24 Strangest Models & Practices from Analyzing 1,000 VCs
The investment ecosystem is surprisingly large enough to have interesting practices from a VC that takes only 0.2%, cash-out founders, or shares its carry with the founders! So I've analyzed 1,000 VCs - Yes literally - from 25 countries over the year to come up with the strangest yet insightful models and practices.
If you go to any VCs or accelerator websites, you will find that they are almost identical. Most of them have a Portfolio (Detailed or just Logos), Investment Focus/Scope/Thesis, Partners/Team (With or without Emails), and Contact Information (General form, Detailed Application, or Nothing). But today I want to talk about the unique 1% that caught my attention.
Table of Content:
Various Financing Methods:
The traditional structure of investing in technology companies is to inject money in exchange for a share of the company, the percentage of the share is determined immediately - Priced Round - or later in a subsequent investment round - Convertible Notes. And Convertible Notes can come in the form of investment only, and they can come in the form of debt payable before a specific date - Maturity Date - if they haven't converted to shares until this date.
1) Investment in return for a percentage of the income or the so-called Revenue-based Financing, which is the investor’s participation in the company’s revenue until the payment of a specific “multiplier” on the original investment,?and this may be the only form of restoring the original investment, or it may be a mixture between a percentage of revenue plus a share of the company.
2) A French investment fund of $10M called Super Capital buys the shares of one or all of the partners during the investment round.
3) An investment fund of $544M called NewView that buys shares of other investors in companies, or what is called Orphaned Startups.
4) An investment fund of $174M in New York called Harlem Capital shares 1% of its profits as a fund - Carry - with the founders. And other funds share this percentage with the Scouts who nominate these companies for the investment fund.
Uncommon Preferences:
The traditional preferences are either based on a field/sector, stage/size of the company, or the geographical scope, so it’s normal for the investor to invest in FinTech or eCommerce only or Seed stage only, or in Europe only and this specialization started timidly in the Middle East, but it’s not standard yet.
5) A US investment fund called Banana Capital aims to own a minority percentage starting from 0.2% to a maximum of 3% of the company, to give itself space and freedom to execute as many diversified investments as possible.
6) An investment fund that invests exclusively in the Post-Seed and Pre-Series A stage and participates in intermediate rounds or what is called Bridge Rounds and Extended Rounds because they consider this stage as the lowest risk rate and the highest return multiplier on the company valuation. Specifically when the company got an investment in less than 12 months and is targeting another investment in less than 12 months with a higher valuation.
7) An investment fund in North Africa, they have a headline on their website that says “Why we don’t invest in startups and only invest in SMEs” and they list many reasons but in summary, they don’t invest in tech startups because they are high-risk and they invest in traditional companies instead targeting large shares, not a minority.
8) Investment funds target specific business models, which is different from sector-targeting such as Health, Education, or Real Estate. The business model itself is like multi-sided platforms - Network Effect - eCommerce or On-demand Apps.
9) Investment funds target minority groups or the so-called Underrepresented Founders, such as female founders, dark-skinned people, or the LGBT community, in which some investors just give preference to these categories but also invest in others, and some funds invest exclusively in these minorities. This means it’s a condition to consider before applying is to have at least one partner who falls into these categories with a high impact in terms of shares management roles and is not just a minority or non-influential partner.
10) Similar to the previous point, but it’s targeting Overlooked Markets, and they don't necessarily list what these markets are, but they are sectors - or geographic areas - where there are not many people building or investing in them.
11) Investment funds target companies with a basic condition; that they have raised a previous investment, regardless of the size of their business, the maturity of the product, or anything else.
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Transparency & Communication:
Traditionally, there is no transparency most of the time. Often you will be surprised at each point by the time frame, conditions, or a piece of information that you didn't know at the beginning or even contradicted in the first place.
12) An investment fund in the UK called Kindred Capital makes its Term Sheet open to everyone on its website.
13) An investment fund in California called Stage1 Fund, offers on their website the Pitch Deck to their investors - Limited Partners - based on which they collected the fund amount.
14) An investment fund of $174M in New York called Harlem Capital, displays a whole Pitch Deck for the founders on its site with the aim of convincing startups why they are the best investment fund and what their vision is, and what they can offer companies in their portfolio.
15) An investment fund called TMT Investments exhibited the most important numbers and results that it achieved from the most important companies that exited or that were re-evaluated in its portfolio, an example of a company that achieved 13 multiple on investment.
16) Investment funds set a timetable for each expected step. For example, the first response must be within 14 days, and if there is an interview, it must be within a month, and the whole round is often completed within 2-3 months.
17) Investment funds specify their preferences in much more detail, not only do they say the areas that are most preferred to them, but also the areas that it’s impossible to invest in and the deal breakers or the details that once they see it, they will reject it. They also define the gray area, such details if they see it, it doesn't mean they will refuse, but it’s also not their favorite preference.
18) Investment funds that don’t have any direct or indirect contact information and write clearly on their website saying “We don’t accept any communication except through personal recommendation - Warm Introduction - and that if you are a founder building a great thing, you will find your way to us in one way or another.”. We all know that most investors prefer recommendations, but not exclusively in this way.
Value-Added:
19) Most of us know that an accelerator like YC has one of the most popular educational curricula and platforms, YC School, but what I discovered is that this pattern of building a whole ecosystem also exists in other places. Many investment funds like Soma Capital and Pillar VC launched Blogs, books, Podcasts, Courses, Fellowships Programs, Events, Matchmaking tools, Databases of alternative funds, Legal Templates, and a huge amount of original content.
20) Investment funds tend to be Operational Investing, which are investment funds that have hundreds of employees and help their portfolios on an operational level, from assigning important positions, planning, finances..etc. And many of them have integrated on their site the job needs of their portfolio, one of the biggest investors who apply is model is Andreessen Horowitz.
Uncommon Fund Managers' backgrounds:
21) A lot of actors, singers, and celebrities have active investment funds like Leonardo DiCaprio - known for investing in the environment and climate - Will Smith, Serena Williams, Jessica Alba, Jay-Z, and Snoop Dogg, not only that but there is Jessica Alba who happens to be an investor and also a founder of her own tech company - The Honest Company.
22) A US investment fund called Coughdrop Capital, its partners are current founders in an existing startup, and their investment fund, as they describe it, is a “Side Hustle”.
Funny Findings:
23) An investment fund has a puppy on their team as Chief Happiness Officer and put her pictures and stories in every place around the website.
24) The famous rapper Snoop Dogg - whose real name is Calvin Cordozar - has an investment fund called Casa Verde Capital, and he mainly invests in startups that work in cannabis. So far, they have made 33 investments and 3 exits, and their slogan on the site is literally "Helping Founders Build the Future of Cannabis". (Mostly, cannabis produces products that they consider medicinal and are sold in pharmacies).
This was all about strange and funny findings, now let’s talk seriously. Did you notice anything on this list? Exactly, no example of them is in the MENA region. This is understandable since such diversity has a direct relation to the market size. To see such examples, a million investors had to exist first. I don’t expect MENA to kick-off such initiatives, but I expect us to localize, adapt and apply the positive examples of such initiatives since these initiatives are not just an anomaly, but many of them solve real problems or embody the best version of the evolution and maturity of investment funds such as transparency, adding value, targeting non-targeted founders & markets, diversification of financing methods, and others. Having the chance to deal with hundreds of funds and thousands of startups motivates me to help any fund that likes to adopt an entrepreneurial spirit and put similar initiatives into action.
Lastly, please share what you think is the strangest finding so far, or if you saw something different that you want to add and would like to see it applied in MENA (I will add it to the original article with your Name).