Verissimo Monthly - August 2024
Fund Size - Strategy Fit
Thoughts on Investing and Starting Up
As investors, we talk a lot about product-market fit and founder-market fit, but there is very little introspection into the idea of fund size-strategy fit. This is the key question of whether a venture fund’s strategy is set up for success from its very structure.
There are a handful of factors included in determining this…
Company stage target
Industry target and capital needs by stage
Ability to source and get allocation in quality companies
Diversification or number of portfolio companies
Ownership targets and thresholds
Total fund size and ability to raise it
Balancing all of these factors - some more subjective than others - is key to driving a fund strategy (which is much more than just an investment strategy) and is often one of the biggest challenges when transitioning from angel investing to fund investing.
When we set out to raise our second fund, we had a hypothesis that consisted of two parts:
We could develop a method that would allow us to invest in what would have been the top third of our fund 1 companies (thus shrinking our portfolio from 72 companies to 24 companies)
We could get 3-4x as much allocation in those deals (from ~$125k to $500k initial check sizes)
We also took into consideration a few other elements:
What industries can we fund?
Meaning… can our $500k-$700k initial check make a meaningful impact in the company’s runway towards achieving their goals? For some companies, $100M is necessary out of the gate (think aerospace, AI infrastructure, etc.), and as a result, we would simply be along for the ride rather than driving the progress of the company with our check. This is another big difference between being a VC fund that supports companies financially and an angel investor who picks companies.
Software business models in their many forms are a great target, especially using a modern tech stack. Building a product and testing it in the market is something that our check size and target round size can support.
What is the right stage?
Given the investment amounts and multiple goals, we need to focus at the early stages of the startup lifecycle. But this also begs the question: do we have the requisite network/deal flow and expertise to be investing at this stage?
In addition, is the risk-reward well-balanced at this stage?
How much diversification is healthy?
~25 companies is a good number for two reasons: first, our target investments aim for 30x returns, meaning that a single winner can return the portfolio, and second, there are enough shots on goal to achieve a normal distribution of returns fund after fund.
This means we are less likely to get a 20x fund vs. a fund with 8-10 companies, but more likely to hit the 3-8x target return consistently.
How many companies can we actually engage with after investment?
Portfolios grow, but our time does not. We have focused on making our value-add targeted and efficient, but needed to make sure that we had enough hours to go around to the portfolio companies.
We also handled this by splitting the portfolio into two categories:
Lead/co-lead at pre-seed
In these cases, we will spend significant time with the founders in nearly every facet of the business.
Participate/follow at seed
In these cases, we can be more targeted in where we engage with the company to complement the rest of the investment syndicate’s skills and offerings.
The other strategic element here is actually to “graduate” companies. Meaning that once they raise follow-on, we can sit with the founders and re-assess where we can be most helpful in the context of the new investor syndicate. In certain specialty areas, we will always be the go-to. For example, I spent 2.5 hours doing a modeling session with one of our fund 1 founders who we backed in 2020 and is now past the Series B. Our philosophy here is to always be available but never in the way.
What is the right ownership?
Tying all of the above criteria together means 4-7% ownership at pre-seed and 2-4% ownership at seed. Naturally there is variation within each category, but the averages should work themselves out.
There is also a “hurdle” at 5%, meaning that starting and staying about this level with pro rata investments keeps us in “major investor” territory, which is helpful in the long-term to maintain upside and continue to be a part of the companies’ journeys.
Can we access the best companies?
At the 5% target ownership or $500k minimum initial check size, we have the flexibility to properly fund the super early stage bets while also fitting into more competitive, larger rounds as a value-added follow check.
This flexibility has proved to be a great asset. On several occasions, we have been able to get founders from 0 to 1 with our initial and follow-on checks as a lead investor, and in other cases we have squeezed our $500k into competitive rounds where a $1M minimum check would not have gotten us (or anyone else) access to the round.
In addition, this should matter a lot for founders as a $500k check out of a $100M fund will almost certainly not move the needle or justify a partner spending time with the company.
Then of course comes the final question: can you raise the money to support the strategy?
Fundraising strategy is a full subject on its own, but I will point out that it is very GP-specific and is based on background, network, skillset and several other factors. No two GPs will execute the same strategy, even at the institutional level and certainly not at the smaller scale.
On one end of the spectrum, to run through the math and see that $100M is the right amount, but with no meaningful track record or industry connections, it is unlikely that a GP will be able to hit this fundraising goal and therefore must reassess the strategy.
On the other end of the spectrum, if a GP is spinning out of a global venture fund where they built many institutional LP relationships but is then going to raise $15M, they will not be able to accommodate the necessary check sizes for those LPs’ strategies.
The most important part of this framework is that it is an iterative cycle. Like in any modeling exercise, the exercise itself is the most valuable part. Running through the assumptions and making sure they check out with the rest of the flow and then iterating is the key to finding the right balance and building a solid strategy.
Portfolio Highlights
Trace Machina recently emerged from stealth with a $4.7 million seed announcement led by Wellington Management.
Trace Machina is building the software infrastructure to enable efficient and productive simulations for autonomous robotics applications.
When developers go from working on web apps to working on robots, it becomes obvious that the existing developer toolkit with Docker, Kubernetes, etc. does not suffice. Engineers need to be able to run experiments and tests on the local hardware directly. NativeLink (their first offering) bridges that gap and provides engineers with a staging environment that enables them to run simulations in resource-constrained environments, like an embedded Nvidia GPU chip, which are difficult to source for robots, self-driving cars and edge devices.
Vanta recently raised a $150 Million Series C led by Sequoia Capital and is now valued at $2.45 billion.
Vanta is a trust management platform that simplifies security and compliance for organizations worldwide. Founded in 2018, Vanta automates the complex process of achieving SOC2, HIPAA or ISO 27001 compliance, offering a modern, out-of-the-box solution for software companies. By replacing the traditionally manual and costly approach with a streamlined experience, Vanta enables businesses to build and demonstrate trust in real-time. With offices in Dublin, New York, San Francisco, and Sydney, Vanta serves thousands of companies across 58 countries.
mpathic is an empathy-as-a-service API that enhances SaaS platforms with real-time conversation analytics, training, and suggestions. Founded by an empathy research expert, mpathic's advanced ML models accurately detect and improve over 200 human behaviors. This helps organizations in life sciences, healthcare, and client services create more empathetic products and services while quickly measuring and improving their effectiveness. mpathic recently made it to TechNational Top 100 Companies to Work for 2024 list!
Goodcall is a conversational AI solution designed for SMBs and franchises that transforms frequently asked questions into a smart, AI-powered agent. This allows businesses to provide valuable customer service 24/7 without being tied to the phone. Goodcall's platform handles common queries, ensuring it is always working in the background. The service also offers analytics and insights into customer behavior, helping businesses understand why and when customers are reaching out.
Elevent is a corporate events marketplace that connects experience providers with companies to deliver unique, memorable virtual and physical experiences. Their platform offers a variety of curated experiences, providing engaging alternatives to traditional corporate events and catering to both sales and HR needs. Founded during the pandemic by a team with a strong background in event execution and digital marketplaces, Elevent is focused on expanding its offerings for both corporate and SMB customers.
Who we are
Verissimo Ventures is a Pre-seed and Seed Venture Fund based in Israel and the US. We invest primarily in enterprise software companies and take a fundamentals-driven approach to early-stage investing. We work closely with founders to help them build the strongest, most fundamentally sound businesses with potential for explosive growth and a meaningful impact on the market.
We were founded in 2020 and are currently investing out of Fund 2.
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