Funding Secured

Cash in the bank is the Monday morning double-shot espresso after a holiday weekend of an early-stage business. You can live without it, but only for about 5 minutes. For many, this initial capital infusion is fueled through an outside investor exchanging cash for a current (or future) claim on equity. While getting access to capital is important, the source of that money can be even more important. Nicole DeTommaso of Harlem Capital does a fantastic job breaking down the core types of VCs in this tweet thread.

Expanding on this a bit, I’d also like to share a mental model that is “source-agnostic” and can be applied after a conversation with any type of investor. In a founder’s post-call debrief, an investor can likely be classified into 1 of 4 buckets:

1. Loud & Helpful — the best of both worlds, a deeply connected investor who evangelizes your business while also providing key strategic connections and advice
2. Quiet & Helpful — not a connector, but a person with broadly applicable experience to help you build
3. Quiet & Unhelpful — an investor providing capital only, without the time or ability to provide connections or strategic help
4. Loud & Unhelpful — the worst of both worlds, an individual providing limited strategic value while continually taking up a founder’s time and brainpower

Each category is unique in its weighting of advantages vs. disadvantages and it’s important to carefully analyze each invested dollar to ensure your cap table “portfolio” is appropriately allocated. Can you rationalize taking loud and unhelpful money when you’re in a funding crunch? Certainly. Will it backfire down the road? Likely.

The great news for founders is that sources of startup funding are plentiful (grants, accelerators, crowdfunding) and the venture asset class shows no signs of slowing down. Venture funds raised a record $128.3bn in 2021, a 47.5% YoY increase. Given most venture funds typically deploy the majority of their capital within the first 1–4 years post-raise, it’s likely we’ll continue to see a competitive venture landscape in 2022 and beyond.

A potential investment vehicle receiving quite a bit of ecosystem attention is the DAO, and more specifically Syndicate DAO (I can’t believe I made it 370 words in a venture capital related article without a Web3 reference!). Syndicate feels like the natural evolution for a digitally native generation of investors who see the potential for crypto to democratize the early-stage investing process. It may also become a helpful tool in opening up the venture ecosystem to non-accredited investors. The protocol allows a group of individuals to create investment “clubs” that provide utility to invest in Web3 primitives (tokens, NFTs, etc.) as well as potential real life objects like…..startups! Syndicate creates coordination and governance capabilities through issuance of tokens (ERC20s) that drive group decision making.

While still nascent, it’s hard to ignore the differentiated value proposition that DAOs could provide if centered around a business or problem where community truly enhances buyer/seller interaction. For restaurants, a collective of chefs sharing their experiences and providing unique perspectives likely drives continuous engagement and “repurchase” interaction for both operators and foodies alike. On the other hand, one-way engagement where community is only used to increase product awareness may lead to value-extraction (I came for the information, I get it, I leave) vs. value-creation (I came for the information, I learn and provide my own perspective, I stay).

The emergence of crypto native vehicles to fund startups makes it even more critical to do an honest evaluation of both how you’re raising money and where that money is coming from. While mediums may change, the buckets outlined above will always provide a cheat sheet to quickly analyze your investor list. Done correctly, investment DAOs have the potential to supercharge businesses through a new type of investment vehicle that defines capital not only as money, but also the time and expertise dedicated to a project from a diverse collective. Done incorrectly, you may have a stadium full of loud, unhelpful, and potentially anonymous people that require investor updates exclusively on Discord.