LaunchCapital’s 2018 In Review

Reflections on our 10th Year of Seed & Early-Stage Investing

Last year, 2018, was an important one for LaunchCapital as we celebrated our 10th year (!) of investing in and supporting great entrepreneurs tackling important problems. It was also a year of some pretty major changes for the seed and early-stage landscape with more dollars going into fewer deals and traditionally late-stage funds investing big checks into the Seed ecosystem, particularly outside of the Bay Area and Silicon Valley. Simultaneously, the level of traction now required to raise a true Seed round has risen to look pretty identical to that needed for a Series A raise just a few years ago.

Rolling with changing tides, LaunchCapital made new investments in 17 amazing companies in 2018 across both seed and pre-seed as well as two first-checks into traditional Series A deals. In addition, we committed to follow-on investments in 17 portfolio companies, seeing them through to raising larger rounds to fund their growing teams and operations.

As we head into 2019, we wanted to reflect back on the past year through the lens of LaunchCapital’s 17 new investments in 2018 and share our learnings and perspectives that we hope to carry forward into our investing future.

Teachings, Themes, and Theses

At the beginning of last year our Managing Partner, Cliff Sirlin, articulated a framework for LaunchCapital in 2018, drawing upon the prior year’s experiences and market signals. These included, in no particular order:

1. Focusing on demonstrated product/market fit, including unique defensibility focusing on higher-conviction, larger checks with appropriate reserve capital to support these businesses into the future.
2. Analyzing and investing in companies that may be considered “non-traditional VC” deals including solid cash flow businesses in historical non-technical sectors
3. Doubling-down on opportunities in New York City and across the Northeast & Mid Atlantic (affectionately called our Boston-to-Washington “Amtrak Corridor”)

While we at LaunchCapital stay true to a “stage-specific yet industry agnostic” mandate, over the year we’ve refined our investment thesis in a few key elements, further honing the way we source and evaluate early-stage investments:

1. Business Model Innovation: Yes, every industry is becoming technology-driven (i.e. “Software eating the world”) but not every industry has yet harnessed or utilized technology to the fullest extent. Nor is every industry moving to embrace technology at the same pace. In each case, consumer (or business) needs are outpacing the ability of the existing providers to adequately meet demand, represents a critical divide. It’s that divide which many early-stage companies are hoping bridge and will generate many opportunities worth evaluating for investment.
2. Enablement Layers (or “Picks & Shovels”): During California’s 1850s Gold Rush, miners put in long, arduous hours but most failed to strike it rich. Meanwhile, consistent returns came from those providing the literal picks and shovels to the miners. As these evolving industries, mentioned above, explore new ways to reach consumers and new methods to manage operations, we believe there’s “gold in the hills” for the startups building the frameworks, infrastructure, and new delivery models that allow operators, both large and small, to serve end-users more effectively.
3. Founder-Market Fit: Right team and founders mean everything to the success of an early-stage start-up. While its easy to only back repeat founders who’ve “been there before”, we love the enthusiasm of first-time entrepreneurs who take on important problems. Thus Founder-Market-Fit, the match between a founder’s experience and the problem they are going after, has become a critical evaluation guide for us. Often that fit comes from a founder’s domain experience being applied to disrupt their industry’s underlying business model, we’ve also found founder-market-fit can successfully apply in adjacent industries, leveraging unique insights on customers acquisition, user behavior, or go-to-market. In the end, it all comes back to “Why This Team” and “Why Now?”

“Your Portfolio is Your Path”

Snapshots from our Founder’s Events in Boston & NYC this October & November Respectively

This article last month by Semil Shah also inspired me to also think about our 2018 cohort and to understand what it said about the topics we were particularly interested in as well as themes we explored deeply over the last year, in addition to the thesis and framework already discussed above:

1. “Millenials: All Grown-Up” — For nearly a decade, “Millenials” has been used derisively to stand in for “clueless young people”. As the last few millennials turned 21 last year, we saw a clear shift in millennials now facing challenges of adulthood. Millennials are delaying home-buying as well as childbirth compared to their parents’ generations and lack trusted guides or information sources for these major decisions. Our investments in RateGravity & Future Family spoke to those respective needs while in our investment in Hall, explored how third spaces and communities can address Millenials’ higher reported rates of loneliness, social anxiety, and depression.
2. “Data as a Compounding Moat” — While Artificial Intelligence and Machine Learning became SaaS buzzwords, we found the best companies still focused on the customer-pain point first, using data to inform that problem-solving, and saw AI/ML simply as tools to help better address customer pain. Human resources felt particularly underserved by data insights which we explored via investments in Filtered, improving hiring processes for engineers and data scientists, and through Involvesoft, helping enterprises improve company culture to promote better employee retention. Meanwhile, Datasembly bridges the gap between slow data collection techniques of existing providers and retailers need for real-time, on-the-shelf pricing data, while MarketMuse uses predictive analytics to help content marketing teams generate better ROI on their written content. In each company’s case, data insights gathered and contextualized also serve as a moat that grows stronger over time.
3. “Future of City Living” — As the rapid urbanization of America has continued, the underlying infrastructure of our cities has been severely tested. Politically & socially-conscious residents that especially value transparency, equality, and sustainability are leaving small towns for cities every day. Modumate will quickly become the new standard tool architects everywhere use to design buildings to help realize this future. ClearGov speaks to local governments’ needs to provide their highly-engaged citizens with better transparency. rOcean meanwhile is building an in-home filtered sparkling water solution that addresses conscientious consumers’ need to reduce their plastic bottle waste. Most recently, our latest, as yet undisclosed investment is tackling growing mobility and transportation infrastructure challenges facing much of the northeast, starting with New York City.

LaunchCapital: By the Numbers

Through conversations with entrepreneurs, we’ve found there is often confusion about what exactly goes into the VC deal-sourcing & evaluation process. While we published some stats about our portfolio companies last year, this year we thought it might be helpful to offer some more concrete numbers and context on our deal funnel for 2018.

To get to our 17 investments in 2018:

• Our team evaluated 434 active leads over 365 days. Active leads include all deals sourced by our team, prospective deals sent to us by existing portfolio companies, personal contacts, or frequent co-investors, and the rare cold email — most cold intros die in the inbox and never even make it into the funnel.
• Qualified leads are where we’ve had a phone call, meeting, or extended email interaction with founders. The number of deals we passed vs. moved-forward on won’t be 1-to-1 higher up in the funnel but the deeper we go, the more fervently we communicate and track passes when a deal isn’t right for us.
• Time and breadth of due diligence can differ based on the sophistication of the company but generally speaking we’ve been able to move forward on deals that we like within four weeks of moving to the Diligence phase. Conversely, we allow ourselves almost twice as long as that to definitively Pass on a deal once we’ve made it in the diligence phase with a company.
• Getting to negotiating means we’ve communicated our intention to invest and are either finalizing terms (when we lead) or awaiting deal documents (when we co-invest). The rare case where a deal won’t close after this stage is due to deal structure, governance, or other structural issues.

We particularly focused this year on tracking where our deals actually came from to better align our sourcing efforts with highest yield outputs. Also included here are the deal sources for all of the deals that make it to Due Diligence, which is, generally speaking, a signal of quality. Some of the takeaways were obvious, others less so:

• Cold outreach, including companies met at demo days, had the lowest yield through to portfolio, while Personal Contacts seems to have the highest. This is to be expected as cold outreach happens when we’re exploring a theme or topic in which we ultimately may not end up investing, while trusted personal contacts generally provide an additional filter of deal quality and relevance.
• While none made it into the 2018 cohort, 21% of the companies referred to us by our Portfolio companies make into due diligence — there may be some selection bias at play here but we like to think that our founders understand our investment theses and criteria well and know which of their friends would align with LaunchCapital.
• Taken together, other investors account for 26% of our active leads and 31% of the deals that make it to due diligence and nearly half (47%) of the 2018 cohort. This was surprising because anecdotally, our team spends much more time per month with founders than with other investors. We’re nevertheless grateful to our peers in the early-stage ecosystem who seek and value LaunchCapital’s participation and insights as co-investors.

Finally, we spoke at the beginning of the year about a renewed focus on the Amtrack Corridor. What the rest of the industry learned this year we’ve known for quite some time — major innovation is happening outside of Silicon Valley. To that end, 11 of our 17 new investments came from the NYC, Boston or DC metro areas. Beyond the North East, we were excited by opportunities in the rapidly growing Los Angeles startup ecosystem and plan to keep a close eye on “Silicon Beach” as it evolves— especially during the winter months.

Looking Ahead to 2019

Our Managing Partner, Cliff Sirlin, often says “Venture Capital is a get-rich-slow business” meaning it can take several months, often years for a thesis to prove itself out meaningfully. Fair to say then that many of the themes we explored in 2018 will still likely to still be relevant in 2019, perhaps with slight variations. Here are a few additional topics we’ll think about in 2019:

• As Millenials age into our prime earning years, the way we work has become remote and distributed which will continue to create friction for collaboration within industries, between organizations and across generations creating ever more opportunity for the picks and shovels that enable future of work.
• We’ll likely see a greater resurgence of Content X Commerce models in digital media (like in the early 2010s) with both pre-recorded and live mobile video becoming the ways in which digitally-native and mobile-first consumers spy, try, and buy products online — think interactive Twitch streams for e-commerce.
• Astronomical prices in higher education and costs incurred to attain relevant credentialling have become untenable. There’s also a renewed focus on continuing education and ‘upskilling’ blue collar workers though much of this has been focused on helping non-technical people join coding programs like HackReactor & General Assembly and emerge as employable software developers. It’ll be important to explore if these models fit other fields: the Lambda School of nursing care or paralegal studies or to new industry-standard certifications like Six Sigma or PMP, but at the fraction of the inflated costs of a degree.

To close on a personal note, it’s been almost a year since I joined LaunchCapital and I remain excited about the evolution of seed and early-stage investing ecosystem, here in NYC in particular. Moreover, I’ve been fortunate to play my part in building LaunchCapital’s mission of identifying and investing in exceptional founders solving important problems and am grateful to have worked closely with and learned from so many of our incredible companies over the past year. Here’s to continued success in 2019!