Why We Are Pre-Seed Impact VC Investors
“Time flies when you are having fun,” right? Not always. While we typically associate fun with ease – think a day at the beach or watching standup – there is another lesser-known category of fun, what social scientists define as “Type 2” fun. Type 2 fun is earned – it’s the type of fun that is grueling in the process and rewarded with a deep sense of satisfaction achieved only through accomplishing the challenge — like climbing Mt. Everest or completing a 5,000 piece puzzle.
Out of all available investment opportunities, from stock and bonds to bitcoin and real estate, venture investing is considered the riskiest. Roughly 75% of startups fail that manage to raise a minimum of $1 million in venture funding. In addition, at Temerity, we allocate funding for early-stage ventures: companies in their pre-seed or seed raise. For these early-stage companies, an investment is made when a startup is at its most volatile: few employees; a yet-to-be-proven business model; and little to no revenue.
Roughly 75% of startups fail that manage to raise a minimum of $1 million in venture funding.
And while we are at it, we like to up the ante. Discovering and believing in a startup that successfully matures into a large, profitable company is nearly equivalent to finding a needle in a haystack. We are on the hunt for a needle in a hayfield: the early-stage + impact startup. Grueling, yet rewarding? Let’s call this Type 2 investing.
Think of early-stage impact investing as climbing Mt. Everest. We take our hard-earned skills climbing the rise and fall of venture capital and take it to the extreme: locating impact founders who are creating solutions addressing society’s largest challenges and gaps in equity. Google, Facebook, and Amazon raised money because of their economic potential, not their positive impact on society. Impact startups, on the other hand, receive significantly less funding than their non-impact peers because they are stereotyped as less scalable. Less capital means these impact solutions will take longer to make a real, visceral impact.
Helping to improve equality, food access, intergenerational wealth, and offsetting the impact of climate and systemic oppression is no day at the beach. But its results leave us with the bone-aching satisfaction of supporting visionaries climbing the toughest mountains.
The New ROI: Returns On Impact
In startup land, there is a common anecdote about the Four CEOs a business will need. The visionary takes you from $0 to $1 million, the warrior takes you to $10m, the manager takes you to $50m, and the marathoner takes you to your first billion. Each of these phases requires a different set of business acumen, leadership skills, and world outlook.
We enjoy the visionary part of the creation process: turning an unproven vision into a proven and scalable business model. The startups we invest in typically have an initial prototype with a few paying customers but have yet to earn more than $100,000 in revenue. In startup lingo, these companies have not achieved product-market fit. In impact, we find fewer business degrees at the helm and more specialized interests: field experts, passionate advocates, and behavioral scientists who are hoping to accelerate impact through the fast-paced engine of business vs. universities or government.
In impact, we find fewer business degrees at the helm and more specialized interests.
It’s here we find both the greatest opportunities and risks: if investing is only about financial returns, empowering non-finance leaders feels like a risk. Yet, with impact founders, investing in their world-improving visions – the greatest return is an improved society, and in turn, healthy financial returns.
Research suggests there are 27X traditional VCs than impact VCs. Fewer impact investors mean impact startups get less capital. Less capital means figuring out how to make your vision work with far less capital than non-impact founders which leads to increased failure rates. The result is less overall returns for impact VCs. While traditional VCs produce annual returns (median net IRR) of 10% to 20%, impact VCs see returns at far lesser ranges of 6% to 17%. We’re not scared though. These stats inspire us to beat the odds and build a great impact VC. We relish the challenge of it.
Be The Change You Wish To See
“Rising tides lift all ships.” Climate, a polarized political system, increasing obesity, the decline of mental health, growing gaps in wealth: there has never been a need greater than this to invest in impact than present day. We designed our impact investment thesis on the belief that the greatest chance to improve our conditions is to empower innovators instead of institutionalized systems.
And there is promise: Millennials and Gen Z consider the social impact in their employment and spending decisions at higher rates than previous generations. While impact startups represent only a fraction of venture-backed companies today, we believe the majority of businesses will need to have social impact coded into their DNA in 20 years. We are proud to be among this new wave of investors ushering these startups into the next decade.
Millennials + Gen Z consider social impact in work and spending decisions at higher rates than previous generations.
It may all sound cliche – but it doesn’t make it less true. Time favors the bold, and we are putting our money where our values are. Impact investing takes tremendous intention, fortitude, and willpower, much like putting together that 5,000 piece puzzle. We are not sure what it looks like yet, but when we complete it, we know the intrinsic reward of summiting our impact Everest will be worth 100X a lazy day in the sun.
