SaaS Interviews with CEOs, Startups, Founders
Behind The Term Sheet: How this $76m Seed Stage Fund Really Works
22 Sep 2023
Chapter 1: What is the main topic discussed in this episode?
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Guys, Emergent Ventures, AI-focused, most recent fund, $76 million fund closed in January of 2021.
Chapter 2: What is the Emergent Ventures fund and its focus?
They've made about 14, 15 investments out of that already. Target a $1.5 million check size and a 10% equity stake and usually hold $3 to $5 million in that fund for their winners that are really taking off in terms of the reserve.
They got two partners today looking to scale, really focused on, again, those AI machine learning startups as they look to deploy money in a smart, capital-efficient way. Hey folks, my guest today is Anupam Rastagi.
He's a seasoned venture investor and his letter played a substantial role in over 20 successful technology investments globally, ranging from early to expansion stage and several larger exits. This is a little unique for the show. We rarely have investors on, but Anupam reached out and I said, you know what, let's get him on. He's early stage.
He's backed some similar founders that we've backed at FounderPath. So Anupam, we're excited to have you today. How are you?
Thank you for having me. Doing great.
You bet. I didn't mention this in the bio, so I should. You are now with emergent.vc. You guys have a sector focus on AI and machine learning tools, or how would you edit that statement?
Yeah, Emergent Ventures. We are a six-year-old firm, seed stage, first check. We lead seed rounds, AI, led SaaS across both application and infrastructure layer. And then we partner closely with founders on building out their go-to-market, getting to product market fit, and then future fundraising.
Yep. And help us understand sort of, I guess, last fund that you guys closed, what was the size and what's your thesis? How many portfolio companies, that sort of thing?
Yeah, we are investing out of a $76 million core seed fund. And we would do about 22 to 25 investments per fund. And we do a fairly concentrated approach to seed investing. And there's two of us general partners. And we invest the fund over three to five years.
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Chapter 3: How much capital does Emergent Ventures allocate for initial checks?
I always get perspective from founders, obviously, on the drying up of equity markets. Getting your perspective would be valuable here. When I look at your guys' deal flow, that fund looks like closed on Jan 1st, 2021, at least publicly in the press. That's what was listed. And your guys' most aggressive or most active month or quarter was back when you guys did nine deals in one quarter in 2021.
How are you guys thinking about deploying capital today?
Yeah, sometimes the public reporting and the actual events are a bit out of sync because of when companies announce these rounds. I'd say a vast majority of pre-seed investments we do don't get announced for a while. But yeah, I'd say we've been at a pretty consistent five, six, seven deals per year throughout this fund. And that's what we have done in the last six months.
We've done three deals as well. And last year we did six deals. So we've been right on pace. And 2021 was about the same as well. So we haven't, you know, when the market is hot, we didn't really ratchet it up too much. And then in what is perceived to be a slower market, but I see that it's a pretty thriving market. We've been maintaining a pace.
It's really about how often we meet really high quality entrepreneurs. We see about 600 to 1,000 deals a year. So we invest in about 1% of those. So whenever we see a great founder, we're going to be able to invest.
It's an interesting statistic. How do you define deal seen per year? Is that a formal application by a founder or do you count a casual email from another VC as seeing a deal per year?
Yeah, I'd say the six to thousand, of course, that includes a superset of everything that passes our desk. I'd say we probably spend a meaningful time with 100 to 200 of those where we take a call and do some research and do some thinking on it and more. So, but yeah, I'd say deal scene is a wide term, which includes things coming in from a number of sources.
I'd say the best ones are usually from a common connection. Often, you know, folks have their, you know, either prior bosses or colleagues or folks I work with that would know us and they would send us, you know, the mutual connect would often send us a warm intro. But yeah, we are very happy to receive cold email as well. And we receive tons of that. And then also through events and other things.
And what's average check size typically?
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Chapter 4: What is the investment strategy for follow-on capital?
Do they have time to spend with you? And then also, I'd say the future thing really comes into, I'd say, you know, everything is going fantastic. Then the providers don't matter as much to founders. But oftentimes, it's not very clear if things are going super fantastic or not. And there, especially in times like these, that becomes important to have someone who
can continue supporting the company. And also I'd say seed has gotten deconstructed. So I'd say it's very rarely the case that a company just does one seed round and then goes straight to series A. I mean, that of course does happen quite a lot, but in many other cases, the company ends up doing a seed two or a seed extension or pre-series A or pre-seed and seed.
And so in that second seed round as well, we can be pretty proactive where we see the company has made requisite progress. And that becomes really important to keep the company going rather than having to go out to put another round before they're ready for series A. What paper are you typically sitting on?
Are you doing sort of safe or priced rounds?
Yeah, it's a combination of both. So we are, yeah, we're agnostic to that. We're happy to work with whatever the founder wants to as long as, yeah, you know, safes are always faster and easier. So we are pretty comfortable with that. But yeah, we do equity rounds as well.
What should a founder expect to pay in terms of legal fees if you're doing a priced round?
Yeah, that's a good question. It varies a lot. There's a pretty wide range, I'd say. For a $3 million round, I would have seen everything from, you know, for a price round, you know, 10K to 50K. It's a pretty wide range. I'd say it's somewhere in the 20, 25K seems to be median range.
Yep. And how do you, in terms of the money you guys spend on your legal team to redline back and forth with the founder, does that usually come out around 10, 20, 30K? Or for a 1.5 million check, what does that look like on your end?
Yeah, that's about right. Yeah. Okay. And do you pass that down? We try and give it in the $10,000, $20,000 or less range. Safe is lower. It's closer to the $10,000 or lower. And then equity round, it's a more complex round with other rights have been negotiated and other things that can get in this legal diligence and other things. Yeah, it gets trickier.
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Chapter 5: How many deals does Emergent Ventures evaluate annually?
Yeah, quite a wide range, safe rounds, pretty clean. We can do it in as little as a few days and we have done it. And then in some cases where there's complex, you know, we have quite a few cross geography companies. So all our companies are US market focused, but we have quite a few companies that are building in places like India.
We also have companies from places like, you know, Europe and other places. So sometimes those require more work and more legal review. And sometimes they may require changing the structure, which the funders anyway plan to do. And those could take, you know, a few months to three months. That's a median is probably three, four weeks.
Yep. Three, four weeks. Okay. Very good. That's helpful. And then what about your source of capital? Single big LP pension fund endowment or no, you know, hundreds of, you know, smaller checks?
Combination. So we have a few institutions that are investors, which are bulk of the capital is from those institutions. And then we have a bunch of individuals actually who are very well placed in the enterprise space. So a number of successful founders of companies that have had good exits and then senior executives at pretty much any enterprise company you can think of.
So a lot of those folks have skin in the game and they're also a very helpful source for our founder community. helping them navigate to product, market, freedom, and beyond. So yeah, it's a combination of institutions, which has a lot more reckoning and long-term and good support pillars for us. And then individuals who bring a lot of operating expertise with them.
What are the negatives? So a founder listening right now, talking to a potential seed lead, and they learn that that funds investors are either pension funds, endowments, or individual angel checks. What are the downsides to each of those kinds of groups from the founder's perspective, not from a fund's perspective?
I would say, you know, I don't know if that has a very meaningful impact on the founder directly. What could matter to founders is the fund being around and being prominent over time or not. So if the fund, let's say, invests in your company and then it just shuts down six months later or something like that, that's probably the worst case scenario or one of the bad case scenarios.
So I'd say as long as there's...
Well, what can a founder ask to try and deduce that from a VC fund? Obviously, the VC fund is not going to say, we're shutting down in six months. So how can a founder can try and ask questions around that to get a sense?
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