Fishing in Venture
I came across an article this week that caught my eye, “The Extinction of Venture Capital As We Know It And The Rise of The Venture Studio Business Model” by John Cowan. Boy was I startled as someone who works in VC… But, nonetheless I journeyed on to learn his perspective. The first paragraph in his article goes like this:
“Venture capital (VC) firms are forecast to raise less than $200 billion in 2024, a 48% decline from 2021 levels according to Pitchbook. Fundraising is only expected to grow 2.9% annually through 2028, less than half the rate of other private capital strategies, including private equity, private debt, and real assets funds. Grimmer still, the Venture Capital Journal’s annual survey of Limited Partners (LPs) revealed the proportion of LPs looking to add VC managers to their investment portfolio plummeted to just 30%, down a heart-stopping 36 points from just two years ago.”
Remember when we discussed the rough market condition? Yeah, well here is some unneeded validation to that overwhelming hypothesis. Now, 2021 was one of the most historic years in VC so it’s hard to compare where we are now to then. John makes a great point, LPs (article on LPs) are investing their money where (less risky) investments have a stable ROI – and usually sooner. So, how can VCs start to gain the trust (was it ever lost?) and ultimately dollars of LPs to fuel startups? Well, John believes Venture Studios are the answer. Prior to this, my perspective on venture studios was that they were just a coworking space for the ultra rich to research in – but boy was I wrong. I quickly became fascinated with the concept and could see this being the future of what VC looks like.
So, what is a Venture Studio?
MIT Researcher Nelson Dario Muñoz Abreu defines the Venture Studio model as:
“The venture studio model aims to systematically build new ventures by trying to combine the financial resources of a venture capital firm, the expertise of accelerators and incubators, and the drive of startup founders. Acting as “factories that build businesses,” venture studios are companies that apply venture building methodologies to systematically identify market opportunities, develop ideas for businesses that can pursue those opportunities, assemble founding teams to operate those businesses independently, and support the businesses’ growth from inception to spin-off.”
Basically, piecing together all the VC ecosystem pieces together. You see, founders are being tugged in all sorts of directions when it comes to growing their businesses. They’re hearing things like; “You need to get money from a VC to grow”, “You need to do my accelerator to understand your customer and business”, “You need to read these books”, “You need to research with academia and prove out your product”. These are all good things to do, but we tend to overwhelm people with our ideas because they work for us or benefit ourselves in some way. Our perspective is different. The Venture Studio combines all of those questions/faucets of support into one platform. Is this for everyone? Not at all, but I believe it’s a step in the right direction to disrupting the traditional VC model.
From a practical standpoint, a venture studio can be thought of as this. A physical space for founders to work in with a fund that will support business creation, advising, research, operations, and growth. John then goes on to share that venture studios are achieving an average IRR of 53%, more than double the 21% average for traditional venture funds. His belief is that the IRR is driven by a lower fail rate, efficient capital spend, and the ability to scale companies quicker. Reading this shocked me. But when you think, it makes sense. We learn and grow our best when there are intentional, experience driven structures that have the goal of building towards some sort of success (however we describe it). I’m going to continue to dive into the venture studio model, in the meantime if you know anyone or are involved with a venture studio I would love to connect!
Here are some really cool venture studios –
Fish of the Week
Sift.io
This week I got to catch up with a friend of mine, Ani who I met during my time at Virginia Tech. He and some college roommates started Sift, a platform to help students use AI to get hired. I got to hear some unique experiences that Ani has had as a founder and what he currently faces.
As an international student in the US, Ani and his co-founders encountered firsthand the frustrations of the job search process. Despite extensive networking, building relationships with recruiters, and even securing referrals, they faced repeated rejections, some so swift it was hard not to take personally. The most disheartening moment came after months of effort, only to be rejected by an ATS system due to lacking the right keywords. It felt like technology wasn’t just replacing jobs but also stealing opportunities from capable individuals. This experience fuels their passion for creating a more humane and effective recruitment process with Sift.
The story of Sift began during a moment of deep frustration and reflection. They reached a breaking point after numerous job rejections, feeling existentially lost. Overwhelmed, Ani confided in a friend, who shared similar frustrations as a Marketing Leader in India. This shared dissatisfaction sparked a conversation about challenging the ineffective recruitment system.
They toyed with the idea of a platform like “Tinder for Jobs” or “Hinge for Jobs,” focusing on meaningful connections over superficial matches. Driven by this concept, they delved into researching the recruitment process, its flaws, and potential improvements, initially considering ways to make the job hunt engaging or gamified. Consulting a friend with expertise in HR crystallized their vision. The three of them decided to collaborate, aiming to reinvent recruitment to be fairer and more effective.
Sift aims to eliminate common recruitment frustrations like ghosting, application status ambiguity, and the lengthy hiring process. They’re poised to revolutionize global hiring, reducing hiring time from 41 days to mere days and making quality recruitment accessible to SMEs without high costs. Their story is ongoing, with a vision of a future where their platform brings transparency, efficiency, and fairness to recruitment, impacting countless lives positively.
To bring it back to our theme of fishing, I asked Ani if he had fished before. Ani recalls a vivid memory of fishing during a summer trip to Kerala. Despite his lack of skill, the experience taught him the value of patience and enjoying life’s simple pleasures. It’s a memory he cherishes, reminding him of the joy of sharing moments with others.
Currently, they’re building a pre-onboarding tool for SMEs, leveraging AI and NLP to streamline recruitment. Despite challenges like securing funding and refining their technology, they remain committed to innovation and user-centric design, passionate about overcoming obstacles and rewriting the status quo of recruitment.
If you’d like to help them out, be sure to contact me and I will make the connection!
Ebbs & Flows
Participating vs. Non-Participating Liquidation Preferences
One of the many terms that an investor can include on a term sheet is the liquidation preference. And arguably, one of the more important terms. Understanding what the liquidation preference is crucial for both investors and founders. A liquidation preference determines the payout order to shareholders when a company is sold, dissolved, or undergoes a liquidity event.
Participating Liquidation Preference – This type allows investors to “participate” twice in the liquidation (exit) proceeds. First, they receive their initial investment back, and then they participate in the distribution of the remaining assets alongside common shareholders. This structure is more favorable to investors as it can significantly increase their returns, especially if the company sells at a high valuation.
Non-Participating Liquidation Preference – this preference only gets the option to either receive their initial investment back or convert their preferred shares into common shares and share the proceeds with other shareholders. This type is less aggressive compared to participating preferences and aligns more closely with common shareholders’ interests, as it avoids the scenario where preferred shareholders are paid multiple times over. This is most common on term sheets.
In both cases, if you have a 1x liquidation preference then you would get the opportunity to get paid back your initial investment. However if it was 2x then it would be 2 times your initial investment.
So, an example. You invest $10M in a startup and there are two potential liquidation preferences:
You have the Participating Preference: You have a participating liquidation preference at 1x plus dividends. If the startup is sold for $50M, you first get your initial $10M investment back. After this, the remaining $40M is split between all shareholders, including yourself, according to their ownership percentage. If you own 20%, you’ll receive an additional $8M ($40M x 20%), totaling $18M.
You have the Non-Participating Preference: You have a non-participating liquidation preference at 1x. In the event of a $50M sale, you can choose to either receive your $10M back or convert their shares into common stock and participate in the distribution as a common shareholder. If you choose the latter and own 20% of the company, you would simply receive $10M (20% of $50M), not both the preference and a share of the remaining proceeds.
In both cases, the choice will depend on the total sale price and the percentage of ownership
Thank you for your support!
Dawson J. Racek
Dawson Racek 