5 founders discuss why SAFEs are better for early-stage and bridge rounds

Fundraising is hard, so it’s no wonder that SAFE (simple agreement for future equity) rounds are popular. Conceived by Y Combinator as an alternative to convertible notes, SAFEs have long been considered a founder-friendly way to wrap a venture deal. But, as with most things, the reality is that SAFEs are only an ideal fit for founders sometimes.

To find out how the startup ecosystem is doing deals right now, TechCrunch+ recently surveyed five founders about how they’re thinking about less structured rounds like SAFEs. And it appears SAFEs are still a popular choice, except only for pre-seed and seed rounds — plus fundraising between rounds. After that, though, it appears most founders would prefer priced rounds.

“SAFEs continue to be an exceptionally appealing mechanism for fundraising, particularly from a founder’s perspective,” said Amy Divaraniya, founder and CEO of Oova. “The ease of setup, flexibility in determining terms, and absence of a formal close date make them highly advantageous. Additionally, the streamlined nature of SAFE agreements eliminates the need for extensive legal intervention, resulting in a remarkably cost-effective process.”

While several founders echoed Divaraniya, saying they liked the speed and flexibility of a SAFE round, most had a caveat: By the time a startup reaches the Series A stage, this mechanism is less attractive for a variety of reasons.

Vishwas Prabhakara, the co-founder and CEO of Honey Homes, said that he’s glad his startup raised a SAFE note for its pre-seed round, but for its recent Series A round, he didn’t even consider it.

“Due to how dilution works, it usually doesn’t make sense to stack rounds using SAFEs, in my opinion,” he added.

Both Tory Reiss, the co-founder and CEO of Equi, and Zach Blank, the founder of Hurry, agreed with that sentiment, saying founders have to pay close attention to how different investor equity stakes will convert down the line.

“There’s a significant downside for a company (and founders/employees) with a SAFE,” Blank said. “While it’s great to get investment when price can’t be determined, you need to watch out for ‘gotchas’ at the next round.”

Read on to find out how founders today are using SAFEs, what these rounds look like in today’s less founder-friendly market, and if investor-friendly terms are making inroads into early-stage fundraising.

We spoke with:

Zach Blank, founder, Hurry

Was a SAFE the option that made the most sense for your last round?

We raised a seed round ($2.5 million at a $15 million post-money valuation) in November 2021, the height of the bubble. We had a product in the market with revenue but were still very early. We had been in the market for maybe 30 days at the time we closed the round.

When speaking to investors, a SAFE seemed to be the default option, because there is no real way to price a round this early. So for investors and for us, at the time, a SAFE made the most sense.

Will you use a SAFE in your next fundraising event?

No. There’s a significant downside for a company (and founders/employees) with a SAFE. While it’s great for getting investments when the price can’t be determined, you need to watch out for “gotchas” at the next round.

For example, let’s say you raise on a SAFE at a $15 million post-money valuation and a 20% discount. If your next round is priced at $50 million (good for you!), then all your SAFE investors convert at that price from a dilution perspective. They don’t get diluted at all. That’s the upside for them for being early, but it then leaves less room for new investors down the line.

The most ideal scenario is that you raise at $15 million in the round subsequent to a SAFE with the same cap.

Would you say SAFEs are as attractive to you as they might have been a few years ago? Why or why not?

No. Ideally, as a founder, you’re able to bootstrap to a business that can be priced. And if you can’t, you should raise a very small amount (more than $500,000) from angels at a reasonable price, say $2.5 million.

Massive seed/pre-seed rounds are a thing of the past and were just a result of ZIRP [zero interest-rate policy] and the bubble we were in.

15 investors lift the lid on the biggest surprises of H1 2023

The first half of 2023 hasn’t been kind to startups, but venture capital investors weren’t spared migraines either. Some VCs had a tough time of it, with their portfolio companies finding it hard to fundraise, while others dialed back their investment cadence to match the current investment climate. But what would they have done differently if they had a crystal ball? To find out, we asked 15 investors what they found to be the most unexpected trends of the year so far.

Rather unsurprisingly, the biggest surprises all seem to be related to AI in one way or another. Several investors said while they were caught unawares by how quickly generative AI took off, the real eyebrow-raiser was VC funds going from a conservative stance to jumping headfirst into AI-related companies’ cap tables seemingly overnight.

“The No. 1 surprise has been the speed of financings and valuations in the generative AI space. Probably no surprise there. But it really is a tale of ‘haves and have-nots’ in fundraising right now,” said Matt Murphy, partner at Menlo Ventures.

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Jenny He, founder and general partner at Position Ventures, had a similar take: “I was surprised at how quickly the AI boom happened in 2023 and how many top tier firms went from a wait and see approach at the end of 2022 to becoming very active in 2023. Some of our portfolio companies went from quiet insider rounds to very hot competitive rounds at a rapid markup at the beginning of 2023, spurred by the AI boom.”

Not all AI-related surprises were positive, though. John Tough, managing partner at Energize Ventures, was baffled by how readily some firms cannibalized their climate funds to buy into AI. “We knew generalist investor interest in climate was fleeting, but it has still been surprising to see how many household names planned to launch a climate focus area and then moved along to LLMs and AI instead,” he said.

For Rajeev Dham, partner at Sapphire Ventures, this rapid increase in AI investment also brought some worries. “There’s no question that advancements in AI will spawn an incredible set of companies, disrupt industries and be the transformative technology that drives far more productivity within existing companies, but my concern is that we’re still in the very first inning, which will lead to a lot of lost capital,” he said.

It wasn’t all about AI, though. Mark Grace, an investor at M13, was surprised by the range of early-stage valuations: “Valuation ranges are all over the place, especially at the Series A stage. We all know how quiet the later stages have been, and the seed market has seemed strangely resilient. However it has been interesting to see the wide variance in Series A pricing.”

As for what investors wish they’d done differently, several felt they should have been faster on the uptake and more active than they were. “In macro environments like this one you always regret not being more active while everyone else was fearful,” said Logan Allin, managing partner and founder at Fin Capital. “These cycles only come around so often and are a boon for net-new investments in portfolios.”

Jason Lemkin, CEO and founder of SaaStr, wishes he had taken the time to meet with more founders. “I slowed down in 2022 as did many, and should have picked it up more. Multiples are still relatively low in SaaS but great companies are being formed as often as ever.”

But our favorite answer to this question by far came from Howie Diamond, managing director and general partner at Pure Ventures: “Not have personally invested in First Republic Bank stock!”

Read on for more about what investors felt were the biggest surprises and what they learned from the first half of 2023.

We spoke with:

Matt Murphy, partner, Menlo Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

The No. 1 surprise has been the speed of financings and valuations in the generative AI space. Probably no surprise there. But, it really is a tale of “haves” and “have-nots” in fundraising right now.

The No. 2 surprise is the scarcity of later-stage companies raising. It’s not that surprising, but behind the scenes, companies are still getting their houses in order, and it’s really difficult to sell right now, so companies are grinding through things until they find more predictability.

No. 3 would be the amount of M&A and companies trying to be acquired. We’re only going to see that accelerate.

In hindsight, what do you wish you had done differently in the first six months of 2023?

We mobilized the entire firm around GenAI and it paid off. We’ve got a strong portfolio and continue to invest. We’ve even got a handful of investors who are attending hackathons and coding in their free time. I only wish we’d started building that pipeline more purposefully in 2022. So many of these businesses are being started by founders leaving companies with pockets of AI talent, so you really need to be focused upstream on founders before there is even a full twinkle in the eye. We have been doing a great job of this so far, and really doubled down on Menlo’s Future Founders program this year.

Sheila Gulati, managing director, Tola Capital

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

Startup investing in 2023 has been defined by difficult macroeconomic headwinds on one hand and accelerating AI tailwinds on the other. The dichotomy has created a startup investing environment of haves and have-nots that has been quite interesting and, to some extent, surprising.

I’m surprised that the AI conversation is not centered more on the potential of AI for good. There are intractable problems that society has yet to solve where AI could offer a breakthrough. Technology has a history of presenting these types of breakthroughs and thus has been a harbinger of optimism.

AI is no different, and I see education as a prime example of where AI could offer every child individualized instruction that addresses their style of learning, pacing needs, and adaptive modalities. This could advance education practices for all learners and provide the inalienable right to education for all offered by a good society.

I’m obsessed with thinking through these types of scenarios and working on them, as AI will offer many breakthroughs for the world.

In hindsight, what do you wish you had done differently in the first six months of 2023?

While we spent time on it, we wish we had spent even more time with academics and researchers at top-tier institutions focused on AI. We believe a good subset of the AI generation’s decacorns will originate from deep technical research, much of which is in academic research labs today.

Gen Tsuchikawa, CEO, Sony Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

15 investors lift the lid on the biggest surprises of H1 2023 by Karan Bhasin originally published on TechCrunch

7 investors reveal what’s hot in fintech in Q1 2023

The global downturn has impacted every sector, but fintech bore the brunt of it as public-market valuations fell off a cliff last year.

However, it appears that even though VCs are proceeding more cautiously than before and taking their time with due diligence, they are still investing.

CB Insights recently found that two of the largest global VC firms, Sequoia Capital and Andreessen Horowitz, actually backed more fintech companies in 2022 than any other category. In both cases, about 25% of their overall investments went into fintech startups.

And, while global fintech funding slid by 46% to $75.2 billion in 2022 from 2021, it was still up 52% compared to 2020 and made up 18% of all funding globally, proving that investors still have faith in fintech’s future.

You could even say some are bullish: “If anything, I expect our investment pace to increase this year as early-stage fintech companies prioritize operational discipline and product differentiation,” said Emmalynn Shaw, managing partner of Flourish Ventures.

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The tougher conditions created in the past year has resulted in down (and smaller) rounds, M&A, and an emphasis on fundamentals. Gone are the days of investing on a whim.

But for Ansaf Kareem, venture partner at Lightspeed, the tough times can be seen as a good thing because they often create the best companies. “If you study previous compression periods in the ecosystem (e.g., 2008 and 2000), not only have we seen outstanding companies being formed, we’ve also witnessed great venture firm performance during these windows,” he said.

“The last two years in the venture ecosystem were an anomaly, but I believe we are coming back to a healthy ‘normal.’ Diligence cycles have extended, better relationships with founders can be formed, investors can enter new spaces with more preparation, and a thoughtful approach to early-stage venture capital can emerge,” Kareem added.

Challenging market conditions drive a sense of discipline and perspective that can be a gift. Emmalyn Shaw, managing partner, Flourish Ventures

So whether you’re seeking to raise your first round or your third, make sure you focus on fundamentals, save cash and don’t shy away from raising a down round if you think your idea may change the world, several investors said.

“Grow in a way that’s smart and sustainable for the long run,” advises Michael Sidgmore, a partner at Broadhaven Ventures. “We can’t control the macro environment, and today’s geopolitical climate means that there may always be the threat of exogenous shocks on the market. But the markets will bounce back at some point. So just grow in a manner that lets you focus on unit economics and profitability so that you can control your own destiny no matter what market we are in.”

To help TechCrunch+ readers understand what fintech investors are looking for right now (and what they’re not!) as well as what you should know before approaching them, we interviewed seven active investors over the last couple of weeks.

Spoiler alert: B2B payments and infrastructure remain on fire and most investors expect to see more flat and down rounds this year. Plus, they were gracious enough to share some of the advice they’re giving to their portfolio companies.

We spoke with:

Charles Birnbaum, partner, Bessemer Venture Partners

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

We continue to invest in great companies regardless of the market. However, many entrepreneurs have opted to remain heads down and build more efficiently instead of testing this new valuation environment.

While our investment theses are always evolving, the shift in the macro environment has not changed which areas we are most excited about.

Do you expect to see more down rounds in 2023? Are you seeing more companies raising extensions or down rounds compared to 2021 and 2022?

We do expect more flat and down rounds to come later this year as runway tightens for many companies that raised more than two years ago.

Private market valuations, at any point in time, are not only a reflection of a team’s hard work and progress, but are also impacted by the financing environment.

What are you most excited about in the fintech space? What do you feel might be overhyped?

We see tremendous opportunity for innovation in the world of B2B payments. The infrastructure groundwork laid by modern developer platforms over the past decade and the upcoming catalysts in the real-time payments world, with the launch of FedNow, could spark much faster adoption.

We are excited to see how entrepreneurs leverage these tools to enhance our archaic B2B payments ecosystem.

Consumer fintech businesses without long-term, durable customer acquisition advantages are overhyped and will continue to struggle to live up to the lofty expectations set by investors over the past several years.

We’re expecting to see significant consolidation across the consumer fintech landscape this year.

What criteria do you use when deciding which companies to invest in? Would you say you are conducting more due diligence?

We look deep into all areas of innovation, including fintech, and focus on startups that align with our theses. We try to predict where there will be opportunities for seismic innovation before we find the entrepreneur. This helps us with diligence, as we work to understand the market before we make any investments.

We also work hard to perform due diligence on every investment opportunity we pursue by spending significant time with the company, with a deep market study, and as many references as possible on the teams we back.

Have fintechs gotten close to growing into their 2021 valuations? How many will not manage the task in 2023?

Given the sharp run up in valuation over the past few years in the private market and the precipitous fall in the public market over the past year, it is difficult to say how many companies have grown into 2021 valuations.

For the top tier of companies that were able to raise larger rounds, the reality is they don’t need to answer that question for quite some time.

What advice are you giving to your portfolio companies?

The most important thing for me is to not give the same advice across different companies. There is no one-size-fits-all solution. Every business is at a different point along their journey to find product-market fit, prove the sustainability of a business model, execute on a repeatable go-to-market motion, etc.

Rethinking growth targets, in light of the rising cost of capital, to focus more on efficiency in this environment is a consistent thread in board meetings these days.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

From my experience, you often have to find the most exciting companies and earn the right to invest. We are always reaching out proactively to founders building in the areas where we have active investment theses.

We are also always looking at exciting opportunities that come in through referrals from entrepreneurs we work with or have worked with in the past, and other investors in the ecosystem. We do our best to review and evaluate inbound messages we receive.

Aunkur Arya, partner, Menlo Ventures

Many people are calling this a downturn. How has your investment thesis changed over the last year? Are you still closing deals at the same velocity?

We’re definitely seeing the reset we expected to see after a decade of operating in a macro environment where the cost of capital was near zero. It’s a difficult but very healthy reshuffling of the deck.

I’d say that our core theses within fintech have largely remained the same: we’re investing in developer infrastructure and embedded finance APIs, vertical banking, end-to-end consumer and business financial services, and the Office of the CFO. We’re also looking at thoughtful enterprise applications of AI that intersect with each of these segments of our fintech thesis.

We continue to avoid balance-sheet heavy businesses that take undue risk to generate revenue, and ultimately look less like pure technology companies and more like insurance companies or lenders. These are the first businesses to suffer during a downturn because they’re heavily indexed to the macro environment.

We were less active in 2022, but are already seeing an uptick in deal flow in fintech in the first few months of 2023.

7 investors reveal what’s hot in fintech in Q1 2023 by Mary Ann Azevedo originally published on TechCrunch

A VC’s perspective on deep tech fundraising in Q1 2023

Like nearly every other sector, deep tech faced significant headwinds in 2022. As interest rates skyrocketed, deep tech deals, which inherently take more capital than other kinds of software businesses, became less attractive to many VCs and their LPs than lower-risk investments.

For instance, even though quantum computing suddenly became popular in the public markets as D-Wave, Rigetti and IonQ listed in the last year, private investment declined significantly — the sector received just over $600 million in venture capital in 2022, down from $800 million in 2021, according to Crunchbase.

Seasoned investors and operators in different segments of deep tech have been adapting to these changes in real time as the cheap money days dwindle in the rearview. For instance, in this environment, space tech startups would never have been able to raise the kind of money they did in 2021 to be able to deploy the technologies they’re working on today. As Delian Asparouhov, a principal at Founders Fund and the founder of Varda Space Industries, shared last month, it would be impossible to raise the $42 million his startup did in 2021 for its space factory “idea” in today’s market climate.

While some investors will continue to sit on the sidelines as we kick off 2023, it’s important to note that many funds are still sitting on amounts of dry powder like they’ve never had before. That doesn’t mean they or their LPs will be in a rush to deploy that capital, but money will be available to startups that can demonstrate current demand and are realistic about their valuations. As it becomes increasingly difficult to realize big exits in the years ahead, the technologies within deep tech that are transforming entire industries offer some of the only paths to “10x exits.”

These are positive signs for deep tech founders preparing to raise money this year. Another positive note is that some of the logic driving VCs to stay away from deep tech startups in down markets may be unfounded. Our team recently analyzed recent deep tech unicorns to understand how much money it took for them to get to the $1 billion mark. The results reinforced what we knew from experience: Deep tech startups’ capital and time requirements are on par with companies in other sectors. In fact, the median deep tech startup took $115 million and 5.2 years to become a unicorn.

While the space economy will continue to provide numerous opportunities to invest in atoms, there will also be an opportunity to invest in the bits moving atoms across our skies.

With that as a backdrop, let’s look at a few areas where deep tech will find interest from investors in 2023.

Startups moving beyond launch tech in space

While Delian noted correctly that funding for long-term “moon shots” will be tough to find in the current market, I still believe investors will look for startups that are closer to commercialization in the sector. To date, 99% of the total investment in the space tech market has gone to the satellite and launch industries. Now is the time to focus on moving objects around in space rather than just getting them there.

For instance, investors are increasingly interested in solutions that tackle astrodynamics or propulsion to guide the motion of satellites and other spacecraft — for example, AI startups working on ways to simulate scenarios and generate maneuver plans for operators so they can avoid space collisions. Investors are also interested in future machine learning and neural networks use cases for astrodynamics, such as orbit predictions and spacecraft flight modeling.

Space missions also call for hardened software and hardware. As we look toward edge solutions for space-bound vehicles and objects, startups that can create radiation-safe applications will be in demand. So while the space economy will continue to provide numerous opportunities to invest in atoms, there will also be an opportunity to invest in the bits moving atoms across our skies.

Deep tech riding climate’s regulatory wave

Software alone will never solve the multitude of issues contributing to our climate crisis. Hardware solutions and engineering-led innovations in deep tech are needed to solve our most significant climate challenges.

A VC’s perspective on deep tech fundraising in Q1 2023 by Ram Iyer originally published on TechCrunch

TechCrunch+ roundup: 2023 unicorn slump, global VC slowdown, email marketing 101

Due to a phenomenon called semantic satiation, if you repeat a word or phrase too frequently, it can sometimes lose all meaning.

That’s what happened to “unicorn:” We wore it out like a pair of sneakers that leak in the rain but are too comfortable to part with.

In fact, most of the startups in CB Insights’ unicorn index are on the bubble and “are actually hovering right at the $1 billion mark,” reports Rebecca Szkutak.

“How many of these will stay unicorns through this calendar year?” Out of 35 investors she surveyed, “the vast majority felt the herd has likely already been winnowed,” she found.

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“It’s not just about whether they’ll still command ‘unicorn status,’ but rather whether or not they will be fundable, at any value, period,” said Harley Miller, founder and managing partner at Left Lane Capital.

By all accounts, the IPO window is nailed shut. Any startups that hope to weather this downturn must raise additional funds.

I’m sure the hunt is already on for another mythical animal that best represents startup attainment in a down market, like ‘ARRmadillo.’ You can have that one for free.

My greater hope: investors and founders will use this era of austerity as an opportunity to create value, and not just wealth.

Thanks very much for reading,

Walter Thompson
Editorial Manager, TechCrunch+

Teach yourself growth marketing: How to boot up an email marketing campaign

A megaphone with colored streams flaring out as if a message were being amplified

Image Credits: Jasmin Merdan (opens in a new window) / Getty Images

In the third article of a five-part series, growth marketing expert Jonathan Martinez (formerly of Uber, Postmates and Chime) explains how to create and optimize email campaigns that will “push consumers through your funnel and drive conversions.”

Martinez shares fundamentals for segmenting customers and anticipating where leaks will occur along the funnel you’re developing. Startups that recapture these users can eke out higher ARR, and every little bit counts.

“It is crucial to distill user segments as much as possible because we must ensure that we’re sending the right messaging to the right consumers.”

Putting numbers on the global venture slowdown

an isometric illustration for The Exchange, rendered in blue

Image Credits: Nigel Sussman/TechCrunch

According to CB Insights’ State of Venture report, VC funding fell 35% in 2022. Although estimated deal count didn’t drop proportionately, “global venture funding was down by 19% quarter over quarter in Q4 2022,” reports Anna Heim.

“How long things will take to improve is anyone’s guess, so we will be looking forward to more data as the year progresses,” she writes.

Dear Sophie: What are some fast options for hiring someone on an expiring grace period?

lone figure at entrance to maze hedge that has an American flag at the center

Image Credits: Bryce Durbin/TechCrunch

Dear Sophie,

I’m a co-founder of a very early-stage startup. My co-founder and I are considering bringing on a third co-founder, who was recently laid off. She is currently in the United States on an H-1B with a grace period that will expire soon.

What are the fastest, least risky immigration options that we should consider? What’s going on with potential increases to USCIS filing fees?

— Careful Co-founder

Pitch Deck Teardown: Scrintal’s $1M seed deck

Visual collaboration tool Scrintal says it has more than 40,000 people on its waitlist, but that didn’t stop its founders from raising €1 million.

Co-founders Ece Kural and Furkan Bayraktar shared their pitch deck with TC+ — click through to learn why their value proposition, vision and product plans connected with investors:

  • Cover slide
  • Problem slide part 1
  • Problem slide part 2
  • Solution slide part 1
  • Solution slide part 2
  • Value proposition slide
  • User testimonials slide
  • Traction slide
  • Revenue slide
  • Retention slide
  • User profile slide
  • Growth projection slide
  • Vision slide
  • The ask slide
  • Contact slide
  • Appendices cover slide
  • Appendix 1: Why now?
  • Appendix 2: Competitive landscape
  • Appendix 3: Product and growth model

TechCrunch+ roundup: 2023 unicorn slump, global VC slowdown, email marketing 101 by Walter Thompson originally published on TechCrunch

Losing the horn: VCs think majority of unicorns aren’t worth $1 billion anymore

The past few years have been a rollercoaster for the startup world’s herd of unicorns.

Two years ago, we saw a record number of companies cross the $1 billion valuation milestone. But that momentum slowed to a trickle last year, and this year’s market conditions look likely to reverse course to a point that we may witness some of those companies losing that status.

Down rounds are likely to become the norm this year as venture firms and investors look to bring valuations back to earth. We’ve already started to see some decacorns, like Stripe and Instacart, lowering their valuations, but they are so highly valued that they aren’t at risk of losing their unicorn status. But most unicorns don’t enjoy that luxury.

CB Insights’ unicorn index shows that there are 1,205 companies currently worth over $1 billion. But if you look closely, you’ll notice that the majority of these startups are actually hovering right at the $1 billion mark. Currently, 685 unicorns were last valued between $1 billion and $2 billion — that’s more than half the list.

How many of these will stay unicorns through this calendar year? To find out, we recently surveyed more than 35 investors on how many startups they thought would drop below the $1 billion valuation mark in 2023. While nobody could peg a specific number, of course, the vast majority felt the herd has likely already been winnowed.

Losing the horn: VCs think majority of unicorns aren’t worth $1 billion anymore by Rebecca Szkutak originally published on TechCrunch