Masterclass Live! VC201: How We Evaluate a Deal

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• Where is the transcript for this webinar?

  Speaker 1:
  Good afternoon. My name is Ludwig Schultz, Managing Partner here at Alumni Ventures. Thank you for joining us. We will slowly get started with the webinar today and we will, of course, begin with our disclaimer. So this presentation is for informational purposes only and is not an offer to buy or sell securities, which are only made pursuant to the formal offering documents for the fund. Please review those important disclosures in the materials provided for the webinar, which you can access at this link right here: avfunds.com/disclosures.

  Alright, a couple of housekeeping reminders. You are all on mute and your cameras are all off, so please sit back, relax, and enjoy. This will also be recorded and shared with you subsequently, so if there’s anything that you want to go back over or you want to double-check and review, you’ll be able to do that with the recording.

  The last piece is I really, really encourage you—please, please—at any point during the conversation, if you have a question that you want to ask, please feel free to drop that into the little chat box there. We will try to get to them as we go, if I can see them as we are running, and if not, we will certainly have some time at the very end for Q&A.

  Alright, with that—today’s agenda. So we’ll do some brief introductions of the team and Alumni Ventures. We’ll talk a little bit about venture capital in general—what it is and how it works—and then the meat of today’s conversation will be about how we evaluate deals, with a couple of specific examples of companies we’ve invested in historically. The next piece kind of moves more toward the currently available funds and how we invest. So if you’re curious about and perhaps are new to investing with us, you’ll want to stay for that piece because that’ll get into some of the meat of what we do and how we build portfolios and what those portfolios look like. And then we will, again, as I mentioned, wrap up with some Q&A. So that’s today’s agenda.

  To get us started, I wanted to give you some context about Alumni Ventures more broadly. So, Alumni Ventures overall—we’ve raised over $1.3 billion. We do a raise of around $200 million per year. We invest into, or have historically invested into, over 1,400 startups, and every year we invest into an additional about 250 per year. And that’s all made possible because we are 120 people overall, with 40 investment professionals.

  Now, let me contextualize a little bit. Alumni Ventures is kind of the parent company. 116 Street Ventures, which is for the Columbia community, and Waterman Ventures, which is for the Brown community, are a part of this larger group of Alumni Ventures. I’m, of course, an alum of both of those schools.

  Our team, in terms of investment professionals—you can see here in these small little photographs—is all these folks, around 40 of us, who are looking for investment opportunities for all of our investors, including into these two funds. And we, of course, have our folks across the country in all the major markets.

  In terms of the team that manages the portfolio of 116 Street and Waterman, that is this group. So that’s me, obviously, on the left-hand side. Very briefly—again, Brown undergrad, Columbia MBA. Started my career at Boston Consulting Group. Went to venture capital way, way back in the pre- and post-dotcom days. Then went to a company called Nokia that some of you may be familiar with. Then became a founder for a number of years and then came to join Alumni Ventures just about six and a half years ago.

  I’m joined on the team by Andrew and by Brooke. Andrew started off at Baylor and then did a Columbia MBA. He began his career as an accountant actually at Ernst & Young, which ends up being extremely valuable when we have some very detailed questions about financials and so on—Andrew’s always able to get into the meat of it. Andrew then spent a number of years allocating from an institutional perspective into venture capital funds, so seeing sort of the buyer-of-venture-funds perspective. Then went on to the venture side with a group called Ral Capital, which was founded by Peter Thiel—may be a familiar name for some of you—and then subsequently joined us here at Alumni Ventures. (Oh, and I’m sorry—the piece I missed with Andrew is he has also been a founder, so he created a financial services business along the way as well.)

  Brooke similarly has been a founder of two consumer startups in the past. So you see, we all have this founder perspective to our backgrounds, which I think is extremely helpful both in terms of understanding risk that is sort of unique in the startup environment and also sort of the empathy of the difficulties—the good, the bad, and the ugly, if you will—of what founders go through. Brooke started off at University of Richmond and then did an MBA at McCombs. As I mentioned, he started two consumer retail businesses and was at Funding Circle pre-its IPO.

  Alright, so that’s a little bit about the team. We are all responsible for managing your portfolios.

  Moving now over into the next subject matter: an overview of venture capital itself.

  So, venture capital itself—I think it’s important to contextualize what is this? And I think the easiest way to describe it is—well, these are the kinds of companies that venture capital has historically invested into. So every one of those six businesses—Apple, Amazon, Facebook, Google, Microsoft, Uber—companies that many of us are using every single day, all of those six companies originally, somewhere in their history, very early in their history, had the support of a venture capitalist to make them possible.

  Jeff Bezos, when he was creating Amazon—this crazy idea of selling books online—originally someone was there, a venture capitalist, to support Jeff in building up that business. Same thing for these other companies. So these are great proxies to appreciate the kinds of things that we are looking to as investors into the next iteration of venture-backed businesses. We’re looking for companies that have that potential to grow very large in a pretty short period of time, and obviously, generally speaking, based on some technology that is unique in the marketplace.

  So this is the kind of investment that we do in venture capital, and the kinds of companies that we are ultimately looking for.

  When you turn to venture capital more as sort of an asset class and how it is different or comparable to other assets and financial services—obviously, one of the most important things in any financial service asset class is its relative performance. And here’s where venture capital has very clearly been unique.

  What you see on the chart there is the dark green—that’s the average (just the average, not the best, just the average) venture capital return in a variety of different time periods, after fees in particular. And that’s in comparison to that sort of bluish color, which is MSCI—it’s basically a large public market comparable, so an S&P-type of index.

  And so you can clearly see over a variety of different timeframes that the venture capital markets—the average venture capital funds—have consistently beat the public markets in any variety of different timeframes. So this is one of the key reasons why institutional investors have, for such a long time, applied a pretty substantial piece, an important portion, of their portfolios into venture capital.

  So that’s sort of reason number one.

  Reason number two is actually perhaps—and in some cases—even more important, and that is because venture capital is largely uncorrelated to the public markets. I sit in New York City—Wall Street, downtown—whatever happens today on the markets on Wall Street doesn’t have a direct correlation to what happens with our portfolios.

  It’s important to understand: venture capital businesses are supported independent of the public markets. So these companies can get support, get gap capital, and continue to grow regardless of the turbulence and any volatility that may be occurring on Wall Street.

  That said, ultimately, if you go toward the end state of a venture capital business—before it gets acquired or it goes public—at that stage, at that end state, when it’s getting acquired or goes public, then of course the public markets matter a lot. But we are talking here about a timeframe that might be 10 to 12 years from the original investment.

  So in essence, you can think about venture capital as a largely independent asset that’s going to grow regardless of what happens on the public markets—or grow or shrink. I mean, it could obviously go in any number of different directions—but act independently from what the public markets do over the next 10 to 12 years as those businesses grow and mature.

  There’s actually a really great white paper—for those of you who really enjoy digging in on some of these things—I encourage you to take a look at Invesco’s white paper, The Case for Venture Capital. It talks a lot about this non-correlated piece of the puzzle.

  Alright, turning the page—moving on to how we actually evaluate deals, in the core of today’s conversation.

  The first piece to recognize is that within Alumni Ventures, we’ve spent the last 10 years or so creating a very process-driven approach to be able to evaluate our investment opportunities. Frankly, that’s a necessity. When you have 40 different people going and looking for investments, you want to have a common language, a common perspective of what a good deal looks like and what a bad deal looks like.

  Now, you still want some sort of range of perspective and opinion so that you get a diversity of outcomes and a diversity of different kinds of companies, but we do have this scorecard—which is 120 points, 15 different sections—that we really use to have a common language and compare notes across different teams.

  That said, one of the most critical ways in which we consider deals is the approach that we take in investing is unique in that we are always investing alongside a traditional venture capital fund.

  So these are just—whatever it is—eight, nine of the examples of the several hundred that we like to invest alongside. These are firms that we see as having very long track records, have great expertise in their areas of activity, and have deep pockets in order to support companies through difficult times if they are good companies.

  So this is an important factor to understand about us—we are never beating on the garage door, kind of trying to be the first or the only investor into a company. We’re actually always investing alongside, in the same preferred securities, as these folks. Now, we may not have all of the same rights—they may sit on the board and we do not—but that is very much our approach: to invest alongside these folks.

  As I described, we evaluate each of these deals as well on all of their metrics—and we’re going to talk about each of these in great detail—but just to give you a rough sense: about 500 deals come in per month to our teams. And of those 500, it’s probably about 50 of them where our teams will dig in, we’ll go into the data rooms, we’ll spend multiple cycles with the founding team, and ultimately write up a due diligence report that is somewhere in the order of 15 to 25 pages of our perspective about this company.

  Those are then taken and given to a peer team internally to also review. And so quite literally, just this morning as a good example, one of our peer teams had an opportunity that they had created the diligence for. We had sat down among a couple of peer teams and given feedback on that diligence—asking important questions, asking things where maybe some information was missing, or providing suggestions like, “Hey, these are some additional people or things you might want to look at as you’re evaluating this specific opportunity.”

  If we pass those steps, we then go to an external investment advisory committee that gives us, again, a new set of inputs, a new set of feedback. And at the end of the day, about 20 to 25 of those companies will be invested into per month by our teams across Alumni Ventures as a whole. So just under 5% selectivity overall.

  Alright, moving to the sort of four key areas that we evaluate with each of these companies.

  That first block within our scorecard is the deal dynamics—not because it’s the most important, we just start there. So, deal dynamics—what does this mean? This is talking about the actual financing that we are being given an opportunity to invest into.

  And we break deal dynamics into sort of three bigger buckets.

  Number one is the round composition. What that means is—who is leading this round of investment? Who is the investor that priced the round and is presumably putting the largest check ultimately into the round? What is their knowledge? What is their expertise? What is their perspective?

  And then we’re looking at the existing investors. There are a bunch, typically, of existing investors involved. What are they doing? If they’re backing away and walking off, that’s certainly not a very good sign. If they are doubling their position, that’s a great sign. They have good insight, good information internally, so we want to see exactly what each of those folks are doing.

  And then of course, are the incentives of the investors aligned? We want to make sure that our position—the investor that represents our share class on the board—is aligned with our interests. And so that’s the type of thing—what kind of investor is it? Is it a financial investor? Is it a strategic investor? Is it an impact investor? What are their perspectives on what they want to get out of that round of financing?

  The next bit is then valuation and terms. This is often, I think, what people think of as first in terms of importance and priority—is the valuation of the business. How much is it going to cost us to get access to it?

  Speaker 1:
  We obviously think that’s important, but it is one among many different factors, and the important piece here is really making a comparison of: is this valuation appropriate for this business’s development? How far along it is in its growth as a company?

  In some cases, you can see companies that try—or even successfully get—a valuation that might be a bit outside of market terms. And the question then becomes, well, why do they actually deserve it? Is there something unique that they’ve done that validates that extra-high valuation?

  On the flip side, we also sometimes see companies that may have a relatively low valuation—something that maybe even is a lower valuation than the previous round of financing. Again, you want to sort of understand what the dynamics are. Why is it that it’s come down, or why is it relatively inexpensive compared to the rest of the market?

  These are all things that we want to be digging into and understanding.

  The terms of the round are equally important. Think about liquidation preferences, think about information rights—there’s a long list of things that we’re looking at in legal documents to ensure that the terms, again, are appropriate to that market and to our liking, ultimately.

  Lastly, we have runway. So when we talk about runway, what we’re speaking about is how long will this amount of capital support the business going forward? And the sort of rough rule of thumb in venture capital is that most of the time, companies are raising capital to live about two more years.

  As you’ll appreciate, in venture capital, the goal is really that high growth—as we were talking about with the Ubers and Google and so on and so forth. So it’s really about: what are the milestones that they need to achieve in order to raise the next round of capital? And we want to make sure that they have enough runway to achieve those milestones with this particular round of financing.

  We start getting nervous if the timeline is short or if those milestones are really material or very risky—you want more runway. Again, part of the calculation in terms of the deal dynamics that we want to understand.

  And here you can see one example of a business called Oura. Some of you may have seen this company—in fact, I’m wearing one of their rings and have done so for a couple of the cycles of this business. We are proud owners of Oura. Oura has done quite well for us and continues to grow very nicely.

  For any of you—let’s see, yep, great, the website loaded—for any of you who are curious, I encourage you: if you wear an Apple Watch or you’re interested in monitoring your sleep and your exercise and your stress levels, Oura does all of those things in this quite nice, simple format. The battery life is sort of eight days now with the newest version that they just launched this week, and so I definitely encourage you to think about it—obviously a really good sort of holidays kind of gift, something to take a look at. If you have anyone in your family or yourself or a friend that may have interest in this type of monitoring and understanding better what’s going on with your body.

  Again, in terms of the deal dynamics, particularly, I pointed out that the investors here were Forerunner Ventures and Gradient Ventures (which is part of Google), and Marc Benioff, the founder of Salesforce. Again, that was all kind of part of the consideration for us as we were evaluating the original investment.

  Speaker 2:
  Alright, moving to the second major category…

  Speaker 1:
  …that we look at within a given fundraising or a round of financing that we’re looking to participate in, and that is, very specifically, the lead investor.

  As I described in the earlier slide, we are not a lead investor—so we do not sit on boards, we do not price rounds—and that is a very deliberate choice. Our perspective is: these folks are exceptionally good at what they do. They get to see awesome investment opportunities, and the last thing we want to do is compete with them. This, in our view, would be a very dangerous and foolhardy thing to do. They are really good, so I don’t want to ever compete with them—I want to collaborate with them. I want to work alongside them, get the benefit of everything that they bring to the table without getting in their way. And so this is why, when we are evaluating an investment opportunity, the lead investor is important.

  So, the first factor we’re considering in that is the quality of the track record of that lead investor. What have they accomplished historically? What exits—what investments and exits—have they had historically to show that they have insight, that they’re seeing the most unique and interesting deals?

  And that’s at a general level, but it also is very particular to the stage or the sector of the business that we’re talking about. It’s one thing to have been an early investor in Airbnb, but that may not be very pertinent to a company like a Hawkeye (which we’re going to talk about in a minute), which is in the satellite space. So you want to think about: what’s the sector of knowledge and expertise and value that that investor can bring, as well as the stage knowledge of that investor?

  If an investor is really good and consistently exceptional at seed-stage investments and is suddenly doing a Series D investment—those are very different areas. So we’d much rather see that alignment: a great seed investor doing a seed investment in this particular case.

  The second piece of the puzzle is we’re trying to read the tea leaves a little bit on: what’s the conviction level of that lead investor?

  There are lots of different ways in which you can evaluate this, right? So think about a lead investor where there’s a $10 million financing round and they’re only putting $1 million in—that’s not a very good indication. That’s suggesting that they’re sort of limiting their risk ultimately, and they’re not doing much other than really pricing that round of financing. And if that’s the first time they’re investing in that company—not great.

  Whereas if it’s a $7 million investment that they’re putting into a $10 million round—alright, that feels more normal and consistent and really approaching a very particular ownership target that these funds are typically looking for.

  But there are other dynamics, right? A $7 million check from a $100 million fund—alright, that’s a pretty material amount. A $7 million check from a $10 billion fund—of which there aren’t very many, actually—but at that level, it doesn’t make for a lot of conviction into the particular company.

  So again, trying to get a sense for: how committed is that lead investor to this round of financing and to this company?

  The last piece of the puzzle with the lead investor that we’re trying to evaluate is not just at the fund level, but at the specific partner level.

  Ultimately, there will be a partner from this fund that typically sits on the board of this company. So, what is that partner’s specific sector and specific stage expertise? Very different picture if you have a partner sitting on the board who created and built and sold a company in exactly that sector of activity, than somebody who maybe has never actually built a business, or has never done an investment into a particular sector, or never done an investment at that stage. Again, we’re trying to get a feel for: who is representing our interests on that board and as a shareholder class, and what are their competencies to be able to do so?

  Again, part of the evaluations that we do.

  So, Hawkeye 360 is, again, one of our portfolio companies—as an example in a very different space, which is satellite activities—specifically, satellites that look for radio frequency information.

  What Hawkeye 360’s satellites can do—and they’re up in the sky—is best illustrated, I think, with this imagery here on the bottom, or on the right-hand side of your screen. On the left, you see this is just sort of a classic, normal satellite image of the Earth in the Middle East in particular. As I scroll over, what you see here is this coloration is all the radio frequency information that Hawkeye’s satellites are picking up.

  Effectively, what that means is: there is human activity going on in those locations. It could be marine radio, it could be jamming radar—it could be any number of things that are generating radio frequency, and the Hawkeye 360 satellites are picking all of that information up.

  So in the case of Hawkeye 360, we invested at a relatively later stage and alongside a pair of co-lead investors. On the one hand, we had Insight Partners, which is one of the funds that we very much like to invest with—they have a lot of experience across a wide range of stages and sectors.

  But importantly, the co-lead on that round of financing was a group called Seraphim Capital, which is very specifically a space expert. And so we felt like that was a great combination: you had a space expert and a generalist venture capital fund with lots of good track record and experience coming together to lead the round on Hawkeye 360. So it kind of met our criteria in terms of a lead investor into that business.

  And I encourage you, by the way, to take a look at any of these websites as we go through, just to give you…

  Speaker 2:
  …a flavor for the type of businesses that we are investing into. Alright, finally, finally we’re getting to the third block…

  Speaker 1:
  …which is actually: how’s the company doing?

  I know that in some respects, that’s sort of the most obvious and probably the place where most people would start with their evaluation—and it by all means is an extremely important part of the puzzle—but I think this is a valuable note to appreciate: that there’s lots more that goes into an investment choice than just “how is the company doing?” It is an important factor.

  Execution, specifically—and we break this down into multiple sub-factors.

  The first one here is customer demand—not too surprisingly, right? We refer to in the industry something called traction. Traction is kind of a nice word because it can represent a lot of different things. The easy way of defining traction is revenue and revenue growth. But in some cases where we’re investing, you might be investing into a business that isn’t necessarily focused on revenue growth—maybe they’re focused on building a community first, or maybe they are an open-source business and therefore they’re more focused on the number of developers using their tools.

  In any case, in any example that we’re evaluating, we’re looking for some definition of traction. What is indicated in terms of the customer’s interest in this particular solution? Obviously, equally, the revenue—and as a willingness-to-pay example—is a very helpful shorthand. And certainly, as you get into the later-stage investments, the key thing that we’re going to be looking at.

  Business model encompasses a bunch of different things. In my mind, the two factors that are most important here are:

  • Scalability—so whatever that business model is, can they continue doing that and grow that fairly infinitely without difficulty? Software is kind of the easy example: you write it once and you can replicate it infinitely, effectively at zero incremental cost. But there are other businesses in a similar vein where you can be able to scale the company very fast.

  • The second piece is—yes, some people are sometimes surprised—but we do care quite a lot about profitability. Not necessarily bottom-line profitability, but certainly gross margin, in terms of understanding how much of this business can be replicated and how much can be dropped to the bottom line as this company overall scales.

  So that’s where we encompass the business model in our evaluation.

  The next piece of the puzzle is momentum. There’s a lot to be said for: is the company hitting its stride? Is it hitting a bunch of metrics? Is it now kind of accelerating dramatically? It is one of the harder things to sometimes judge, because yes—it’s easy if you’re seeing 100% or 300% annual growth. That’s obviously what we like to see.

  Sometimes, we’re looking at a company that’s just expected to hit an inflection point on its growth—and sort of piecing out exactly what’s happening there and are the drivers in place—is a very important part of our diligence in that kind of example.

  The next piece is capital efficiency. So in essence, you can think about this as: two equal companies both raised $10 million…

  Speaker 1:
  How well-developed is each of those companies? If one of the companies spent $10 million and has reached $100 million in revenue, that’s one very particular picture. If one company—the other company—has raised $10 million and has only achieved $10 million in revenue, that’s a different picture.

  Now, the other dynamic that gets a little bit complicated, of course, is we are investing across industries and sectors, and certain industries and sectors naturally have different capital requirements. So again, trying to kind of balance that in the overall perspective of what this business can do—also in the long term.

  Lastly, and for all our Columbia MBA folks out there—competitive moats. And what you all recall from value investing—the importance of actually creating something that is unique and defensible as a company—is incredibly important. This, again, is one of these things that varies quite widely.

  When a seed-stage company comes to us that’s been in business for 18 months and says, “We have the most amazing moat,” well, that’s going to be hard to prove. What is it that you’ve been able to accomplish in 18 months that nobody else can replicate in 18 months? Or what is it about your team and their knowledge and their expertise, or maybe unique access to technology? Something has to be there to really be unique and create that moat.

  As you get into those later-stage companies, the question becomes: Alright, well, you’ve done amazing things. Can you sustain that moat? Are there people coming for your opportunity? And so all of those dimensions are pieces that we want to understand when we’re getting to know these different businesses.

  I will turn to an example company here again called Forta Health. Forta serves the pediatric autism market. So they recognized a dramatic gap in care, where families were very often lacking access to care for their children to support them in their autism therapy.

  And so what Forta recognized is there was actually an opportunity to create that gap at the family care level—with the families. They recognized that the first level of care provider training is about a 40-hour training. And so what they determined is there are actually people in the family, or friends or neighbors or grandparents, etc., who are more than happy to do that 40 hours of training so that they could be empowered to do a better job of helping those autistic children—and be then supported by a clinician using telehealth—and to be able to deliver that total therapy, which is actually shown to be better than the standard of care.

  So, simultaneously, they’re solving a family problem with lack of access to care—actually in many cases generating income for a family member to deliver this care—getting better care than they were previously providing for their child—a better-than-standard-of-care outcome.

  And so, from the family perspective, it has become really a no-brainer. And their demand is overwhelming.

  Now, on the flip side of Forta—obviously with any healthcare provision—the question is, who’s going to pay for this? And of course, it’s the insurance companies. And in this example with Forta, the insurance companies are basically just as excited as the parents, because this system ultimately reduces the cost of care quite dramatically from what the existing model is. So insurance companies have been signing up with Forta at a very, very fast rate.

  What that all means is that Forta—basically, we originally invested in them in June of ’22, they launched the company services in December of ’22—by the end of ’23, or December of ’23, they’d already reached a substantial number of millions of revenue, and at the end of this year we anticipate that being even substantially more.

  I can’t give you the exact numbers, but suffice it to say that the growth has been this kind of growth overall. So that’s an example where, in the context of our model, this is a company that has massive amounts of momentum. It has a bunch of other things—obviously a very interesting business model, huge customer demand, have actually been very efficient with their capital—and so they’ve been growing very, very nicely as a business.

  Alright, turning to our fourth and last evaluation point. The fourth piece—and we do segregate it because we think of it as this important—is the team. Venture-backed businesses really, really, really come down to people and capital. And so that’s the kind of critical fuel to making something work.

  You can take a bunch of capital and throw it at a problem and fail miserably. I will tell you that incumbent businesses—large companies—do this all the time. They see an opportunity, they think they can go after it, and they throw lots of money at it—and fail miserably.

  And this is where startups are unique, right? You’ve got a team that is wholly focused on a very specific problem. These teams tend to be about as good in terms of their competence and their ability and their creativity and their communication skills and all the dimensions that you can ever imagine.

  I think the cult of the founder—as is often sort of thought of as Bill Gates or Mark Zuckerberg—these people are all quite exceptional. They can accomplish amazing things. You put a dedicated team of them together to solve a problem, and they really move mountains. You add the capital from venture capital to support that development—and you get something magical.

  So when we’re looking at team, we segregate between two things.

  One is: at the end of the day, there is a CEO. And that CEO ultimately has to make the decisions on a day-to-day basis about where that business is going to go, how that business is going to develop, where it’s going to put its people, its time, its capital—all of those questions.

  And so we’re looking at that very particular CEO and their background and their experience. What have they done historically that gives us confidence that they can do it in this business?

  Yes, I’ll pick on Mark and Bill again, because they are massive outliers. I think sometimes we get into this romanticized image that all the great founders actually dropped out of college and built a business from nothing to multiple billions of dollars all by themselves. They are really unusual.

  The data actually shows that most successful founders are actually a little bit later in their career—often have some experience under their belt, have some specific knowledge in an industry—and then are going out with a great team to go after that.

  The other piece, of course, is that you often have founders who don’t do this once, but do this multiple times. And that often means that somewhere along the way, they’ve succeeded—or failed—or both. And we think of that, whether success or failure, as very valuable. You learn a lot. I learned a lot as a founder the first time—made a lot of mistakes.

  And so the value for us to look at a CEO is to say, alright, what have you done? Have you built a startup before? Did it succeed? Did it fail? Have you accomplished other successes in your career?

  But understand that it’s not so much an academic or traditional sense that we’re evaluating—it’s actually much more about the building skill that’s important.

  And so, I’ll use the example here—and let me just finish off with team.

  So, team—having a great CEO with mediocre people behind them is actually its own indicator, right? A great CEO tends to have a really great team, right? Often people they’ve worked with in the past, people that they’ve brought in from their career in different places with very unique skills and experiences—exactly to support what this company is going to do.

  So similar sort of an evaluation: how have they accomplished what they’ve done in the past and how will they bring that to this particular opportunity?

  So, turning the example to Formlogic—here again, one of our portfolio companies—in a space that you probably have never thought of. But this is precision metal parts manufacturing.

  So, you probably saw in this past week that SpaceX had another very impressive launch and recovery of one of its vehicles. In each one of those launch vehicles—and also the, I guess, chopstick sort of catching vehicle that they had—there are an enormous number of very, very, very specific parts. And those parts have to obviously be successful—can’t fail at any time and under extreme pressure, under extreme conditions.

  Those are the kind of parts that Formlogic manufactures all the time. So that’s what they do.

  But I really want to talk about Paul Sutter, the CEO of Formlogic. And the reason is because Paul is a guy who has built multiple companies over the course of his career. So, the first he sold to AltaVista—kind of dates Paul, for some of you who are familiar with that business—and built the other two into hundreds-of-millions-of-dollars-of-revenue-type businesses.

  That is the kind of founder we like to see. They have accomplished the “from zero to building a business into a really viable and ultimately exiting position” on multiple occasions. That gives us confidence that a Paul will be able to find the way through with Formlogic.

  Now, it is not an absolute. In every kind of business, you’ve got different problems and new problems and things that have to be adjusted. But certainly on a relative basis, picking someone like a Paul to run a business versus somebody who’s not done any of those things in the past—it’s no question about who you’re going to choose among those options.

  So that is the last of our four areas of evaluation on the company side.

  I hope that gives you a feel for our scorecard and how we’re evaluating investments—not just at how the company is doing, not just about how the team is doing, not just about who the lead investor is, not just about who the round is—but all of those things put together into a pretty elaborate 120-point scorecard to make that evaluation.

  And again, that’s kind of the originating team’s work—to pull all that information together and write it up in a diligence report. And then we have a peer review among multiple other teams to give feedback to that originating team on that opportunity.

  The result is a much clearer sense of the risks, a much clearer sense of the opportunities, and also opportunities for us to find ways in which we can be supportive of each of these businesses.

  Speaker 1:
  Alright, we will now turn our attention to the practical—what does the fund look like? If you are choosing to invest with us for the first time, this will be kind of new information. For those of you who have invested with us in the past, this will be quite familiar.

  The starting point that I just want to clarify—because sometimes I think people hear our whole message and they’re sort of like, “Oh, okay, so you’re waiting for one of these lead VCs to send you a deal”—and let me be absolutely clear about this: we are not doing that. In fact, if one of those lead VCs sends us a deal, we are immediately extremely skeptical. Why are they sending it to us?

  Now, our approach is very specific—it is about getting to the founder. Our job is to build a relationship with the individual founders of these companies. The best case is that we actually meet these founders before the lead investors find them, and then we build conviction and make the introduction to those lead investors. That’s our optimal case.

  How do we do it? How do we get to know these founders? Lots of different ways. Obviously, we have 120 employees—about 40 of which are working on the investment side every single day looking for opportunities. That’s already quite a big team looking for investment opportunities. And to be clear, those are all investment opportunities from across Alumni Ventures, and then myself and my team are picking from those deals as well as the deals that we are bringing to the table.

  But beyond that 120, we also have all of our existing individual investors. So we have over—it’s actually 11,000 individual investors—who have invested with us to date. And I will tell any of you today, whether investor or not: we love to hear about investment opportunities. Send them to us. We want to know about these companies before other people know about them. We want to know about them as early as the idea stage. If it’s your nephew or your neighbor, your niece, your college roommate that’s thinking about starting a business—send them our way.

  Obviously, you saw that funnel—it’s sort of a very small proportion of the companies we ultimately meet that we actually invest into, but we want to hear about them. I’ll tell you—my favorite, favorite, favorite way to find out about and meet a new founder is from our existing founders. With 1,400 portfolio companies, there are at least three—maybe even 4,000—founders out there who know what we do and know how we do it. I love it when they send us their friends who are founders, because they automatically know what we do and how we do.

  Alright, the portfolio that we build for you. So if you were to join us in either of the funds that are currently available to these communities, this is what you’re going to get. You’re going to get a fund built by us on your behalf with about 20 to 30 companies in it. Now, those 20 to 30 companies are going to look very different from one another.

  We are going to diversify this portfolio by sector—so different industries, if you will. Different stages or maturities of those businesses. Different geography—largely U.S., about 90% U.S., maybe some international in there. And then by lead investor—so all those different names, you’re going to see a bunch of different lead investor names as well.

  The one that we can’t control for—but you can—is investing over time. We make these portfolios available every single year. Many of our investors join us every single year. We kind of think of it as similar to dollar-cost averaging into venture—building your portfolio over time. So, encourage you to think about that in your total allocation towards venture.

  The last thing I’ll just mention—because it’s sometimes a confusion—when we build these portfolios, or when we are going to invest and identify investment opportunities into companies, we are looking at all companies. So just to be clear: the 116th Street Ventures portfolio, which is built for Columbia alum—we are going to see a bunch of Columbia alum, but we’re not going to exclude non–Columbia alum. Same thing for Waterman and the Brown community. Ultimately, we are going to build you portfolios that are the best possible companies that we can possibly find. Some of those are naturally going to have an alumni connection, but that is not a requirement when we go to invest.

  Alright? Now, obviously we are very proud of what we’ve been building, and we’re still kind of—in some respects—only just getting started as a business. We’ve been at it for 10 years, but these are long-term investments. And so it was kind of nice, I would say, to see CB Insights—which is one of the industry’s analyst groups—put us on their list of top 20 venture firms in North America.

  What you’ll see is this is a lot of the firms that you also saw that we’re investing alongside. So this is kind of logic here, right? When we invest alongside these very strong venture firms and build these diversified portfolios, the result necessarily should be that we can perform ultimately to be in this type of a list of top 20 venture firms in North America.

  Alright, I want to move to the practicalities. I’m going to take a moment’s breath, and I’m going to introduce you to Stacy Sii, who is one of our senior partners here at Alumni Ventures. Stacy, please.

  Speaker 3:
  Hi everyone. I’m sure you’re very excited about the funds after hearing Ludwig’s presentation, so I’m happy to go over some of the key terms.

  First and foremost: minimum investment size for the funds is $25,000 and upwards to $3 million. So don’t worry—we can accommodate anything in between.

  We are able to onboard individual accounts, joint accounts, as well as trust accounts—or even retirement funds. Just let us know what you need; we’ll be happy to accommodate.

  On our end, we do charge a 2% management fee and a 20% carry. But let me walk you through that process to see how it works, right?

  So say if you want to invest $100,000 initially—we will reserve $20,000 upfront. That’s 2% over the course of 10 years. And the remaining $80,000 will be deployed between the 20 to 30 phenomenal companies and opportunities that Wig and the team will identify for you.

  As companies have liquidity events, you will collect the proceeds in full initially. So back in your bank account, you have $100,000 again—which means you got back your management fee. The next dollar you’re entitled to is considered profit. On the profit side, you’ll keep 80 cents on the dollar. The fund will keep 20 cents on the dollar. That’s our profit share.

  We try to make things very simple for you. So it’s going to be one capital call—whatever dollar amount you decide to invest with us, we will require that upfront. We will make sure we have the management fee and everything. We will manage everything within that, and that’s pretty much it.

  We don’t pass through expenses—legal fees, structuring fees, or anything like that. In terms of the term, it’s going to be a 10-year fund. That’s why we take 10 years of management fee upfront. But on the flip side, if a company needs 12 years to find a buyer or go bankrupt, we will not charge you additional management fees—but we’re not going to arbitrarily wind down the fund either.

  Alright? If you have any additional questions, feel free to reach out—we’ll always be happy to answer them.

  And one more thing is that we also can accommodate offshore investments as well. So if you’re an offshore investor, we do have a BVI share class, and we have a lot of experience working with folks. So just let us know what you need, and we’ll make sure that we get it squared away.

  Speaker 1:
  Yeah, maybe one other thing, Stacy—I’ll just drop in here—is the retirement fund angle.

  Speaker 3:
  Yep. Yeah, the retirement fund—sorry! So if you have a retirement fund—whether it’s Roth IRA, SEP IRA, or 401(k) from prior employers—you want to roll over, we can accommodate that as well.

  Usually, a lot of your current custodians won’t be able to accommodate, but we have a third party that we work with. My team here—we are very experienced. There’s also a dedicated team at Strata Trust, a third party we work with, that we can help you onboard.

  So just let us know and we will make sure it’s a warm handoff. It’s going to be a white-glove service.

  Alrighty, so QSBS—there is a potential tax advantage if you want to invest with non-retirement dollars.

  So it’s a federal tax code, and what it says is that if you invest in a company when the company has less than $50 million in assets, and you hold the investment for more than five years—at the point of sale, you’re not subject to the capital gains tax.

  But I would say—I’m not an accountant, and neither is Ludwig—so definitely consult your tax advisor, your lawyers, whoever you want. But this could be a significant savings because of the no cap gains tax.

  Loic, anything else you want to add to that point?

  Speaker 1:
  Yeah, I think it’s a fascinating thing and I think in some respects ties very well with fees, because venture capital is not cheap. Alternative assets are generally not cheap, but this is unique to venture capital, and it is very clearly all about enabling and supporting young businesses to grow. That’s why it’s in the tax code, that’s why it’s been in there for decades, and I think it’s a pretty interesting potential—again, potential—benefit, where you basically could have all the gains up to $10 million per company tax-free at the federal level and at some states as well.

  Speaker 3:
  Alright, another very important thing to cover: the deadline discount.

  So, we’ve already passed the first deadline—so thanks to those of you who have already joined us. And if you’re still thinking about it, we do have a second deadline coming up towards the end of this month: October 31st. If you choose to sign your subscription agreement by that point, there is going to be a 5% discount on the annual 2% management fee. So effectively, instead of reserving 20% upfront for your management fee, we will be reserving 19%.

  So if you know you want to invest with us, that’s actually a savings you could take advantage of. And there’s going to be a final deadline on December 31st. Once that deadline’s over, we’re not going to be able to accommodate any new investors for the current funds—you’ll have to wait until next year. Right? And then—oh, sorry, go.

  Speaker 1:
  Oh, I was just going to say about the deadline—we’re clear, and sorry if you said this Stacy—but it’s a signature deadline, right? So this is about you making a commitment to us to participate. You can fund your investment thereafter. So don’t worry about “it’s only two weeks away.” That’s fine. Signing is pretty easy—funding you can do later.

  Speaker 3:
  Yeah, and one other thing that’s not on this page though—we also do have a loyalty reward. If you hold more than half a million dollars with Alumni Ventures, there are going to be additional fee discounts on the management fee side. And that is not just in one fund, right? It could be half a million dollars across all of our investment products.

  Speaker 2:
  Perfect, thank—

  Speaker 1:
  Thank you, Stacy. I see Amanda has also dropped into the chat the links for you to learn more information, read more materials, actually start your investment process, or schedule time with Stacy.

  So one of the great things you can do here is schedule one-on-one time with Stacy to talk through any questions that you have about this potential investment—talk about it in the context of your family or your situation, whatever that might be. Stacy’s very pleased—as well as our other senior partners—to spend that time with you.

  Alternatively, you can also watch for—or in addition, you can watch for—our Q&A session. I hold a Q&A session every couple of weeks for each of the communities, and that’s sort of a Zoom format where you can come, ask your questions, listen to other folks’ questions, and get some perspective on anything that you’re interested in specifically asking me as your portfolio manager.

  Amanda has also put two emails into the chat. Those emails go directly to her in investor relations, and so that’s a perfect place—if you have a question specifically about retirement fund investment, or offshore vehicle investment, or any of the practicalities of getting this done—

  Speaker 2:
  You can drop Amanda an email there.