The investment landscape has changed dramatically over the last decade. The expansion of growth-stage investing and the development of early-stage investing and seed funding as their own categories has altered the industry. Despite this categorization, over the last few years, seed investors have been putting fewer dollars into deals, according to Crunchbase. At the same time, larger venture funds are taking a less direct active role in early-stage investments, as it could limit their ability to invest in competitive startups that emerge later.
But if investors are able to see deals mature before investing and know there is a higher likelihood of the startup not failing, then why does anybody bother to invest in early-stage startups? Particularly if it is such a high-risk market to be involved in and any pay off is likely to only come five, ten or even fifteen years later.
Well, for early-stage investors it comes down to believing in a vision of how our society could possibly be.
At TSVC, we decided to focus on early-stage startups instead of startups that are in the growth-stage, because of the inbound excitement, satisfaction and reward, and the outbound potential of assisting an entrepreneur to find their end goal and realize their vision. Investors that focus on early-stage investments are in a distinctive position to help propel businesses into the growth-stage and help them succeed.
Regardless of what stage you invest in, there will always be competition, you work with partners and you compete with others. Peers and friends inevitably end up vying for the same deals. It is seldom intentional, but often the end result, so the best way for anyone to succeed is by playing to their strengths. And that is what we do at TSVC.
When we make an investment we use a decision framework. First, it’s the evaluation of the three pillars - team; market potential; technology or product. After meeting each of the criteria, the second part begins, the synthesis of the three pillars and the final judgement call with conviction. From our historical data, more than 1 out of 10 times we strike gold, a ratio that puts us ahead of most competitors.
Getting started is never easy, but early-stage investing is a crucial component of the broader startup ecosystem. Here are 10 reasons why we at TSVC invest in early-stage startups:
There is no better fulfilment than choosing to join an entrepreneurial journey, particularly so, when you share a common vision. Although the journey itself is full of unknowns, we make each investment decision with conviction in our judgement. Our investment in the first round of Carta is a prime example. Carta’s early selling point was to turn paper stock certificates into an electronic version - nowadays people have coined it “software eats the world”. However, many VCs at the time didn’t foresee that managing investor’s cap tables would have the potential to grow out of a niche business market.
We only invested a small amount of money, but we were excited about the company. Carta was tackling a problem that had certainly been a pain point for us as a fund, and we knew that we couldn’t have been the only ones who would appreciate the tool. They were building a solution for every type of investor. As a vision, it made perfect sense to us. And although there was not much data at the time to support the idea, we were excited about the vision of building a tool for the future. Looking back, we take considerable pride in our investment, as Carta has grown into a healthy unicorn.
Being a part of a startup’s journey from the very beginning, going through their ups and downs, celebrating their successes, and learning from their failures is immensely rewarding. Obviously, the depth in which we are involved with the company varies from company to company. For some we will be deeply involved, sometimes as a board member or advisor to the startup, other times we are just there as a resource they can turn to if needed.
As an early-stage investor, you can help shape the success of your portfolio company from the very beginning. Often when we are heavily involved we have an influence on outbound company strategy. We have a say in recruiting styles, the direction of the company, and certain pertinent choices. We enjoy being more involved and helping shape a startup’s journey.
With some portfolio companies, however, we have the philosophy of positioning ourselves as the “grandparents”. At a high level, this means that we don’t influence the day-to-day operations of the company, but take on the role of experienced advisors ready to listen whenever the need arises.
When we choose a company to invest in, we have to make sure that we can be hands-off, that they have all the necessary things to support and be successful themselves.
There is never a dull moment in the startup world with technology evolving and advancing non-stop. Having been in the business for the last decades, we are continually awed by the new ideas, products and visions that people come up with. As an early-stage investor, we get to constantly learn new things and fulfil a thirst for knowledge, and we witness and are a part of history from the very beginning. We get to witness disruptors and be privy to the next technological advancements that will come to shape our society. Of course, with this, there is a process of constant learning and reevaluation based on our successes and mistakes.
As mentioned earlier, it is essential, particularly in the industry of early-stage investing, to play to your strengths. Investing in early-stage startups allows you to learn from and gain experience across a variety of sectors.
The TSVC team is composed of senior and experienced entrepreneurs. Most of us have been through two up and down cycles in Silicon Valley. We have founded our own companies, we have made mistakes and we have all learnt from them. This has provided us with the ability to support entrepreneurs from the very start of their journey. We understand the issues that they face and know the questions they need to ask.
Additionally, our entrepreneur's view on historical tech developments guides us in envisioning how the future will look like in 5-10 years. We look out for trends before any hype or racetrack has been established. This is one of the main reasons why we can spot opportunities much earlier than other investors. For example, in 2011 we invested in Lex Machina is an AI startup for legal services, way before AI became the hot topic it is today.
Our own experience provides us with a solid judgment that helps us to make the right kind of decisions when it comes to what sort of vision and company to invest in. Utilizing the breadth of our experience and knowledge in a variety of different sectors, we use our team to make decisions that we all believe in. We analyze any data that we do have, we test the entrepreneurs, and we ensure that they are able to show a promising level of execution.
As a team, we have a wealth of operation experience. We successfully advise founders when they start and support the company through its growth. Although we are content to be in the background at the early stage, we are equally happy to be hands-on if they need an advisor on board. Then as the company grows and blossoms, the role that we play decreases.
That being said, supporting the company from the very beginning allows us to stay engaged and provide introductions to new investors and partners. At the moment we don’t help position startups to go public but we can have an influential role in the major decisions that are being taken.
Investing in early-stage companies allows us to continuously use and build on our past operations experience and skills. We are able to use what we learnt ourselves to help others succeed.
We also have a strong network of resources that are well-fitted for early-stage startups. We love to leverage our resource pool and help founders because we were founders and we experienced the same trials and tribulations. We embody a founder to founder type of relationship.
The majority of our TSVC team are technologists. We are hands-on as practitioners, and we appreciate the future value of technology before it materializes.
For example, when we look at AI, we evaluate the product ourselves. We have twelve partners that understand the technology at its core and are capable to test it. We don't need to rely on a third party to give us some kind of artificial input. When you have this level of experience, investing in early-stage startups gives you the opportunity to evaluate and understand the type of products and technologies that would be successful on the market. This ability to be hands-on from the beginning enables us to help entrepreneurs shape and fine-tune their vision. It allows us to be transformative.
Over the last 10 years of investing we have built deep and broad deal sourcing networks that we trust. This has enabled us to ensure that we have a diverse portfolio of investments in various sectors. Many times, the big opportunities lie at the intersection of two industries. Ginkgo BioWorks is one classic example of the cross-section of biology and computer science. Many VCs develop a thesis for biotech companies or software SaaS companies, but they are hesitant for a cross-sector play. In that regard, we have a big advantage in the fact that we have expertise across multiple industries. We are able to spot opportunities even when there are no successful references in a particular sector.
As another example, we have recently invested in Preveta in the health tech space. Preveta uses software to manage the process and treatment of chronic patients. Instead of many different practitioners struggling to coordinate results, treatments and operations, it is handled by one central practitioner.
The health tech space has always been complicated to sell, however now we are starting to see a merge with enterprise software. The reason the healthcare space is tough to invest in, is because it is often difficult to find the right team - one with a suitable combination of software expertise and medical background. But it is an essential industry for us to be involved in, and the combination of healthcare and enterprise software is something that is just the kind of thing we will bet on. With Preveta, we did not wait for any other investors to lead the way, we made the choice to be the first to invest because we believed in the vision and the founding team. It is clear to us that this company solved a real problem that desperately needed to be addressed, and we wanted to help be a part of the solution.
As an early-stage venture fund, TSVC has a winning record of investing in unicorns. During 10 years of operations, we have 5 unicorns in our portfolio, including Zoom, Carta and Ginkgo Bio to report today and we expect more to come. With insufficient data and evidence to predict the ultimate successes of these companies, we are proud of this achievement.
Investing in early-stage startups and depending 100% on our own conviction makes us stand out from the plentiful short-term investors. We are constantly learning and adapting our learnings, and we get to use our own methodology and decision framework to make investments. We are not bound by the short-term ups and downs of Wall Street. We are the early bird catching the worm. We are at the forefront of a future trend and already ahead of the many that are chasing after it trying to profit.
Achieving over a 100x return for an investment is an extremely exciting part of investing at an early-stage. In theory, TSVC is definitely in the high-risk, high-reward business. With the track record of the past ten years and the relentless efforts to improve on how we operate, we see no reason to move away from it.
For late-stage VCs, the typical playbook is to have a valuation multiple for a public company in the sector as a reference, and then to apply the discount when assessing a private deal and make investment decisions. While that model could work well for deploying large capital amount, that is not the business TSVC has any advantages in or aspired to get into.
In our eyes, if you could buy Zoom at 11 cents, why would you want to buy it at $3 dollars a share?
Our intention in this industry and with TSVC is to always build from our strengths in the seed-stage and then continue to build value along the way, sometimes with partners. With our vast experiences of being entrepreneurs and raising money for our own startups in the past, we know how to think like the founders that we are supporting.
We are mindful that many fast-growing startups will need big capital down the road. Being a seed-stage investor, we get to recommend late-stage funds to a startup. We choose to stay at the early-stage and build partnerships with late-stage investors in the eco-system. We choose to be a part of something bigger than just ourselves.
It is important to remember that early-stage investing might not be for everyone. However, for us as TSVC, we love every part of early-stage investing. Every unicorn starts from a tiny startup, and we choose to be at the beginning of their journey.
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