The Games Fund is a Moscow-based $50 million early stage fund that launched last weekRead more...
Better Ventures is about to close its second fund of $20 million
There has been a big debate over the last few years over whether the Series A crunch is real or not.
What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give money to young companies looking to make it big.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Wes Selke is co-founder and Managing Director of Better Ventures
Selke has 15 years of venture capital and financial advisory experience with Good Capital’s Social Enterprise Expansion Fund, William Blair, and Ernst & Young's Mergers & Acquisitions group.
He earned an MBA from the Haas School of Business at UC Berkeley and a BBA from the University of Michigan. Wes has volunteered with organizations around the globe, which has fueled his passion for applying his business skills to build a better world.
VatorNews: What is your investment philosophy or methodology?
Wes Selke: We're a seed stage fund. We invest at the intersection of impact and technology. We also believe that a focus on impact can lead to outside financial returns, so we're looking for opportunities where the focus on impact actually does reinforce the financial returns. What that boils down to is information technology companies that are confronting social and environmental issues here in the U.S., from work and education to sustainability to better health outcomes.
There are lots of reasons we focus on companies that have an impact. Number one, it's an area that both Rick Moss and I are passionate about. We love the VC model, we love being at the forefront of innovation, and working with young founders to really make an impact on their business. For a variety of personal reasons, both for myself and for Rick, that's the area we're most interested in. We're excited about innovations in clean energy, and the way it can really, as an economy, wean us off fossil fuels. We're excited about innovations in education.
We think there's are many aspects of society, related to the opportunity gap, where there are underutilized assets, including individuals that aren't given enough opportunities to realize their full potential. We feel that there are a number of really compelling information technology businesses and products and services out there that can enable folks to realize that potential, get access to work opportunities, get access to educational opportunities. The third bucket is the health bucket, where we just fundamentally believe that we're going to be much better off, and more productive, as a society if folks can live healthier lifestyles.
So I would say it's a combination of passion and interest from a personal standpoint, but also, again, this belief that these kinds of businesses can lead to, and reinforce, the financial side of the equation. We've seen founders that are that much more passionate about building a big, successful business that addresses something that they're passionate about, causing them to be that much more focused and resilient. Also, the ability of these companies to attract and retain top talent, in what is a very tight labor market. We're seeing this particularly among the younger generation, the Millenials, where they're a little bit disillusioned by your typical Wall Street job, or maybe even a similar tech job, and want to go work for a company that they can get behind and get passionate about.
VN: What do you like to invest in? What are your categories of interest?
WS: We have three main buckets that we talk about. The first are companies that are addressing the opportunity gap. This boils down to things like edtech, work opportunity, financial inclusion. Technology products that are targeted to improving opportunity for individuals.
The second bucket are companies that enabling individuals to have improved health outcomes. A company called Eko Devices, out of Berkeley, we invested in them back in 2013. They've got a hardware/software product, and they call themselves "Shazam for heartbeats." They're a Bluetooth device that connects and analogs stethoscopes, and essentially gives the practitioner another set of ears to make diagnoses, based in heart sounds. So things that are improving health, that are improving access to health.
The third bucket is, at a high level, sustainability, but, more specifically, transitioning from fossil fuels to clean energy. We've made a couple of investments. One was a financial platform for solar, the other two are more focused on reducing the soft costs of solar, reducing sales and marketing, customer acquisition costs around acquiring solar customers.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
WS: We've backed about 22 companies in the last four or five years, and there have been a number of very successful companies so far in the portfolio.
One that I'll mention is a company called LeadGenius. They're based in the East Bay, in Berkeley. We invested in their seed round back in 2011. What they do is they've created, essentially, a better version of Amazon Mechanical Turk, with more of a focus on lead generation. When they first started they were more of a digital work platform, where you could farm out different kinds of work to to the crowd. They've got workers here in the U.S., they've got workers in developing countries, where English is spoken prominently, and they have, over time, really zeroed in on what they call, "Front office work and lead generation." So, if you're a small or medium sized business, and you need some additional support in sales and marketing, and just going out and crunching the numbers on finding leads online, these guys are really, really good at that. They've got a great workforce now of a couple thousand individuals. A lot of these folks are previously underemployed, or even unemployed, and we view their impact as bringing these individuals digital work opportunity. A lot of them stick around, they make good money, they rise up in the ranks, and become managers of other folks on the platform. Others build their skill sets and then move on to other jobs. So companies are getting access to really good, high quality, digital work and LeadGenius is providing cost effective services to the companies that they work with.
It's a great business, they've scaled up pretty rapidly. We invested in their seed round, then they went into Y Combinator, then they raised, I think, two different larger seed rounds, kind of like a priced Series A round. Then they went onto raise a $5 million or $6 million Series A, with Sierra Ventures, around a year and a half ago, and now they're in talks to raise a Series B. So they're really started to scale up, with annual run rate scaling up pretty rapidly as well.
We invested in a company on the edtech front called UClass, and this one of our exits in the first fund portfolio, which was a nice return on investment. These guys built what they call, "The Dropbox for schools." All the founders were Teach For American teachers, they were well aware of the pain points of the classroom, one of which is developing lesson plans for the next day, or the next week. These are lesson plans that have already been developed by thousands of teachers before them, so why recreate the wheel every time you've got to prepare for a math lesson the next morning? What they did was they had this really nice model, it's an enterprise software model, that they sold to school districts. It was a curriculum plans sharing platform. So the school district would buy it, they would roll it out to all the teachers in the school district, and it would enable teachers to upload high quality curriculum content, and then other teachers in the school district download that same content through a shared platform, kind of a Dropbox-style program.
On the impact front, what this company was doing was narrowing the gap within school districts, where you've got underperforming schools that don't have access to really great content and technologies and curriculum plans, and enabling those schools to get better access to that kind of content.
They were very successful with rolling out the platform, and as they were going out to raise a Series A, they got some pretty significent inbound interest on the acquisition front. They were acquired by Renaissance Learning, pre-Series A. So a really good outcome for the fund.
One on the solar front, we invested in a company called SunFunder. They're based in San Francisco, and and they are doing solar finance in the developing world, focusing on off-grid solar projects. So, if you track what's happening in Sub-Saharan Africa with off-grid solar, it's really exploding right now. It's a huge opportunity. Solar is taking off in the U.S., but it's replacing other kinds of electricity; in Sub-Saharan Africa, entire villages are getting electrification for the very first time, thanks to off-grid solar projects.
There's a company called Off Grid Electric, that just raised a gigantic Series B round, that was led by DBL, along with Solar City, and these guys really pioneered the concept of pay as you go solar, and selling mini, off-grid, solar systems for individual homes. They're unlocked through micro-payments via your mobile phone, on a weekly or monthly basis. They really pioneered this concept of off-grid solar, and now there's been a lot of companies that have developed in their wake to provide these different types of solar technologies to various individuals, and households, in Sub-Saharan Africa.
So our company, SunFunder, is a finance provider of capital to these different companies and projects, in Sub-Saharan Africa. We invested in their seed round through our first fund, our first investment out of our second fund was in their Series A, and they just closed a Series B round in December that we also participated in, so it was a nice markup already for our second fund, as well as our investment in the first fund.
These guys are raising large amounts of debt capital. For example, they're in talks with OPEC right now about closing a $50 million debt facility, that is then providing capital to these various companies that are in Sub-Saharan Africa.
VN: What do you look for in companies that you put money in? What are the most important qualities?
WS: We're looking for slightly different things at seed and pre-seed, but for both of those stages the team is the biggest thing we're investing in. Particularly at pre-seed, but even at seed, you don't have really strong indications yet about the business. Maybe at seed you've got some indications of customer engagement, but, for the most part, we're really backing teams, first and foremost, and we're backing ideas in certain markets that we need to be comfortable with, and excited about.
On the team side, we're looking for a minimum of two co-founders. They have to have a strong technical co-founder, and a very strong business/sales co-founder. We have a hard and fast rule that we will not back single founders. Startups are hard. The odds are already stacked up against you from day one, that the thing is going to fail, so having a co-founded team is essential. You've got to have, from a skills standpoint, a team with complimentary skills. You've got the hacker, the hustler, someone working on the product, someone out there trying to sell the product, and trying to raise capital for the company. You also need someone who's taking care of all the bookkeeping and legal stuff. There's a lot of work to do in a startup, and there's too much work to be done for a single founder.
Clearly there are examples out there of companies that have been successful with single founders, but I think that's more of an anomaly than the rule. I guess there can always be exceptions to the rule, but we've had a couple of companies in the past that just took a lot longer to get off the ground, that we invested in very early on with our first fund. They were single founders that were looking for co-founders. So if we come across someone that we're really intrigued by, but they're in the search for a co-founder, we'll start engaging with them. We don't want to just turn them away, if there's something very compelling about that person, their idea, the market that they're working in, ad we'll want to get early tabs on them. We do a monthly event series here at the hub in Oakland, geared toward early stage founders, and we'll encourage them to attend those, and to the extent that we can do a little bit of matchmaking, but it's really up to them. So we'll keep tabs on them but it's just really hard to start a startup and I think the odds are even longer if you're going at it alone.
We won't back teams that don't have the technical expertise. Often times you'll get an application from a couple of co-founders, they're both MBAs, they're starting a software business, and you're like, "Ok, well, where is the CTO?" They say, "Well, we're just need to raise some money and then we're going to hire a CTO." That doesn't fly with us. You want to have a CTO as part of the original founding team of the business and having strong imprints and fingerprints on the technology and the products from day one. So that's really what we're looking for.
Pedigree certainly counts for something; where they went to school, indications on their resume that these guys are brilliant, that they've done extraordinary things in the past. There's the intelligence side, but there's also the resilience side and we want to see that really strong indication of a killer instinct. They can be very, very smart, but if they don't have the killer instinct then they're not going to know how to break down the barriers and walls that come up for them as they're starting this company. That can be hard to test for, but you can start to get a good gut feeling for it as you get to know these teams, and you interact with them over time. You're e-mailing them questions at 11 o'clock at night and if they're responding right back with well thought out answers to your questions, you're starting to build a mosaic of this person, that this person has good insight, they've got drive, they've got ambition, they've got scrappiness. We're definitely looking for all those things.
I think having good industry insight is something that really counts for a lot as well. We don't necessarily require that an individual has worked in the industry that they're focused on for a big chunk of time, but it helps. For example, the two solar companies we backed recently, all the co-founders of those companies had worked in solar for at least a few years. They're not brand new to that industry. They've got some industry industry insights there.
Lastly, we're looking for fundamental innovation, technology innovation around these different products. You want a really strong indication that this really is a problem that they're trying to solve, and then that what they're developing is a true pain killer, in the sense that there's going to be a strong demand for this solution once they really start to roll it out. And that is truly is a fundemental innovation, and not something that's just sort of incremental or a "nice to have."
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
WS: Different people define pre-seed differently, but, for us, we say two co-founders, and a minimal viable product that is out in the marketplace and which is starting to show that there's some very early encouraging signs of customer engagement. It can be pretty minimal at that pre-seed stage, but we prefer not to invest prior to them having developed anything. I think some people would define pre-seed as essentially have nothing, but we prefer them to at least have something. We're not looking for any large amounts of numbers in terms of usage, or customers, just some sign that they've pinpointed a problem that truly is a problem, and they've got early development of something that has some encouraging signs of engagement.
We'll come in for $100,000 investment, we'll start working with them, and the idea is that, after four to six months of us engaging with them, helping them get further customer traction, that we would then lead their seed round with a larger investment of $250,000 to $400,000.
If we're coming directly into a seed round, and the entrepreneurs have loftier valuation expectations, i.e. raising on a note with a $5 million cap, you're effectively raising at $5 million, so show us something that indicates that the company is truly worth that today. If that's the case, if we're going to invest, we need to see that the product is out there, that it's really showing very solid indications that people are using it, really engaging with it. We can invest pre-revenue but we want visibility to revenue probably within six months of our investment if it's going to be a seed investment at that $3 million to $5 million or more valuation.
Again, we're not looking for thousands of users, or millions of users, at this point, because we also know that they're going to use some of the seed capital to start stepping on the gas, to get usage up. In a nutshell, we're looking for strong indications of product market fit for the seed round, whereas the pre-seed can be pre-product market fit.
If the founders are really compelling, if they were second-time founders, or just really, really compelling, we might be willing to commit to a $100,000 pre-seed investment. The lower the traction is, the higher the bar is on the team side.
VN: Given that these days a Seed round is yesterday's Series A, meaning today a company raises a $3M Seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes to get that Seed round? Since it's a "Seed" does it imply that a company doesn't have to be that far along?
WS: There was recently a post I read about the 4x increase in companies raising seed rounds but the same number of companies getting Series A financing, and the whole Series A crunch, and I think that's very real. It's really hard to raise a Series A. I think one of our roles, that we view for us, as a seed investor, is to really work hard with our companies, not only with our capital, but with the way we engage with our companies, to help them get to a successful Series A. That's a very successful outcome for us. We know a lot of the Series A guys, we can call them and set up meetings when we feel like it's the right time for our portfolio companies to go and talk to them.
We typically, at the seed stage, we start to formalize the board structure and really get the company's corporate house in order. We want it to be known, over time, among Series A investors, that companies put out by Better Ventures are awesome. That they've got their houses in order, they've already got board cadence going, and that's part of our job as seed investors, to really get them ready for Series A, not only with traction, but also with having the corporate house in order.
I think the bar is really high on Series A. I haven't come across hard and fast rules, like you have to have a million in revenue, for example, but generally speaking we target at least $100,000 in monthly recurring revenue, as a benchmark for Series A, or, at the very least, $83,000 monthly, which equates to $1 million annually. So if you've got that $1 million annual run rate, and so long as it's growing nicely, and I don't know if that's 25 percent to 50 percent quarter-over-quarter growth, but something that indicates that if they've got real revenue it's growing rapidly, the team is great, the idea is great, the market is great, then you start to that Series A mindset.
VN: What are the attributes of a company getting a Series A?
WS: Investors are thinking long-term. If they're coming in at Series A, on a $15 million pre and a $20 million post, somewhere in that ballpark, or $20 million pre and $25 million post, to go 10x this company has to be a $200 million company now. So, does it have the legs? Does it have the early indication in the revenue, and the customer usage, and in the growth? I think that's part of it.
Is the team, the idea and the market really compelling? But I think the other big question is, does it have legs? Does it have high quality revenue over time? So, what do the gross margins look like? Is it 80 percent plus gross margin business? Is it recurring revenue? Is there low churn? The whole LTB to CAC ration, I've heard people talk about that, you need to be north of 3x. Is there good indication that that is north of 3x? I think all of those things need to sync up for it to be an attractive opporunity at A.
VN: Given all the money moving into the private sector, I believe there's more money going into late-stage deals in 2015 than there was during the heyday, back in 2000, do you think we're in a bubble?
WS: It certainly feels like the bubble has deflated. It started to happen in Q4, or even late Q3 and I think the writing is on the wall now. It's happening in the public markets, it's happening with Fidelity putting out their report on the markdowns in their portfolio of unicorn companies that they're invested in. We've got a company right now that's looking to raise a Series B and I've just heard anecdotally from them that all the VCs that they're talking to are just talking doom and gloom. So it certainly feels, anecdotally, that there's a slowdown happening.
Personally, I'm happy about it, so long as it doesn't screech to a halt, of course. I think everybody would love to see a soft landing of all this, and not a huge bursting of the bubble, and I guess that remains to be seen. But a healthy correction could really benefit us all. It's just been lots of capital sloshing around in the later stage deals, and there's been very lofty expectations among early stage founders as a result, which then, frankly, makes our job harder to do. There's been this sense, at least there was in 2015, among entrepreneurs, that you kind of roll out of bed in the morning, write down a business plan on the back of a napkin, and it's worth $5 million bucks. They say, "Well, my buddy just went through YC and they raised at $8 million so I think I should get that valuation." So there's been a lot of that loftiness, and frothiness, going on, and I think, obviously, for our business, we would love to see that come back down to earth a bit.
Of course, if VC funding is really drying up, that could be really challenging. It's already hard enough to raise an A round and now if these A investors really start applying the brakes that could be tricky. I haven't seen that happen yet. Talk to me in six months, or maybe in three months, it could be a different story. I would say, so far, it feels like a healthy correction and not necessarily a popping of the bubble.
VN: If we're in a bubble, how does that affect your investing?
WS: It has. We're now looking at 18 to 24 months, rather than 12 to 18 months, in terms of how much capital our seed companies need to raise for how long they need to survive, or how long they should plan on it taking to raise a Series A. We're about to close a new seed deal right now that, initially, had targeted $800,000 to raise, and now we're bumping that up to $1.4 million. I feel good about them raising a bit more capital, and buying more time to build out the metrics, to get to that A round.
I think the good companies will still get funded, there's just going to be a slow down in more speculative investing. Obviously it's still going to be really hard to know at Series A, but maybe the me-too businesses, and the more speculative investing, will slow down but the fundamentally good, sound businesses with sound unit economics and growth trajectories, and LTB to CAC ratio, will still get funded.
We've had a number of companies in the past raise sub-$1 million seed rounds on a convertible note, then raise $1 million price-seed round, kind of as the primer round to get them to Series A. That seems to be fairly standard these days, but, if you can, go ahead and strike while the iron's hot, because the bar is a lot lower at seed than it is at Series A, and there's a lot of believing in the team and the market opportunity and buying into that vision. It's almost the audacity of zero, where it's like, "This could be really big," versus when they actually have revenue, and have something to poke at, the bar goes up. So try to maximize your capital that you're raising at the seed round, up to a certain point. Depending on the team, once you're hitting $1.5 million there can be diminishing returns beyond that, since if you raise the money, and have the money, you're probably going to spend the money. So there's a risk of getting sloppy if you raise too much.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
WS: I went to University of Michigan undergrad, and studied finance and accounting. I grew up in Michigan and then, like a lot of people in my class, moved down to Chicago after school. I spent six years as an investment banker. I worked at Ernst & Young, a finance group, doing M&A, and then I spent a couple of years over at William Blair, which is a local investment bank in Chicago.
So I was on the sales side for six years. The first couple of companies I sold at Ernst & Young were to private equity buyers, and that was my first exposure to the private equity business. I really liked it; it seemed like a really cool business. You get to own companies that are privately held, get involved, fix them up and then sell them again for more money. I was really intrigued by the buy side. Then I was also intrigued, through a variety of experiences, including some volunteering opportunities at my church in Chicago, and through some trips that I did to the developing world, just opening my eyes to some of the big social and environmental issues we face as a society. It got me thinking, "Is there a way to incorporate the things I'm interested in into my day to day career?"
That all led me to coming out to business school at Berkeley. I moved out here in 2005 to start the MBA program at Haas. I was very laser-focused on finding a job that would combine my business skill set that I had developed over the years with my desire to create some impact in the world. Berkeley was a great place to do that. The ethos as Berkeley is, "How are we going to change the world?" I was always really drawn to the west coast, for a variety of reasons.
A lot of different doors opened for me at Berkeley. I ended up getting an internship at Good Capital, which was an early double bottom line fund, that started in 2007. I ended up getting a full time position with the after I graduated from Haas, and then that really got me started doing venture capital. So I ended up on the buy side, which is something that I really desired to do, but doing venture instead of private equity. I was even more intrigued, and drawn, to the venture model because it's less about financial engineering and fixing things up and spitting it out and more about actually working with these early stage companies to get them on a trajectory of success.
About four years after I joined up with Good Capital I was able to spin off my own fund with Rick Moss, my business partner, to do what we're doing now.
VN: What do you like best about being a VC? What makes you excited?
WS: It's a great business, I love it. I love my job. I love being in business for myself. This has been a very entrepreneurial endeavor that Rick and I have embarked on. We started out very scrappy, our first fund was very small, now we're getting ready to close our second fund at $20 million. To be able to go out and raise $20 million bucks has been a lot of effort, but also very fulfilling to go out there and create this company and raise this capital.
I love that it's a people business, both on the investor side, but more so really on the portfolio/founder side. We're getting to work with some really bright, passionate, scrappy founders. I feel like we have a lot to bring to the table, in terms of helping them, we also learn a lot from them, but they also learn a lot from us. Fundamentally, it's people-based business, and I really enjoy the different teams that we get to work with, from lots of different walks of life.
Also, being at the forefront of innovation, getting to look out onto the future and say, "This technology, this innovation, that these guys are developing could just completely change this industry and create a lot of impact in the process of doing so."
The fact that we get to work with people, we get to influence the outcomes with these companies, and then also getting to be on that forefront of innovation, are the top three things that make me excited about this job.
VN: What is the size of your current fund?
WS: The first fund was $500,000, and our second fund will be $20 million. We did a first close about a year and a half ago and we're getting ready to do a final close, so we've got dry powder that we're investing out of.
VN: What is the investment range? How much do you put into each startup?
WS: We'll make investments of $100,000 at pre-seed, we can sometimes go as high as $200,000 and then at the seed stage we'll make investment from anywhere from $250,000 to $400,000, either in a company that we back in pre-seed or just straight up at seed. And then we follow-on at Series A, and potentially beyond Series A.
Our target size for any one company is about $1 million total, once we're all in with our follow-on investment.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
WS: We were targeting 7 percent to 10 percent equity ownership, with our initial investments, then keep that through follow-on, until Series A, Series B. It may get diluted beyond that, but ideally we like being closer to that 10 percent end of the range.
VN: What percentage of your fund is set aside for follow-on capital?
WS: We reserve up to 2x our initial investment for follow on, so I guess about a third of our fund is initial and then two-thirds is follow-on.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
WS: We're seed stage investors, and we make our initial investments at, what we call, the pre-seed or the seed stage. There really has been this emergence of this pre-seed round, which was probably yesterday's seed round, and these are small rounds, typically less than $500,000, often times just a couple hundred thousand, also similar to where companies are at that accelerator stage, if they're going to go to an accelerator.
It will be about half and half, with half going into pre-seed and the other half going in at seed.
VN: In a typical year how many startups do you invest in?
WS: We're targeting 20 to 25 total for the fund, and it's a four year investment period so that shakes out to be about five to seven, call it six, per year.
VN: Is there anything else you think I should know about you or the firm?
WS: In the world of seed funds, there's this spectrum of low engagement, high number of companies. We've seen funds our size invest in 90 companies, and then we've seen funds our size invest in 10 or 15 companies. We're much more toward that concentrated portfolio approach, where we want enough diversification in the portfolio to make sure we're going to get some good outcomes. But also have a small enough, and manageable enough, size of companies in our portfolio that we can get engaged with our companies to help them get to the next level.
I view that we're very unique in this focus on companies that are pursuing social and environmental outcomes, with business models that scale. There's been this debate in the impact investing world about, do you have to take concessionary return in pursuing an impact, and our answer to that is a definitive no. We're not taking a concessionary return to focus on impact. In fact, we turn that argument on its head a little bit and say, "We're looking for opportunities where the impact reinforces the financial return, and may even lead to outsized financial returns."
We have a slide in our deck that talks about the passion of the founders, the ability of the company to attract and retain top talent, the fact that customers want to do business with this company is because they're mission focused.
Also, our job is to find really great companies to invest in. Obviously there's competition but I would say that we have a competitive advantage with our focus on impact because companies and founders that are pursuing this kind of positive societal, environmental impact, we find almost always have a preference to work with us. So there's kind of a founder preference to work with Better Ventures, not only because we have capital and some expertise to to help them build successful businesses, but because we also have this fundamental focus on the impact, which a lot of other VC firms don't have.
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