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Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.
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How to automate angel investing

How to automate angel investing

Hello and welcome to Pipeline! This week: robots replace your angel investor, Coinbase's direct listing and NFTs for cats, NBA players and digital art.

Overheard

  • Equity for referrals. For oversubscribed rounds: "Reserve space for investors who send you employee referrals. Eg: $100k allocation for each engineer, PM or designer that they refer, and you end up hiring. Worth reserving say $500k for this approach" Gokul Rajaram says.
  • Investor updates: "I write a founder email to my investors every month. I put a crazy amount of time into this message, because frankly, I see it as a part of my job. I'm AMAZED at how few founders do this," Liz Giorgi says.
  • SPACs as growth funds. "We thought Vision fund size and writing $100-500M checks was nuts. But Sequoia growth nailed that check size and strategy. And now SPACs are attempting a decentralized version of it… For reference, SVF 1 was $100B. SPACs raised $70B last year and this year will exceed $100B," Sundeep Peechu says.

The Big Story

Automating the angel investing process

Clearbanc has put more than $1.6 billion to work across 4,000 companies, financing advertising for ecommerce and for inventory financing for SaaS companies. The financing, which enables startups to avoid selling equity, requires the startups to pay Clearbanc back with a 6% fee as it makes sales on its ads or receives SaaS revenues over time.

Now Toronto-based Clearbanc is moving further upstream, with a global program, ClearAngel, and a $100 million fund to back earlier-stage companies at the angel investing level. Many entrepreneurs at that stage don't have access to angel investors to help them launch their business, said Andrew D'Souza, co-founder and CEO of Clearbanc.

"There's millions of people around the world who need someone to take a bet on them," he said. "They don't have a rich uncle who can write that check to get them off the ground." They also may not know if they want to turn their companies into venture-backable companies, or keep them as a smaller, slow-growth business, he said.

The ClearAngel program will offer small amounts of cash — $10,000 to $50,000 — for 2% of a company's revenue for four years.

  • The companies need to have at least $1,000 of revenue per month and must be working on the company full time.
  • Companies can return the capital within 30 days if they're not happy with the program.

The program, which has financed 35 companies so far, offers automated advice, such as analyzing their daily data and comparing it to other peers, and offering suggestions on what to do to build the business. The program can also offer assistance from its team and its network of investors, vendors and partners.

While there are other platforms to reach early-stage investors such as AngelList, Clearbanc is looking to invest even earlier than that, particularly for founders who may not have a connection on a site like AngelList.

"We're not trying to compete with AngelList," D'Souza said. "We wish the world had more angels."

If a company gets $10,000 from Clearbanc, it would need to make $500,000 over four years for Clearbanc to break even at the 2% it financed. Or if they got $50,000 they'd need to make $2.5 million for Clearbanc to break even.

Others have tried to automate venture investing in different ways. But few have attempted to do so at the scale Clearbanc is.

  • Social Capital launched an automated "sight-unseen" investing program, but later shut it down.
  • Others like Correlation Ventures, Rocketship.vc, SignalFire and Tribe Capital use data for sourcing and evaluating deals.

But does this scale? Many venture capitalists argue the industry requires a personal touch to evaluate people and deals. But because Clearbanc focuses specifically on ecommerce and software businesses, it has data it can use to analyze companies and predict outcomes, D'Souza said.

  • Ecommerce and software are also easier to evaluate than other types of companies, since they have predictable revenue from online transactions and SaaS subscriptions, respectively, he said.
  • "Ecommerce and software businesses have richer data about them than pure R&D companies with not a lot of revenue that's actionable data to underwrite," he said. "There's compounding effects of the data. We've funded 4,000 businesses and probably seen over 50,000 so we're really starting to build a powerful build dataset."

A MESSAGE FROM MASSCHALLENGE

Calling all #startups! MassChallenge has opened applications for their #MC21 #accelerators. Apply today for access to expert mentorship, a global peer network, $250k in deals & discounts, cash, and prizes, and more – all equity-free, no strings attached. Applications are due March 31 @ 12PM ET. masschallenge.org/apply

Apply Now

Inside Track

  • How to set an agenda for your "VC to VC catchup" Zoom calls? Forget the small talk, and try setting up a structure, Pace Capital's Jordan Cooper says.
  • How to triple your seed fund size: You have to find larger investors — to keep under the 99 investor rule — but get some smaller investors early on to build momentum, Elizabeth Yin says: It took four years of work to do it.
  • Non-fungible tokens — and digital collectibles and art they are attached to — are being bought and sold at astronomic prices. Nikhil Basu Trivedi explains why someone just paid $580,000 for a Nyan Cat. Scott Belsky also has a NFT deep dive.
  • Many gig economy startups have tried to build businesses using 1099 independent contractors. But Turtle Ventures' Josh Breinlinger offers two examples of hybrid W-2 and 1099 models for marketplaces.

Need to Know

  • Coinbase cash. The Coinbase S-1 dropped this week and the direct listing will generate major returns for its VCs. Andreessen Horowitz holds 14.3% of voting power, Union Square Ventures has 8.2% and Ribbit Capital has 7.1%, while Paradigm and Tiger Global hold smaller stakes. If Coinbase is valued at $100 billion, Andreessen Horowitz's stake would be worth more than $15 billion, according to Forbes.
  • Meanwhile, Digital Ocean's IPO will be a major exit for seed firm IA Ventures, which holds some 16% of shares. It's rare for seed investors to hold such a large stake at the IPO. Also in the same IA fund as Digital Ocean is Transferwise (now Wise). Len Blavatnik's Access Industries Management and Andreessen Horowitz are also large shareholders.
  • Multiple share classes in IPOs. Twenty-four companies (or 19.5%) of IPOs last year had multiple classes of common stock, which usually, but not always, indicates that founders have more voting control over the company than retail shareholders. Meanwhile, Nasdaq did 89% of the IPOs compared to 10% for NYSE last year, according to Wilson Sonsini's deep-dive report on IPOs. (PDF download)
  • Bessemer raises $3.3 billion. The firm, which has backed Box, Pinterest and Yelp, raised two new funds and added five new partners.
  • From Protocol: Banking-as-a-service companies have powered the explosion in fintech startups. But they face a number of challenges.
  • This week in VC history: Alphabet's Waymo sued Otto and Uber for allegedly stealing confidential files (2017).
  • Your weekend reading: Who is Beeple? How artist Mike Winkelmann made millions selling NFTs and digital art.

Five Questions With...

Emmalyn Shaw, managing partner, Flourish Ventures

Emmalyn Shaw is a managing partner at Flourish Ventures, which spun out from Omidyar Network. She focuses on financial inclusion and has invested in startups Bridgit, Chime, EarnUp, Kin and Propel. She was previously a partner at Omidyar and before that a venture partner at Oak Investment Partners, investing in companies such as Bleacher Report, Huffington Post and Demand Media.

What problem do you want to see a startup solve?

I'm excited by the number of companies providing digital financial management products for low- to medium-income consumers. However, we need to revolutionize arguably the most critical piece to achieving financial health: increasing income for people who need it most. I'm hungry for ideas that help LMI consumers fundamentally increase their income in addition to improving credit worthiness, saving for the long term and better managing their expenses.

What product or service are you totally, even irrationally, loyal to (non-portfolio company)?

Instacart. We had 10 people quarantined at home for the first seven months of the pandemic, including our six kids ages 10 to 27, and two sons' girlfriends. It was a never-ending cooking and cleaning marathon. Instacart was a lifesaver that safely delivered necessities to our household. And it continues to keep me sane today!

What's a secret obsession of yours that most people don't know about?

My 11-week-old Bernadoodle, Rocky. There is something magical about a puppy during quarantine. You'd think with six children and two dogs already, no one in their right mind would take on a puppy. Rocky has tripled in size in just one month and is always happy to see me.

What's one way you changed working in 2020 that you plan to keep going forward?

I take a walk in the middle of the day to clear my head. With no commute and no air travel, the Zoom hours commence early and continue nonstop through the end of a long day. I've forced myself to create a needed break or two to stretch my legs, process the inputs and give my body and brain time to reset. Some of my best ideas and plans arise during those short breaks.

What company or startup sector is the most underrated right now?

Innovative tech solutions for the gig worker. While this population is growing at a rapid clip around the world, the pandemic has hit them the hardest. Meanwhile, gig workers experience a diverse range of pain points that can be addressed with tech innovation such as income enhancement/tracking, taxes, retirement, health care, etc. While talented entrepreneurs have begun to tackle different facets of this problem, there is much work ahead.

A MESSAGE FROM MASSCHALLENGE

Calling all #startups! MassChallenge has opened applications for their #MC21 #accelerators. Apply today for access to expert mentorship, a global peer network, $250k in deals & discounts, cash, and prizes, and more – all equity-free, no strings attached. Applications are due March 31 @ 12PM ET. masschallenge.org/apply

Apply Now

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Correction: An earlier version of this story misspelled Pinterest. The story was updated on March 1, 2021.

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