Demystifying First-Check Fundraising with First-Check Investors

9:33PM Mar 3, 2021

Speakers:

Keywords:

capital

founders

people

fund

vc

building

brian

vc firms

create

folks

venture capital

venture

traditional venture capital

lightship

community

vcs

early stage

call

kinds

zebras

But music never gets old. Hi everyone, I'm Natasha Mascarenhas. Today we're going to talk about raising money and how to navigate that. Because sometimes, figuring out what kind of capital to go for can be the hardest part of the fundraising process, especially in a world of rolling funds, angels, debt, financing, all the things. And to help me talk about all the things, we have three of the best in the business. Thank you all so much for joining me, this should be fun. So I wanted to start with aspirin, you are a co founder of Zebras Unite. And I wanted you to kind of start by telling me and the audience about your capital arm and how what you do in your view is different and supports founders differently than traditional venture capital. I can't hear you too well.

Hi, all. So there we go. year two of the pandemic, I suppose for now, thanks again for having me. And it's a pleasure to be sharing the stage with some of our favorite people. I am the odd one out on this panel. And not just because I'm holding up the German immigrant quota on this panel. Also, because we in fact, do not yet have a fund. So Zebras Unite, and I'm pronouncing it the international way because we are an international movement of founders and investors building capital community and culture for the next economy. businesses. And the our approach to capitalists is multifold, we thought initially, maybe we would stand up a fund right from the get go. And instead, what we have been learning from a capital innovators, like Brian, and others all over the places, that capital is best designed in close collaboration with the community. And so we are taking a deliberate approach to designing new financing mechanisms and instruments in collaboration with specific sectors, geographies, and demographics. And so we're actually using, basically, what we're doing is we're unpacking the fun design process that typically takes place behind closed doors, and turning that into an open participatory process, where we have LPs and other key stakeholders at the table to identify what's needed in a particular industry. So for example, we're just finishing up the first phase of what we're calling a future economy lab in the education space. Secondly, we also are working on creating a sort of a matchmaking ecosystem, if you will, for zebra aligned, founders and investors. And we're doing this through things like partnering with a bunch of folks who have identified themselves and building a little bit of a prototype for how we can match them up in the community. And then we're also working with platforms like we fund our thirdly to make direct investments into businesses where crowd investing is a good opportunity. And so we have a partnership, we fund our and building partnerships with equivalent platforms, platforms and other countries.

Got it? And I'm really curious to before I throw over to the traditional VCs in the room on if you, you know, actively chose to stay away from the idea of exchanging money for ownership, if that's teams that you still choose to work with? Or if you kind of stay away from finding partners that are doing that kind of approach?

Oh, no, not at all. I mean, there's a great deal of need for it. So I like to joke at the risk of offending the actual VCs on the panel, right? I mean, there's sort of two extremes as well, right? Like, we have the VC end of the capital spectrum, which Garner's a lot of attention, but in the big scheme of things, really is just a tiny drop in the large capital pool of capital that's out there. And then on the other extreme, you have band of bank loans. That may or may not be accessible to startup founders, especially if they're from certain demographics. In this country. Of course, we have a massive racial wealth, gap and access to capital. And so to me, that sounds just like two flavors of capital, right, vanilla and chocolate. It's not interesting. If that was an ice cream store. It's just not very interesting. So Zebras Unite, we're looking to increase the diversity of capital, as well as the diversity of managers off capital. So we're very interested in revenue based financing mechanisms. We're very interested in non dilutive early stage forms of support to entrepreneurs who don't have friends and family wealth, right. So to tell them go raise your friends and family round is really obnoxious and offensive. We were looking at new sort of character based lending instruments and a bunch of blended approaches and so there's there's just more room on the Capitol spectrum to color in than just the two the two ends of the spectrum. And yes, we like we like aligned with these folks on the on the panel.

No, that's great. Um, I'll throw it to Cincinnati, Brian, you are the person behind lightship capital which most recently closed on 22 million and I hear is also kind of already planning out its second fund. Walk me through how you guys support early stage founders. And, and kind of why you chose to take this approach.

I am as described as true said like boring VC standard will take the chocolate side of that equation.

He is already better than vanilla.

Chocolate, Okay, anyway,

outside. But, yes, prime breaking general partner lightship capital to your point where a venture capital firm focused on the Midwest in the south. As I think many folks would imagine that geography is also underserved, just like our demography is understood. And so when you kind of add demographic issues and geographic issues together, you get a real dearth of capital. In the center, really, the we'll call the middle of the country, the mighty middle. And yeah, we're early stage we invest $500,000, as much as a few million dollars in looking for venture, really venture bankable, big ideas, same as many folks you see in the coasts, but in these areas.

I noticed on your website, he noted that you don't require board seats and are willing to kind of bridge portfolio companies to their next round. Can you tell me what went into that decision? More specifically, the first one don't require board seats, especially at the early stage is a little bit more unique compared to other venture capital firms.

Yeah, oftentimes VCs talk about designing your product for your customer, but then they don't design themselves around the customer, right? They completely ignore what they tell people to do. And so we're designed for the underrepresented founders. And for us, that's women, minorities, lgbtqi plus disabled. And so capital path that founder is different than the white male Zuckerberg and founder, as we like to say, so oftentimes, series A is very, very difficult. They have a hard time getting series A's done with venture capitalists, and so will bridge the series. And for instance, we'll write a smaller check, like I said, half a million dollars first, but then we'll reserve $1.5 million. So they can go out, we folks try to get a series aid done. Oftentimes women want to do 150% 200% better than they should have to, to get a series aid done. So we can say, hey, come off the road. Here's a leader bridge 1.5 million bucks. And now just go crush it for six months and go back to those folks and show them what you've done. And so to do that, we don't require board seats and things of that nature, we do require strong collaboration.

Great, great. And Sydney, you are a principal at precursor. And I think the first hire other than Charles, if I'm correct, yet, which is I mean, at that time may be crazy. But I would love to know what went into your decision on joining venture. But also how you see, you know, you've obviously chosen to be a part of the this asset class specifically. And so I want to hear your kind of reasoning behind why you think this supports underestimated founders in an effective way.

Yeah, I think that it was definitely a long decision to decide to get into VC very, I think, took a lot of research, lots of cold emailing lots of random coffee chats. And I decided that I wanted to become a VC because I saw that there is so much, you know, opportunity for us to capitalize amazing ideas and I think amazing ideas from people who were basically providing services to what I call like, the 99%. I think you could also say, My background is my mom is from West Virginia, 1000 person town. It's like only thing there's really like a women's prison, honestly. And when I was growing up, I was so weirded out by the fact that all my cousins had different lives than I did. I grew up in San Diego, and then my mom's from, from West Virginia, we moved to San Diego. And so when you go to West Virginia, all we really do is hang out at the Walmart and also go to Applebee's. And it was, it was fine. But it was a completely different life. So for the people I say I'm building for our the Walmart consumer, because I just think that what they have access to right now, the people who are building for them right now, aren't necessarily. technologists aren't necessarily essentially like building things for them to increase their agency make their lives better, get them more access to products and services. So that's, that's really my focus at precursor.

That's great.

Um, you know, a

question that I want to selfishly ask during this panel is, if the branding and the phrasing around democratization of venture capital is really leading to true enablement. And I think all of you obviously sit at such different tables on a day to day basis. So I would love to know, maybe, Brian, first for you to chime in. And then Astrid and Sydney on that when you hear the phrase democratization of venture capital, is that something that you are energized by or you think is more more noise than action?

Oh, I have to do first. I sort of like the spirit of the of the term for sure. Right? I mean, we want to these are all good things went into Microsoft ventures, democratize venture capital, I would say, oftentimes, we are narrative led by the coasts, right? So it's interesting, I did an interview recently with someone TechCrunch, about electrons moving to Miami, where I lived before, we're just Cincinnati. And she was asking about this new surge and that sort of thing. And I said to her, it's not that it's new. If you go into 2019 data, 6000 people a week moved to South Florida, what's happened is more people from San Francisco and New York, whose friends are journalists are moving. And somehow, like it's a narrative. So I would say I would love for some of these narratives and these sayings to come from West Virginia, for instance, and less from the coast, because then they don't resonate, as what you what you're trying to get at.

Yeah, I think it sounds like Brian, wherever you go, people follow. So watch out for the influx to Cincinnati. You know, the I'm with Brian, the phrase sounds great. Right. And the and the idea behind it, but the reality of it. And I should I should reveal I'm a recovering economist, right. So I'm actually really interested in the sort of the business model of VC firms and funds themselves. And one thing that that you realize, very quickly, it's really expensive to it's like the the startup cost of a fund itself, is is an obstacle as a real barrier. Right? And I mean, where do you find the quarter to a half million right to basically underwrite your existence for several years, while you're pounding the pavement to shop your idea around? Right? And so we, so, when we say democratization of VC, I, the next question is, what are we going to do about that? Right? Like, what do we do to actually create an on ramp of for much more, you know, diverse talent into this industry, which needs transforming, just like the rest of the financial industry needs transforming, right. And so you see all kinds of initiatives and big banks now, or, you know, for for how you promote talent and what was sort of changing, beginning to think about changing underwriting, for example, what I don't see is a concerted effort in the VC industry, to create sort of a like an apprenticeship or an on ramp, or however you think about it, some paid mechanism by which people can can break in, because it can be enough, I've got friends who basically use their startup journey, as a as a mechanism to then jump to VC and the idea of roughly is, I'll sell my company so that I can take the proceeds to then create a VC fund that is for my community, right. And that that just seems really weird to to spend five years building a company so you can sell it. So you have the capital to become to do the thing that you really want to do, which is deploy capital into people that look like you that have a life like you that shop at Walmart, like you, you know that that who's whose experience you share. So I think that's sort of the the missing piece for me in that phrase.

Yeah, I think that kind of to both Brian and astronauts points, the democratization. In order to take that idea into action, you need to create structures that actually enable that type of action. And so you need to build structures that allow for different types of people to access VC capital, you need to create structures that allow different types of people to become VCs and to create structures that allow for You know, those different types of companies that are getting funded by these different types of people additional capital as they grow. And so you need different people at Capital stack, sorry, somebody came to the door. And so I think that it is a really interesting time to be in VC, I think, you know, when I started at precursor, I created the list of black woman and BC It was about 30 to 50. People, this is just multiplied I think, since then. And I also think that the different types of the intersectionality has also grown with regards to Latin x, gender, non binary. And I think it's just, it's been a really, really interesting time. But there's so much work to do.

Yeah, I mean, I think something that I would love for you to follow up on, too is what should founders consider when they're saying yes to all the flashy forms of alternative, or alternative might be the wrong word, but just non venture capital? money out there? What are, you know, both red flags and good thing? Good, it's hard to say, more money in the ecosystem is a bad thing. But I am curious if all that money is, you know, created equal.

I think this really, I'll just jump in here. I think that one of the things that is interesting, and I know this is kind of like, hot takes with regards to the Indy VC announcement yesterday that I don't know if everybody saw, but they're closing down, which was one and they were, I think the frontiers of building new access to capital. And I think one of the things that we saw when not when we would talk to founders who were considering indie VC capital versus our capital was, do you have a essential, essentially does art the investor that you would like after you get that indie VC funding, if you decide to go to a VC firm, a more traditional VC firm? Can they actually even do revenue based financing investments, some people actually legitimately can't, but by the regulatory, the regulatory limits of their fund. And so I think sometimes there's this. And I don't want to say it's unfair, but it's like a really, you have to make a pretty final decision pretty early on in what type of company you want to build. And I don't think that allows for a lot of the flexibility that is the reality of building a startup, we when you build something, you pivot, like five to 10, to 20 to 30 times before you finally get to something that, you know, matters. And so how do we also allow for more flexibility between multiple different types of revenue

structures? I

just don't think that exists right now.

Yeah, what Sidney said, I think that point about founders basically getting locked into a corporate structure and an investment strategy before they even really know what they're building or how it's selling. Is, is just so that is so important. That's such an important observation, right? And, and it's also, you know, the I always joke, you know, like 99 out of 100, corporate lawyers will tell you to incorporate as a Delaware C, right, that may or may not be the right answer, you may, you know, there may be a good reason to become a cooperative, for example, and yes, that will make your that will make your life very difficult. If he then tried to raise venture, we would say, don't try to raise venture when you're creating a cooperative. You know, Indy VC, for example, did invest in a cooperative, and they were able to do so under, under the terms of their fun, right. So it I think those kinds of so I think the there is a need to educate both founders and investors about the options that are out there. And we're very excited about a forthcoming book by omnipotent power, who will describe in great detail like 20 or so different alternatives to E t, through the experience of both the the founder and the investor in each of those deals. And I think that'll that'll begin to open up a little bit sort of the the space of what what's possible in how we match up capital with with ambitious founders. Yeah,

Brian, I mean, I'm curious your take to you know, at lightship, is it as simple as, okay, you can't come from these capital sources. And you can come from these or how do you draw the line around the kinds of cap tables you can and can't work with?

So we're a little more traditional, but I would say that we love non dilutive financing, before and after.

Oftentimes, you see founders, winning pitch competitions, you know, doing a variety of things, just to kind of get from stage to stage. And those have been quite successful for a lot of folks. Yeah, I

mean, the, the cynical part of me is like, okay, so do we stop telling people to go to pitch con petitions. Brian, you retweeted something today that I think came off really interesting. And abysmal, actually, is probably a better word, which is that VC firms reported that 4% of black investment professionals, and they have 4% of Hispanic and Latino investment professionals down from 5% in 2018. And so we know that the decision makers might not be looking like people who can think outside the Zuckerberg of the world, but then what's the solution? on meeting in the middle? I know, you probably don't have a perfect answer, but you know, what comes to mind?

Yeah, and this, it wasn't literal, but it felt like they kind of added one minority and subtracted another one, and just kind of call it a wash for the BLM here, which is what we're trying to accomplish. To increase both numbers, right, we want more and more black folks adventure, it's tough, because it goes back to afterwards point, starting your own fund is not a cheap endeavor. I do think there's an opportunity for large firms to ally with with those GPS, and help to buy some of the GPP by you know, 234 5% and help to seed these early funds. And then that will give folks a chance to really kind of have the time to pitch other folks. I'd love to see more of that a lot of stick will be formalized, institutionalized in some ways. And we'll know where to look. Yeah, these are, these are the kinds of solutions that I think Zebras Unite, for instance, are that those are the kinds of things that they look at, like how to create more room for folks in this industry.

I also think that there's a lot of not just pattern matching with, you know, the investments you do, but the pattern is pattern matching with who you hire. And I've just seen, so much lack of curiosity might be actually the best word of like, what are the things that I don't know, about different, this person who looks very different from me, this person with a very different background, especially who came from a state school, this person who went to a community college? Like, what, what might I not know? If and what could I know if I hired this person? And I think that that is sad, frankly. And I'm hopeful that, you know, as we, as we continue to push the limits on like, what types of financing VC firms can get, I thought, like, even backstage getting the, the, they did a crowdfunding for the actual Fund, which I thought was really interesting. And so we're starting to see these little, you know, like changes and just hopeful that they all kind of color collide into making up this massive movement instead of just all these little moments.

That's great. I think, you know, yeah, I mean, earlier today, when I was talking to Arlen Hamilton, of backstage capital, she she basically said the words that venture capital wasn't the solution to my world in supporting founders, it was simply what would get me a seat at the table, and I'm okay with, you know, pivoting from traditional venture capital, if it means I get to back founders in a more sustainable way, which made me want to turn the question back around on all of you, which is if you think venture, traditional venture capital will be, you know, as important as it is today, 10 years from now, maybe you can go first,

you know, again, I don't think it's that important today. It's such a small sliver of the overall capital spectrum, you know, I mean, if we can figure out how to how to change the way we do underwriting and commercial banks in this country, right? Or if we can get out of the stupid redlining of real estate development, I mean, there are massive amounts of pools of capital available to create community wealth. So I'm Yes, you know, venture needs, you know, sort of a professional ethics standard, and it needs a way to onramp new talent, and it needs to get over its misogyny, right, and all those things. But they're also I mean, I think, well, we're putting sort of reverse Unitas focus is more on how do you lift up and create the conditions for more capital innovation across the board, right, like back to my ice cream store example. Like, I want something other than just vanilla and chocolate in that ice cream store of capital. So how do we how can we support experimentation with new forms of, you know, capital, that is that is tailored and is responsive to particular communities? Right? There's some really interesting experimentation and innovation happening with folks who are creating funding mechanisms that are tailored to Native American tribes, for example, right, where people don't own their homes, you don't have collateral, you can't get a bank loan. So I think that's sort of like how do you spur more capital innovation writ large is how I would symbolize that

that That's fascinating. That's really cool. I think that I am very bullish on venture capital, I think that, you know, the IPOs just keep coming, and they keep getting larger. It's kind of really crazy. And so I think that there is recreating an immense amount of wealth, and that we need to be thoughtful, we need to be careful. And we need to be like, I think, just considerate of that fact. And so I plan the adventure for the next. And I think, also to asteroids point, like, we are not the only we're not on an island, we are, you know, there's we're connected to all of these other different capital statuses, different communities. And so that's also important, but I don't plan to and my bed is here, my bed is here. So

yeah, I would say, capital will continue to play a large role in capitalism, because the two are hand in hand. And venture capital is a version of that, I will say, just kind of like, watch what we do, you know, we can get between everybody. It's 1234. To see billions of dollars into these geographies, these communities, these groups, you're going to see, value creation is outrageous. You know, Morgan Stanley, and others say that racism and sexism cost this country somewhere between 4 trillion and $16 trillion in kind of untapped value. So venture capital can be a key lever in opening that faucet.

In our last minute here, I'll choose to be a little more optimistic. And kind of add like what's giving you guys hope right now, from the the tables that you're

okay, well, I'll give her just because this was really exciting to happen last week, it was so cool to see first boulevards raise I don't know if you guys followed them, but they're building basically a black bank and they raised 5 million from Artemis. I think it's not anthemius and I think up Margaret, and then in addition to Greenwood, which is killer Mike's company that's building also another black bank and then like Kapor Capital is building which is another black bank there's just like so much of this I just think we're in a renaissance moment and that gives me a lot of hope

yeah my my friend and co founder at Zebras Unite mata is a paid our calls it a Cambrian explosion of of capital forms that are emerging and that's super exciting to to witness here in the US and and actually around the world.

Only 20 seconds left, so I will post my what I'm excited about at Brian brackeen on Twitter. Seamus looking

for that. Yeah, today.

You'll be talking all of us because we didn't get to plug in our Twitter

yet.

Thank you all so much for joining. Enjoy the rest of the program to everyone that has tuned in to TC sessions justice. Take care.

Bye all