to expert advice, access to capital all begins with access to a community.
An introduction to an investor that comes from a founder the investor trusts goes a long way. Asking the founder for that introduction is much easier to ask for when you both have a joint affiliation. The incentives to uplift one another are aligned.
Why does this matter anyway? Everyone is accepting cold pitches. There are forms on many VCs websites to pitch. Sure are! Yet, ~60% of venture deals are still funneled through facilitated introductions.
Communities, or more specifically the access to the members affiliated with it, whether Web2 or Web3, discord or slack, VC portfolio community or a fellowship cohort, are how founders most effectively find their way to capital today.
Part 4 | CURATION IS KEY BUT ALSO $$$$
The effectiveness of having an affiliation with a community depends on the community's ability to curate.
Investors of all kinds rely on quality curation.
Organizations and individuals have taken it upon themselves to curate opportunities for investors in hopes of supporting their founder communities. These 'super connectors' are investing their time to build out their networks, help founders think through their options, and make a high-quality introduction.
These introductions are no longer *just* to traditional VC's. Introductions are made to every type of investor listed in Part One. Everyone is vouching for everyone.
Mike MacCombie, Head of Platform at Surface Ventures, organizes a monthly call for pre-seed investors to share their favorite deals. The deals stay within the group and he makes an introduction when requested. MacCombie explains that "the group consists of solo-GPs and individuals at emerging funds/syndicates. Since investors at larger AUM funds see so many opportunities, their excitement around being connected to opportunities depends on the quality of the curated intro."
Younger investors are generally excited about the generosity in early-stage venture with deal sharing. "Some send links of companies, others share one-liners. I also see some investors sharing paragraphs around conviction and allocation," he says.
Investor to investor ad-hoc opportunity sharing is just one type of curation. Newsletter lists are also on the rise. Lolita Taub and Zehra Naqvi of Republic are examples of individuals curating opportunities for the industry.
Last but not least, program managers, platform leads, and community managers (super-connectors) are also master curators. Heather Hartnett has repeatedly pointed out that funds investing in these roles today will be able to differentiate themselves long term.
Curriculum capital programs also recognize that attention spans are lower and time is tight. Investors can't spend hours watching demo days, so these super-connectors go the extra mile to make curated introductions.
How much time and tools do you think these various processes take? Short answer, quite a bit of time, and a great deal of thought.
All stakeholders are leaning on no-code and low-code tools. Many are even considering investing in building in-house software to help with curation.
Curation comes with a high cost. So it's no wonder that communities that curated effectively and the founders who are a part of those communities, win.
We are in the middle of a paradigm shift in the history of early-stage fundraising, where connection effectively equals capital. Whether you are a founder raising capital today, an investor who recognizes the new landscape of venture, or a super-connector, you're likely feeling the shift.
What an exciting time to be a part of the early-stage venture industry, no?
Please don't hesitate to reach out and respond with thoughts, questions, or suggestions. We're here to support all the stakeholders in this ecosystem shift at Closed Round.