In many VC firms, someone leads each potential investment. This deal lead develops conviction about the company by learning as much as they can about it. Once they’re convinced the firm should invest, they turn their energy toward convincing others in the firm of the merits of investing.

This effort usually involves preparing an internal deal memo that details what the deal lead has learned about the company and lays out the case for an investment. To those who see them, these memos provide a rare glimpse of how VC firms evaluate a company for investment.

These deal memos are often protected work product that VC firms don’t publicize. Bessemer Venture Partners, though, has made deal memos about some of their successful investments—Yelp, LinkedIn, Pinterest, Shopify, and others—available for public viewing. These memos aren’t recent and likely have been scrubbed, but they still provide a great perspective on how Bessemer’s deal lead evaluated each company for investment.

If you’re interested in reading Bessemer’s deal memos, you can do so here.

I’ve spent time with a few entrepreneurs recently. One of them is gifted at finding undervalued assets. He buys them at deep discounts, improves them, and sells them for premium prices. He’s got a great eye for opportunity and has a top-notch business. 

He said his main constraint is capital. He doesn’t have a deep network of people who invest in projects like his. So, he has relied on a single wealthy investor to back his projects. This has worked, but it’s put him at a disadvantage in negotiating terms. It also has limited the opportunities he could pursue because the investor, who must sign off on each project beforehand, doesn’t understand the potential of some of the assets.

It amazes me that an entrepreneur with a decade-long track record of success is constrained by capital availability. I suspect there’s a large, fragmented market of entrepreneurs like this one. Seems like a big opportunity!

I found a report from Carta, the equity management platform, that’s full of data and very helpful. It’s called State of Pre-Seed: Q2 2023. Carta defines “pre-seed” as “any company that has yet to raise a priced equity round.” Lots of companies begin by raising capital on convertible instruments and do priced equity rounds as they mature. Carta doesn’t explicitly say this, but I assume it also caps valuation of companies included in this report.

The report is full of useful data. In addition to high-level data, it provides granular data broken down by the two most common convertible instruments used by early-stage companies to raise: simple agreements for future equity (SAFEs) and convertible notes.

One point that stood out to me was that 52% of pre-seed companies that raised in the first half of 2023 were in California and New York. These companies were also more likely to raise more than $2.5 million in their pre-seed rounds.

The report is a great resource for anyone curious about the state of fundraising for early-stage venture capital companies in the first half of 2023. The report can be downloaded for free here.

I recently reviewed an early-stage founder’s fundraise deck. He’s raising capital for his start-up. His first start-up was shuttered when he couldn’t attract paying customers. He mentioned the first start-up to me but positioned the idea behind that business as a success because another company executed on it and is worth $10+ billion. Even though his business failed.

Most start-ups fail. Failed start-up attempts, while painful, can pique an investor’s interest. The failure itself isn’t what they focus on. What they want to know is what you learned from it and how you’ll apply that knowledge to the next attempt. If you learned valuable lessons that will increase your chances of success and speed of execution, that’s a positive founder trait to many investors.

Founders shouldn’t shy away from their failures. Instead, they should own them, share what lessons they learned from them, and articulate how those lessons increase their chances of success as a repeat founder.

Today kicks off what I believe will be a memorable fundraising period for technology in public and private markets. With private companies going public through IPOs, start-ups raising venture capital, and venture capital funds raising from limited partners, we’re likely to see a lot of activity between now and the holidays.

I’m curious to see how receptive investors are to these varying investment opportunities and how much capital is raised.

This week I was discussing an upcoming capital raise with a founder. The company has pivoted, and its latest product is resonating with prospective B2B customers. These businesses have been searching for a solution to a problem, to no avail. This founder’s solution checks all their boxes. Prospects are converting to customers relatively quickly.

Things are looking good, and the founder wants to raise venture capital. His pitch is coming together, but we talked a lot about one part of it: the market. How many customers exist for his solution? I learned that his “known” market is material but not gigantic and not growing (as far as we could tell). There’s a clear path to building a company with seven-figure annual revenue. Beyond that, not so much.  

Markets matter a lot. It’s hard to build a big business in a small market—there just aren’t enough people willing to pay for the solution. It’s equally as hard in a static or shrinking market because companies grow by taking market share from other businesses—the market is cutthroat (and likely low margin).

Venture investors understand this dynamic and spend lots of time understanding the market a start-up is operating in before they invest. If the market won’t support a large company (now or in the future), the probability of an investment being profitable for the fund goes down drastically. If they can’t see the investment turning a large profit for the fund, they probably won’t invest.

Markets matter, and founders should understand their market and its potential. If a founder can’t articulate why a market will support a large company (or multiple companies) and how their solution will win in that market, they may not be able to raise venture capital.

In April, Apple launched its savings account product. A few weeks later, a Forbes article reported that Apple saw inflows of almost $1 billion in the first four days after the launch. At the time, I wrote that it was a sign of a huge unmet need and perfect timing (right after the Silicon Valley Bank failure).

This week, Apple shared that its savings account product has reached $10 billion in deposits. An astonishing amount in just four months—especially when you consider that the savings product is available only to people who have an Apple Card. I wonder what the deposits would look like if the account were available to iPhone users who don’t have an Apple Card.

This product is off to a strong start, and I can’t wait to see how it does over time and what Apple’s next banking move will be.

iBank coming soon?

I chatted with a founder about a seed fundraise he’s considering. He wants to raise $2 million. We talked through his thinking, and I realized two things: he didn’t have a great grasp on current market valuations, and he didn’t realize how raising that much capital at today’s lower valuations would dilute his ownership, especially if he continued to raise capital.

I did some back-of-the-envelope math regarding his future round and a few hypothetical rounds after that. It was eye opening to him. He realized that dilution by early and subsequent rounds would have a material impact on his ownership as founder and materially reduce his proceeds if his company were to be sold.

Raising capital is hard right now for early founders. Even if you can raise the amount you desire, it’s worth thinking through how much you need, the current market valuation of your company, and how dilution will affect you. Tools that can help founders understand the dilution impact of fundraising rounds are out there (645 ventures built one). Spending time with one of these tools can help founders quantify the impact of dilution.

Today I read a WSJ article about deposits at Main Street banks and interest rates. It’s an interesting read that explains how the rapid increase in interest rates is affecting community banks’ ability to attract and retain deposits.

In a post a few months ago, I said that banks will start having to compete for deposits, which we haven’t seen in almost twenty years. The willingness of consumers to move funds in search of higher yields will be the forcing function in this competition.

According to today’s article, Randy Chesler, CEO of Glacier Bancorp, explained, “We went through a decade of zero to low rates, and so there was a little muscle memory that had to be developed in terms of competing for deposits.”

Chip Reeves, CEO of MidWestOne Financial Group, has been in banking for thirty years. He was quoted as saying that “[i]t’s probably the greatest deposit competition that I’ve seen in my banking career.”

The competition for deposits is on. Non-mega banks (sub $250B in assets) will be fighting each other to attract and retain deposits. The first-order effect is that depositors will be paid more than in any other period in the last twenty or so years. I suspect the impact from this competition won’t stop there; we’re likely to see material second-order effects as well.

In David Cummings’s blog post yesterday, Customer Value Financing Example, he referenced David Skok’s SaaS Economics posts (part 1 and part 2). I hadn’t heard of Skok or those posts, so I took a look today. They’re older posts from 2010, but their wisdom is still relevant. They do a great job of explaining the cash-flow trough of recurring-revenue businesses and how cash flow is impacted when companies scale by increasing sales and marketing spend.

I’ve spent today going through part 1 and will dive into part 2 over the holiday. This post contains wisdom that founders building recurring-revenue businesses need.