While the corona virus has caused hardship and sorrow across the country and has presented financial challenges for many companies, it has also given rise to conditions which present a unique opportunity for early stage venture investments. Revenue numbers that are lower than expected and an increased cautiousness on the part of investors has led early stage companies to defer their attempt to raise a true series A and to instead seek funding for a round that is variously called “Seed+” or “Bridge” or “Pre-A,” often at prices that are quite attractive. We at SineWave have looked at a number of such deals, and find they define a space in which we can be quite successful.
In analyzing this space, we decided to ignore the investment stage labels and to instead define a number of company characteristics which would identify those companies which were essentially series A companies at a bargain price rather than seed companies struggling to meet milestones. The characteristics we identified in our analysis are:
- The technology risk has been bought down to an acceptable level. The technology has been developed and has been deployed in a realistic environment. There is a clear technology roadmap, and a clear path to meeting any relevant certifications or regulatory requirements.
- The company has revenue. While we have no preset range for the dollar value of that revenue, it must include revenue from sales of the product, not just paid POCs or paid research partnerships. Also, we look for indications that among the company’s customers there are buyers who are savvy, have brand reputation, or are seen as thought leaders or first movers in their space. In short, they need to be referenceable and their references need to be authoritative and credible.
- There is another investor in the company who buys down investment risk. Our usual deep-pocketed partners obviously fit this category, but it makes sense to expand the criteria in recognition of the early stage of these companies. We seek partnerships with venture firms that have a strong record of successfully closing series A rounds for their seed companies, with venture firms that are particularly savvy in the technology area in which the company is working, or with strategic investors that may be likely partners, customers or acquirers.
- There is a clear path to a successful series A. The company has a strategy to increase revenue and to show marketability.
We see a unique opportunity to add significant diversity to our portfolio by investing relatively small amounts (~$500K) in several such pseudo A companies. We can take advantage of the attractive prices available at this stage and can use the period of time between our initial investment and the eventual series A to really learn about the company. Then we can make series A investments on the basis of this knowledge, doubling down on the most promising companies.
A portfolio constructed with an eye to taking advantage of this opportunity would consist of 10-12 late seed/pseudo A companies, 4-5 series A follow-ons for these companies, and 4-5 direct series A or series B in which we can play a strategic role, in addition to the seed and series A companies in which we have already invested.