Camilo Kejner
Managing Partner
Angel Ventures
Expert Contributor

Raising Capital is Difficult: Explaining our Funnel

By Camilo Kejner | Thu, 12/24/2020 - 13:00

I don’t know, and I couldn’t tell you – so I won’t even attempt to tell you! – how other fund managers make their investment decisions. What I do know is that, while we all probably look at the same data, at least when it comes to the numbers, the way we interpret that data and how willing we are to let our biases factor in our decision-making processes varies wildly. So wildly, in fact, that we could all be looking at the same datasets and coming up with distinct investment decisions as well as valuations. And if a manager is also adept at looking into all the subjective factors surrounding an early stage pre-series A or series A company, the decision-making range broadens even more. That said, we cannot and should not all be investing in the same companies. Variety is good. Different criteria make capital more accessible, allow for more entrepreneurs to raise capital and for investors to not collectively do away with portfolio theory by having entirely too much overlap. 
This explains why in Latin America, while there undoubtedly exists some “competition” for what are perceived to be the absolute best deals in the market, the top firms are never turned down (we have never lost a deal we really wanted, for example) and as a result, other managers and relative newcomers end up funding companies that in hindsight, they should not have. But of course, hindsight is 20/20 and as the saying goes, “everyone is an amazing coach with Monday’s newspaper under their arm.” OK, maybe I made that up, but you get the point.

And yet in the grand scheme of things, the total number of companies raising capital is still minuscule and many a great founder has struggled entirely too much with the fundraising process.

The idea here is to walk you through why such a small fraction of all startups raise capital by drilling down to the single manager level. Not by detailing the process, which I am happy to get into at another time, but merely by looking at the numbers. Numbers that are, without exception, tied to the amounts of the assets under management and investable capital each manager has at any given point in time.

Angel Ventures manages two funds. Our first is a US$20 million fund with a 2013 vintage that made 21 investments. The second, is a US$70 million vehicle that we still expect to grow before its final closing and is a 2018 vintage that has made 12 investments thus far. We have also made several investments through special purpose vehicles (SPVs) over the years in companies that did not fit our funds’ theses. In all, out of two funds and over roughly eight years, 33 investments have been made. Stick with me, this information will be useful in a minute.

We are good with data analysis, this much I know. We compile it, assess it, obsess over it and try to extrapolate from it what we believe is the best decision in every case. Yet, many of the companies we invest in still fail miserably, as do most companies the venture capital industry invests in. Explaining why that happens is far more complicated than just plainly chalking it up to “statistics,” and while we perform a post-mortem exercise on each failure to determine root causes and where our analysis went awry, it is not always easy to understand and definitely a rich enough subject matter for an entirely separate article.

This is what our funnel looks like: over eight years, we have engaged with 6,432 startups, most of which submitted their information voluntarily (but I am convinced we are good at mapping verticals in which we are interested and proactively reaching out to companies in those spaces). Of those, we met and had at least one meeting with 2,960 (46.01 percent). The reasons why the others did not even get to that point range from not fitting with the fund’s thesis to plain old ridiculousness of the investment proposals or valuations to founders simply not following up and everything in between.

We then took a serious look at 368 companies (5.72 percent of all the submissions and approaches we made). By “serious,” I mean that we deemed them fitting and appealing enough to be presented to one of our sectorial committees. These committees are composed of industry experts in each of the sectors we primarily look at, serving as advisers to my partner and I in determining which companies we should present to our investment committee for a final investment decision. In aggregate, roughly 75 experts in fintech, health, e-commerce and consumer retail, foodtech, proptech, general tech and other industries participate in the process and are rewarded just like we are for our collective success ratio: we share a portion of carried interest (our payout as managers for generating returns for our investors) with them. Of course, the work does not end at selection. Rather, it begins. These are six to 10-year relationships we embark on and as any venture capitalist who believes in the wares they are selling will tell you, “that’s when the value add kicks in” (insert witty comment here).

Let us carry on. Of the 368 companies we presented to our first-tier investment committees, 56 (0.87 percent, again of the original 6,432) were approved for extended due diligence (legal, accounting, background checks, the works!) and presentation to our second-tier and final decision-making investment committee. And you best believe by the time we present something at that level we are already close with the founding teams. Bonds have been forged, massive work and dedication has gone into prepping the companies and we are already emotionally invested in the outcome. Yes, diligence is performed to avoid potential pitfalls we may have missed along the way, but what we want for every project we present at this instance is committee approval. And as I mentioned earlier (told you it would be useful), our investment committee approved 33 companies for investment (0.51 percent of all the projects we have ever seen in our firm’s history).

So, there you have it. About one half of 1 percent of all companies we meet have a realistic shot at receiving funding from us, and a little over 1 percent of the ones we talk to in depth receive funding from Angel Ventures. If you do some research – and we did, of course – you will find these numbers very much align with those of the top performing global venture capital household names. Does it mean we are doing something well? I have no idea, but I sure do hope so.

Adolfo Babatz, Clip’s founder and one of the first entrepreneurs we funded, has a phrase that I love but mostly choose to believe holds true: “The best entrepreneurs have a natural tendency to be attracted to the best venture capitalists, and vice versa.” If nothing else, I hope going through the funnel at Angel Ventures has afforded you some insight into just how slim the numbers are and just how successful entrepreneurs who manage to raise institutional money already are, irrespective of the commercial or operational success their businesses may or may not achieve in the end.

Photo by:   Camilo Kejner