Masterclass Live! How Spike Ventures Evaluates a Deal

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• Where is the transcript for this webinar?

  Speaker 1:
  Hello and welcome everyone. I’m Todd McIntyre, Managing Partner of Spike Ventures. Spike is an Alumni Ventures fund for Stanford alumni and friends of the community. Thanks very much for joining us for this webinar on how we evaluate deals, which will also include a brief overview of Alumni Ventures and the Spike Fund for Stanford alumni.

  Working behind the scenes on the call with me today is Spike’s Community Manager, Emily Hamilton. Emily will be collecting your questions throughout the webinar, so please enter yours using the chat function on your screen, and we’ll be sure to follow up right away.

  We’re looking forward to working with each of you who may decide to invest with us, and again, thanks for being here today for this look at venture investing with Spike and how we evaluate deals for our portfolio.

  Before we begin, I need to briefly get some legal notices out of the way. We’re speaking today about venture investing in our Spike Ventures Fund VIII and our views of the associated landscape. This presentation is for informational purposes only and is not an offer to buy or sell securities, which is only made pursuant to the formal offering documents for the fund.

  We ask you to please review important disclosures in the materials which we’ll provide following today’s webinar. You can access them using the link in the materials or by going to avfunds.com/disclosures.

  And finally, just to provide a few housekeeping reminders: You won’t be on camera, and we’ll be muting everyone throughout the entire presentation. We’re recording today’s webinar, and afterwards, we’ll follow up by email with a link to the recording as well as the link to our Fund VIII data room, where you can review additional materials about the fund.

  So, just to provide you with a brief intro to the Spike team, I’ll start by giving you a bit of my background. I’m an experienced venture investor with more than 20 years of early-stage tech company operating experience, and in the time since I graduated from the GSB in 1994, I’ve worked across capital structures all the way from seed-stage investments to public offerings. I’ve done that not only as an entrepreneur and in a variety of senior operating roles, but also as a board member, advisor, and investor.

  Prior to Spike, I was founder and Managing Partner of a life sciences and digital health venture fund that was backed by one of the largest and best-known private investment offices globally. I also spent several years as a senior leader in a technology incubator fund, where my primary responsibility was establishing and spinning out new companies around groundbreaking core technologies.

  The three consistent themes in my career have been innovation, tech incubation, and capital formation. Having been a company founder and builder myself, I bring understanding and empathy for what it takes to manage a successful venture-backed company.

  Joining me at Spike is a strong team of investing professionals, including Alene Giga, who is a Partner on the team. Before joining Spike, he worked at American Express Ventures and GE Ventures, focused on enterprise B2B, FinTech, and machine learning investments. Alene’s connection to Stanford is from his master’s degree in Management Science and Engineering, which is where he first became interested in the entrepreneurial ecosystem.

  NRA Ramaswamy is a Senior Principal on the Spike team. Previously, NRA was a venture investor at DCVC, a VC fund focused on deep tech investments. He’s connected to the Stanford community through his undergrad degree in engineering at Stanford, as well as two master’s degrees there, most recently finishing up an MBA at the GSB.

  Now, to the agenda today: We’re going to walk through venture capital as an asset class, provide a quick overview of what venture capital is and a little bit more about Spike and Alumni Ventures’ role in this space. Then we’ll get into the main part of the presentation: how we evaluate deals.

  We’ll also talk about syndications, which are really opportunities for Spike investors to flex their own deal evaluation muscles on their own. We’ve got a relatively large audience today, and I think a lot of people with varying levels of experience or exposure to venture capital.

  So, to get started, we’ll provide some background just to level-set. We’re going to be talking today about venture capital as an asset class and how we as a company approach it.

  What is venture capital? Well, at its core, it’s an investment strategy that’s focused on investing in equity securities of relatively young operating companies. We’re buying ownership stakes in businesses, and the underlying investment we’re evaluating is an operating business where the value will be created if that company gains traction in the marketplace, increases its revenue and earnings, and builds value over time.

  We’re really trying to identify promising businesses that can grow into large companies.

  What makes venture capital distinct as a marketplace is, first, it’s private. All the companies we’re invested in are privately negotiated transactions between people who manage money and companies that are looking to raise money. You can’t create investments in this asset class by going to any listed exchange, and you can’t seek to sell things easily through any sort of managed exchange.

  So it’s a long-term asset class, which has demonstrated its value over time, but does not have the kind of liquidity that comes with many other equity alternatives.

  In addition, the strategy tends to focus on young companies. We back a range of businesses, from those that are as early as a founding team with just an idea, all the way to businesses that are already demonstrating strong traction.

  Another important characteristic of the types of businesses that end up in a venture capital portfolio is that they tend to have very big aspirations. These businesses typically focus on disruption in very large addressable markets and have strategies built around innovation, technology, and intellectual property.

  And you’ll see a lot of businesses like the ones listed here that have those types of characteristics.

  Speaker 2:
  Traditionally, venture capital has revolved around private partnerships that generally serve a fairly select number of institutional investors drawn from the worlds of pensions, endowments, sovereign wealth funds, and similar pools of capital.

  Alumni Ventures was founded around the notion that there’s an opportunity to build similarly professionally managed venture portfolios but make them available to accredited investors who otherwise have limited ability to gain exposure to this important asset class.

  We’ve been at it now for about 10 years, and we’ve grown to serve the needs of more than 10,000 individual investors, becoming the number one most active venture investor in the U.S. venture landscape.

  Over that period, we’ve accumulated a portfolio representing in excess of $1.3 billion and growing, with investments in about 1,300 portfolio companies.

  The job of constructing and managing this portfolio is the hard work of a group of teams spread throughout the country, including about 40 full-time venture investors.

  Given the volume of investing activity we navigate to construct the portfolio I just described, we’re evaluating a large number of individual investment opportunities. The VC business, like many investment businesses, is really a business of saying “no”—eliminating a lot of inbound opportunities through due diligence and finding the best of the best, which represents a very small percentage of the total opportunities we evaluate.

  To do that consistently and with intellectual honesty, we need a well-established process that everyone understands, buys into, and abides by, just to handle the sheer volume of deals we see.

  We’ve distilled this into a consistent process supported by an underlying scorecard. I’m going to use today’s webinar to take you through the thought process behind that scorecard, how we manage our process using it as an important tool, and share the details so you can understand how we think about deal evaluation—and maybe even incorporate a similar approach as you think about making your own personal investment decisions.

   

  The first category of the scorecard is deal dynamics. The central idea here is to dig into how the round has been structured, and there are three main subcategories. It’s important to remember that Alumni Ventures is purely a co-investor, meaning that we don’t lead rounds or set terms. So all these evaluation criteria need to be viewed through that lens.

  The first subcategory is round composition. Is the round being led by a brand-new investor—meaning this is the first time the firm is investing—or is it being led by an insider, a firm that has already invested capital into the company in prior rounds?

  If you think about it, you can understand how this leads to different incentives for that lead investor. When I say lead investor, I’m referring to the one setting the terms of the round, including valuation and structure.

  If I’m a VC that has already sunk capital into a given company, I have a different set of motives compared to a VC that’s never invested before and is writing a check into the current round as a new investor. All else being equal, Spike prefers to invest alongside a brand-new investor because our incentives are more purely aligned.

  However, there are certainly exceptions. Sometimes a company is growing rapidly, and existing investors step up and offer a term sheet to prevent the company from raising outside capital. That’s actually a good situation to invest in. The trick is really digging into the motivations of the players around the table and understanding the dynamics of the round.

  Valuation and terms are the next subcategory. This is about how the deal has been structured, including valuation—how much of the company investors will own after they invest—as well as other special rights like liquidation preferences.

  We evaluate this based on both internal and external data, essentially looking at how the terms of the deal compared to averages for companies of similar stage and sector.

  Finally, we assess the runway. Based on the amount of capital the company is raising, how long can they go before they need to return to the market to raise another round?

  For example, if a company is spending $2 million per month to run its business and raises a $15 million round, that only gives them about six months before they need more funding. This matters because you want a company to be able to hit proof points and achieve a step up in valuation before the next round.

  At Spike, we typically look for at least 18 to 24 months of runway for a company raising a round. This number can vary slightly depending on the stage of the company, but 18 months is generally the minimum.

  An example of an Alumni Ventures investment in this category is a company called Yassir, a super app targeting French-speaking Africa. The company raised a Series B in 2022, and Bond Capital—led by well-known internet investor Mary Meeker—invested $100 million of the total $150 million round. Bond was a brand-new investor, which we viewed as a great signal demonstrating the lead’s belief in the company and aligning their incentives with ours.

  Category two is an evaluation of the lead investor. As I’ve mentioned, our approach is not to lead rounds ourselves but to be the co-investor of choice alongside other investors who take the primary role of negotiating terms and exercising governance post-closing.

  With that approach, it’s important for us to understand and have a high degree of confidence in who those lead investors are. Many of you are likely experienced public market investors who know that very few managers systematically outperform the broad market over time. That’s why names like Peter Lynch and Bill Miller resonate—they are rare examples of meaningful outperformance.

  In venture capital, while it’s still intensely competitive and difficult to systematically outperform, there are firms that have demonstrated a consistent ability to generate above-market returns for extended periods.

  A big focus of ours is aligning with investors we believe are best positioned to achieve these above-market returns. The lead investor’s firm quality and track record is the first screen we use to focus our portfolio on the right deals with the right lead investors.

  In addition to historical investment performance and similarity of past outsized gains to the current company’s thesis, we look for indicators that show the lead investor has a high level of conviction.

  This conviction can be demonstrated by the size of the check written—both in absolute dollars and as a percentage of the total raise—and by a willingness to commit time to serving on the board.

  Most partners at venture firms limit the number of boards they serve on because it requires a meaningful time commitment to do well. So board participation can be a strong signal of conviction.

  We also look beyond the firm’s identity and dig into the specific partner leading the deal. We assess their expertise in the company’s industry and consider their track record with both winners and losers that are relevant to the investment thesis.

  We aim to understand whether the partner can be a good steward and advisor to the CEO as they navigate their journey. This ability is often a separate skill from simply identifying promising companies.

  You have to live with these deals for potentially a decade before knowing the outcome.

  An example that stands out for us is a database software company called SurrealDB. The Series A round was led by FirstMark, a renowned software investor with successful exits like Shopify and Airbnb.

  The lead partner from FirstMark is a luminary in enterprise software investments, serves on the company’s board, and has led other successful database company investments. In this deal, the lead investor increased their ownership in the company by more than four times, signaling very strong conviction. These combined factors gave us confidence to co-invest in the round.

  The third category of our scorecard is execution, which covers traditional diligence questions around company performance.

  First is customer demand. We assess this differently based on the company’s stage, but the core question is: Has the company proven that customers are willing to pay? Have they secured paying customers, or in industries like biotech, have they achieved critical milestones such as FDA approval?

  Next is the business model. How profitable and scalable is the solution the company has built?

  Then we look at company momentum. We want to invest in companies at the start of a big upswing, not at the peak. Entering early allows you to capture more upside.

  Capital efficiency is another factor. Has the management team used prior capital prudently? Are they scrappy and making every dollar count, or have they been frivolous with spending? This is usually a good indication of how they’ll handle future capital.

  Finally, we consider competitive moats. What’s the company’s differentiation or “secret sauce,” and is it strong enough to help them outperform competitors as they grow?

  A great example here is Deliverr. Back in 2019, Deliverr raised a Series C round when it was entering hypergrowth mode. Revenue was up 10x year-over-year, and they had just closed a major partnership with Walmart.

  This was a perfect example of catching a company at the beginning of a significant upswing. Deliverr was eventually acquired by Shopify, delivering a great outcome for Spike and Alumni Ventures investors.

  The fourth category is an evaluation of the leadership and management team, which might seem obvious, but in all businesses—and especially with early-stage ventures—after all of the analysis we do in the first three categories, developing confidence and conviction in the ability of not only the CEO but the entire team to execute is a critical threshold piece of our analysis.

  There’s obviously some work that goes into understanding the history, track record, experience, and outcomes of the leadership team when evaluating deals that pass our initial screen. But we go much deeper in our diligence. The overwhelming focus is to get comfort with the management team through direct interactions—asking questions about the business, understanding their demeanor, vision, and strategic insight, assessing their ability to focus on executing a plan and being accountable, and evaluating their skill in recruiting and retaining talent.

  This is a critical part of the diligence process, and we distill it down into a specific score when making final investment decisions.

  As an example, we’re highlighting a company we were excited to invest in because of the outstanding quality of its team: an AI company based in Toronto called Cohere. The founding team brings an impressive blend of experience and innovation to artificial intelligence. Aidan Gomez, the CEO, is recognized for co-authoring the groundbreaking Transformers AI training method at Google Brain, which set new standards in natural language processing and is the backbone of NLP interfaces like ChatGPT.

  The entire Cohere team’s collective background in pioneering AI research, coupled with their big tech commercial experience, underscores their suitability to drive Cohere toward significant advancements in AI technology and positions the company to establish and maintain leadership in this rapidly evolving and highly competitive industry.

   

  Now that I’ve explained the process we use to evaluate deals, let’s talk about how we gain access to great investments to consider for our portfolios in the first place.

  Alumni Ventures is a leading venture capital firm focused on investing in companies founded by graduates of universities like Stanford, Harvard, Yale, Columbia, and many other well-known schools. With over 10,000 individual investors and 1,300 founders in our portfolio companies, we’ve built an extensive network within the startup and venture capital ecosystem.

  Our alumni-centric approach creates a powerful nexus of connections, empowering startup founders by providing not only capital but also access to a network of over 750,000 community members from the leading university communities we serve.

  One of our key differentiators is this highly engaged community of investors, entrepreneurs, and operators, and it’s absolutely central to how we gain access to great deals.

  With 130 full-time employees, our team leverages this network to provide unparalleled resources and support to the startups we invest in. We know from experience that our value add is highly appealing to entrepreneurs, as we provide one of the strongest Rolodexes in the venture industry.

  A core part of our value proposition is connecting portfolio company founders to advisors, potential clients, partners, and even future employees. Through community events, digital networking platforms, and personal introductions, we empower entrepreneurs to build relationships that help accelerate their company’s growth.

  Beyond connections, we also have an in-house team called CEO Services dedicated to helping our portfolio companies operationally. They leverage their expertise and our community to assist with recruiting, marketing, product development, and other key functions.

  To sum it up, Alumni Ventures is differentiated in the marketplace by our engaged alumni community, a robust platform for connectivity, and hands-on support that helps drive company growth. This creates a compelling value proposition in venture capital and provides us with great access to compelling deals.

   

  Now, moving on to one of the benefits of being a Spike investor: syndication.

  In addition to receiving a diversified portfolio of quality venture investments, one of the great perks of being a Spike investor is gaining access to what we call syndications.

  These are deals where we’ve secured an additional allocation and can offer that allocation directly to our community, allowing members to invest additional dollars into an individual deal.

  These deals are vetted by our deal team, our investment committee, and at least one other sister alumni fund. You’ll have access to our diligence materials and scoring methodology, and you can listen to a recording of our investment committee meeting to support your own decision-making process.

  You decide whether or not to invest in these individual companies on your own, and participation is completely optional.

  Think of this as an opportunity to take an active hand in managing your own venture portfolio by selectively increasing your exposure to deals that you personally find attractive.

  You might wonder why a company would give us incremental allocation to offer to individual investors. There are many reasons, but they typically revolve around the value we bring to the table.

  For example, consider a consumer product company: having that company presented to a large number of high-net-worth, well-educated consumers—like the investors at Spike and across Alumni Ventures—is extremely valuable. That’s just one example of why a company might welcome the opportunity for us to syndicate a deal in this way.

  When you see a syndication opportunity come through, you’ll have the option to log into our secure data room, where we’ll provide the key diligence material for that deal.

  This typically includes:

  • Diligence report: Our assessment of the opportunity and rationale for investing.

  • Investor presentation: The pitch deck directly from the company, showing how the company presents itself.

  • Term sheet: A legal document showing the detailed terms of the deal (summarized in our diligence report).

  • Capitalization table: Shows the relative ownership of different investors in the deal and the motivations of those around the table.

  • Financials: Company-provided historical financials and projections, giving insight into how the company sees its future financial results.

  In our diligence report, we’ll often discuss our own take on the financials, but you may want to review the company’s projections yourself. Depending on the deal and industry, other documents might be provided, but this is the core set of materials we normally include.

   

  Here are just a few examples of syndications I want to highlight quickly. The main point is that we present a wide variety of syndication deals—by industry, stage, and geography—for you to consider.

  For those wondering how to become a Spike investor, I’ll summarize the key terms and logistics.

  If you decide you’d like to join us, we keep things simple, easy to understand, and transparent. We charge the equivalent of a 2% management fee over the 10-year life of the fund, collected in a single capital call. You send us one check, and then we send a series of checks back to you over the fund’s life as companies in the portfolio have liquidity events.

  Once we return all of your investment capital and the fees back to you, there’s a 20% share of profits for Alumni Ventures.

  Typical first investments are from $50,000 to $100,000, but we accept investments from $25,000 up to $3 million. We encourage you to think about your long-term investments and what percentage of that you might want to put into the venture asset class.

  You can invest with cash, through trusts or retirement funds, and we can also accommodate investment vehicles designed for non-U.S. citizens.

  There’s a regulatory cap on the number of investors we can allow into Spike, so if you’re interested, we suggest committing early. It’s important for us to know you’re interested so we can hold a spot for you.

   

  If you have questions, you’ll receive an email after this webinar with information on how to talk to one of our senior partners directly. They’ll be happy to discuss your specific situation and answer any questions you might have about Spike or Alumni Ventures.

  With that, we’ll conclude this webinar by emphasizing: If you’re interested in investing in Spike, please follow the link provided in the presentation materials or visit us at av.vc/spike to review our fund documents.

  If you have any questions about the fund, please book a call with me or one of my senior partner colleagues—we’d be glad to speak with you.

  Thank you again for joining us today and for your interest in Spike Ventures. Be safe and have a great remainder of your day. Thank you.