Marc Michel had over 20 years of private equity and venture investment experience and was a founding Director of Metamorphic Ventures before joining as a Managing Partner, in addition to to founding a leading health information technology company with revenues well over $100 million that is still operating and growing today.
Anna Garcia was an early stage investor and mentor at several startup accelerators in New York City (ERA, Barclays/Techstars, Canadian Technology Accelerator), with over 15 years of experience in financial services in senior roles across capital markets, investment banking and asset management.
Marc and Anna began sharing their observations and comparing notes on what was happening in the venture market, and how they saw it evolving and ended up partnering up on their aligned vision. They shared that vision and what it means for founders over a SheWorx breakfast.
Feel like you’re making all the right moves, but not ready for Series A funding? It’s not you, it’s the funding landscape.
When Marc was out to start his first fund, Metamorphic Ventures, he did so because he identified an interesting trend in tech: in 1999, a software product cost around $2 million dollars to build. By 2008, that same product cost about $200K to build, and today $100K.
This drop in software cost inspired the idea in Marc that while New York wasn’t a place for semiconductors or hard tech, it was the domain leader in a whole variety of verticals, ranging from financial services, marketing and advertising, publishing, health, legal, fashion, retail, and so much more.
“If you married up that domain expertise with software, you could create many software enabled businesses around those domains. We felt like this software drop was going to unleash New York,” said Marc.
In the same vein, Marc’s motivation for starting his new fund, Runway Venture Partners, comes from observing an interesting trend in the landscape.
Metamorphic Ventures, at the time, was the first of 4-5 seed funds in New York. Today, there are over 60 seed funds in New York and around 80+ active seed investors that are not funds, but incubators, family offices, and superangels. In 2008 and 2009, there were probably around 7 series A funds in New York. Today, that number has grown only up to about a dozen.
“We have not maintained the same kind of series A availability growth that we had with seed capital,” said Marc.
Moreover, despite the push of dollars into the venture market, many funds have declined to build larger portfolios in favor of of concentrating more dollars per portfolio company.
“We were seeing a ton of great entrepreneurs get caught in a trap that was not of their own making. They had raised their money, put that money to good use, were executing, were getting customers, were growing that customer base every single month on a very predictable pace, yet the bar had been moved on them to get and access series A capital.”
How do you build the bridge from seed to series A? Look for post-seed capital.
Anna and Marc believe that returns are always best where there are capital shortfalls, not capital surpluses.
2010 data says that 40% of all seed funded companies graduated onto series A capital. Today that number is down to around 10-15%, meaning a group of 30% or so companies that would have gotten capital in the past are now struggling to get that capital.
Thus, Anna and Marc realized what New York needed was post seed capital to fill the gap that that had been created between a seed capital round and the series A round, and that they could be the first in market to offer it.
“More and more companies just naturally need that additional influx of capital even if they’re doing all the right things, and so I felt as an angel I didn’t really see those opportunities,” said Anna. “I think the good companies were insider deals on the VC side, because you need capital relatively quickly, and successful companies would have prior backers step in.
“We wanted to be that player that could be the lead investor into these rounds and prevent the founder from having to spend 6 months trying to raise that round. Finding the lead is really challenging. Most seed funds, even if they support the company, are not structurally set up to write a million dollar check into that round, because their portfolio construction is different.”
How do you win the post-seed round? Make sure you’ve achieved product-market fit, then explain clearly what you do and why you’re doing it.
Companies that are ready for post-seed capital are ones that are post product-market fit, with some traction and some history of revenue, and ideally with a year plus.
“We can’t go off on 2 months of data, we really have to see that it’s working,” said Anna.
The biggest piece of due diligence in a post-seed fund like Marc and Anna’s is talking to customers.
“Someone’s paying you for your service or product, so we have the luxury of objective data points from those conversations.” said Anna.
For your best pitch, Marc advises connecting your story to your pitch.
“Why are you fundraising? Why are you in front of me? What was the story that brought you what was the problem you encountered that you searched far and wide for the solution for and found none, so you had to start this company?” said Marc.
“I’d rather invest in that than entrepreneurs that are trying to brainstorm their way through 100 ideas and say ‘I wanna be an entrepreneur and I’m going to go find a problem, but it’s not a problem that they necessarily experience themselves.”
The second part of a great pitch is being able to articulate very clearly what you do.
“Don’t use big words like 'I’m transforming or disrupting,’ that just loses for me. Just say ‘this is what we do’ in the most concise possible way, and then it has to tie in with the whole story. Ultimately, if we spend 30 minutes trying to figure out what you do, you’ve wasted that time.”
Even if you don’t win funding, give it your best shot. Anna notes that you may still get an ally out of the meeting who can connect you to another helpful person.
“You have to turn that meeting into a win somehow, and part of that starts with telling us very clearly what you do.”