Tech & VC: How to Invest Smarter (Not Harder) in an Ever-Changing Industry
August 27, 2019 | Scott Murphy
With each year, “tech” as an industry becomes more innovative and wide-ranging. Telling our investors we included “tech” companies in their portfolio is about as helpful as saying we invested their money in startups. Venture firms are investing in an age where commercial space flight is a reality, and your virtual assistant can probably pass the Turing test.
The Scope of Modern Tech
Private equity and venture capital have been fueling tech companies since the late 1940s, when Georges Doriot became the “father of venture capital” by investing $70,000 in the world’s first unicorn, Digital Equipment Corp.
Today, VCs have added a few more zeros to their investments in tech startups. Specifically, the latest PitchBook-NVCA Venture Monitor (Q2 2019) highlighted continued interest in AI and machine learning (ML), with $4.3B invested in 325 early-stage VC deals at the halfway mark of this year. That’s more than half as many deals (610) and nearly 75 percent as much capital raised ($5.9B) compared to all of 2018.
Venture Monitor also reports heightened interest in healthtech startups. Over the last decade, total deal value has skyrocketed by 951 percent, growing from $784M in 2009 to $8.2B in 2018. Deal count more than tripled from 156 to 749 investments in this timeframe. The first half of 2019 indicates this trend will continue, with $4.7B invested in 352 deals so far this year.
AVG Diligence: Rooted in Process and Data
In just these two tech sectors, VC activity totaled $14.1B invested in 1,359 deals last year. So how do you begin to parse all those opportunities?
Thorough due diligence requires familiarity with the unique advances and key players in any given field. Most large VC firms have a focus on a specific industry, and many layer on a stage focus as well. By looking at companies that fall exclusively within these narrow criteria, they develop above-average systems for reviewing those kinds of deals. This approach, combined with rigorous diligence processes, helps improve the odds of picking the unicorns and thoroughbreds from the rest of the herd.
Here at Alumni Ventures Group, we have our own process to source and assess potential deals, which we supplement with the knowledge and research of these larger firms and our own alumni networks. In essence, it’s a way to invest smarter, not harder.
Like many investors and venture firms, we start with a scorecard. AVG investment teams analyze potential deals based on key positives and risks, as well as standard, important criteria: the lead investors and investment ask of the deal, the experience and opportunity of the startup’s team, and the value of the opportunity itself.
In more detail, here’s how we assess potential investments:
Worthwhile Deals. Our investment teams start by analyzing the value of the investment opportunity: Are the capital requirements in sync with the potential risks and returns? We examine key financial benchmarks such as pre-money valuation, annual recurring revenue, funding history, and the size of the current round.
Well-Run Startups. A company’s financial projections relate directly to its past and continued performance. We review revenue, growth, and liquidity potential, then match the company’s numbers against the current market size and competitors to project future performance
Qualified Entrepreneurs. Sourcing deals through our alumni connections serves a dual purpose. On top of providing unique access to top investments, we may have personal knowledge of the founders or executive team members as classmates that helps us assess qualifications.
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Strong Lead Investors. It’s a basic tenet of our investing strategy that we commit to deals only when a lead VC with proven expertise is lined up. We leverage the sector expertise and connections of the lead VCs in conducting our own rigorous due diligence. We find that taking a deep dive into the track record of potential portfolio partners can offer supplemental insight into the perceived value of a deal.
AVG Community. A key asset for AVG in finding and assessing deals is our 400,000+ member community across 20+ funds. These individuals include accredited investors, active VCs, entrepreneurs, and AVG colleagues—all of whom are experts in their own field. Each brings their own connections and experience to the table in helping us source, vet, and assist portfolio companies.
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Additionally, every AVG fund has its own Investment Committee composed of a diverse and talented group of alums with experience in VC. Before any investment is added to the portfolio, the IC interviews the portfolio company CEO and scores the deal, adding an extra layer of diligence.
Sample AVG Tech Deals
Below are some noteworthy tech deals in AVG’s portfolio that we have invested in through our alumni networks and alongside top VCs. They typify the great breadth and potential of our tech investments.
Cryptocurrency can be difficult to leverage as collateral for large transactions and loans. BlockFi provides financial services specifically for cryptocurrency, including term loans up to $500k valued against Bitcoin and Ethereum assets.
AVG invested alongside lead investor ConsenSys, a software developer building decentralized applications on Ethereum. The company’s investment was made by its VC arm ConsenSys Ventures, a $50M+ fund led by experienced blockchain investor and thought leader Kavita Gupta. ConsenSys is focused specifically on investing in Ethereum-backed companies.
Compass (Real Estate Tech)
With a blend of technology, design, and human touch, Compass is disrupting the antiquated $1.5T residential real estate market. The company has built business infrastructures and recruited the best-performing brokers in high-value markets.
AVG sourced the deal through Fission Ventures, AVG’s fund for Columbia alums. Fission Principal Marco Casas met Compass CEO Robert Reffkin while at Columbia Business School and re-connected about the company’s Sept. 2018 funding round. AVG invested alongside lead investor Softbank’s $100B+ Vision Fund. Since AVG’s investment, Compass raised another $370M on a $6.4B valuation, with speculation of an incoming IPO.
Conversica’s AI-powered assistant helps sales teams manage the top of the sales funnel with automated contact, engagement, nurturing, and lead qualification. The platform is leveraged by companies in a variety of industries, ranging from auto services to education to hospitality.
Conversica CEO Alex Terry originally connected with fellow Dartmouth alums at Green D Ventures to provide input on a specific deal and Bay Area angel networks. That experience gave the Green D team a firsthand look at Terry’s leadership skills and expertise.
AVG invested alongside hands-on lead investors Toba Capital and Kennet Partners—with Kennet stating that Conversica could be the strongest investment in their portfolio.
GrubMarket (Food Tech)
Consumers and businesses alike can use GrubMarket’s online marketplace to order organic produce sourced from 500+ local suppliers. Customers can select from thousands of farm-fresh produce and other natural products. GrubMarket then collects, packages, and delivers orders directly to office kitchens, restaurants, grocery stores, and consumers. The company’s client base includes prominent meal delivery services like Blue Apron, HelloFresh, and Munchery.
GrubMarket connected to AVG through an ambassador for Bascom Ventures, AVG’s fund for Wisconsin alums. The Bascom team was impressed by GrubMarket’s seasoned management team with experience in several industries key to the company’s operations. AVG invested alongside several blue-chip venture firms, including Global Founders Capital and Y Combinator.
Shift aims to take the hassle out of buying and selling used cars between private parties. Both individuals in the transaction receive concierge-level service from Shift, which coordinates nearly every aspect of the purchase process. The company handles detailing/repairing, listing, and marketing cars on its marketplace. Once a buyer expresses interest in a car, Shift will set up test drives, connect buyers with financing and insurance, and handle all paperwork.
AVG invested alongside lead investor BMW i Ventures, the VC arm of the luxury car brand. The firm has deep industry experience and a dedicated portfolio of innovative startups in the automotive sector.
This is just a small sampling of the tech investments AVG has made by tapping special connections and working cooperatively with leading VCs. If you’d like to learn more about our approach to venture capital, providing accredited investors with unprecedented access to promising deals, please connect with us.