645 Ventures, a venture capital firm that invests in tech companies at the growth seed stage, has released its first software tool — the 645 Ventures Cap Table Simulator.
This tool helps founders to avoid an upside-down cap table, which occurs when investors (in aggregate) own more of a startup than the founders and its employees, according to Aaron Holiday, co-founder and general partner of 645 Ventures.
“Many founders are not fully aware of the impact of raising multiple notes ahead of a Series A, and they unknowingly dilute themselves much more than they desire,” Holiday wrote in an Oct. 30 Medium post. “These founders are being caught off guard as notes mature and other notes convert to equity during the next priced round — often times at the Series A.”
Twitter users seemed happy to hear about the new tool. “This is what diversity in leadership looks like,” one tweeted. “THANK YOU @AHolidayiii and the entire team @645ventures for empowering founders with knowledge and transparency.”
Another tweeted more details about the software: “And in case anyone is wondering, it all runs locally in your browser, none of the data you input ever hits the web nor our servers, so nobody will ever be able to see it. Have fun!”
“Diluted founders” is a term used by venture capitalists to describe what happens when startup founders gradually lose ownership of the company that they created.
As a startup progresses through multiple rounds of venture capital funding, the VCs providing the financing will often want more and more ownership of the company, according to Investopedia. The founders must surrender ownership in return for the capital, diluting their ownership in the company in exchange for capital to grow their business.
The need for the 645 Venture Cap Table Simulator arose out of structural changes that have been happening in the last few years in the seed stage fundraising landscape, Holiday wrote. “In particular, because of the proliferation of seed funding sources and the fragmentation of seed into accelerator capital plus pre-seed, seed and post-seed funding, these initial rounds are often the most expensive capital that founders are accepting.”
Increased dilution at the first institutional seed round is mainly due to:
“These factors are resulting in heavy compounding dilution on future cap tables, a situation that is very difficult to reverse once a deal is closed,” Holiday wrote.
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Holiday and co-founder Nnamdi Okike are not typical venture investors. Their firm, 645 Ventures, closed in August 2018 on $40.6 million for its second fund. The first fund was $8 million.
The VC firm has made 46 investments, the most recent being Oct. 3, 2019, when they invested $4.5 million in Panther Labs. It has had five exits, including Abacus Labs, Rifiniti, and Source3.
Okike is a first-generation American whose parents emigrated from Nigeria and Germany. Holiday’s mother worked in the collections department of Sears and his father was a substance abuse counselor in New Orleans, according to Techcrunch.
They drew on their backgrounds — Holiday at Goldman Sachs and Okike at Insight Venture Partners — to build a new model for early-stage investing.
A computer scientist, Holiday grew up in New Orleans’ sixth ward and attended Morehouse College. His professional career started at Goldman Sachs, developing algorithms for high-frequency trading. Wanting to be more active in money management, Holiday attended business school at Cornell and began working with the university’s BR Venture Fund.
A Harvard alum, Okike had been involved in angel investing and went to work as an analyst at Insight Venture Partners in 2002, just after the dot-com bubble burst. There, he realized that the data-driven approach used by Insight could be applied to earlier-stage startups.
“What I was seeing was that there was a proliferation of data on startups that you could use to drive an outbound sourcing model on startups,” Okike told Techcrunch. “Insight’s model was a team and using data that they were acquiring manually. What I started to see was that you could automate a lot of the data collection and you could do it earlier.”
At 645 Ventures, they’re seeing a sense of urgency from VCs to close rounds quickly. It’s motivated by “too much capital chasing too few deals,” Holiday wrote. That can be good for founders, but the pitfalls for making rushed decisions and expensive rounds are upside-down cap tables and pro-rata rights that constrain future Series A investors’ allocations.
“This is the current state of the seed stage market and we suspect it will likely to continue,” Holiday wrote. “As a result, we are releasing software tools for founders to quickly evaluate the downstream impact of their seed stage round decisions.”
Holiday claims the tools will help founders in setting round terms and determining who might be the best VC partners, and empower founders to make smart and fast decisions with a higher degree of confidence.
The first tool is the Cap Table Simulator which helps founders evaluate the impact of notes (SAFEs or convertible notes) or priced rounds on their cap table by the time of the Series A round size closing. The Cap Table Simulator answers three fundamental questions for founders:
Holiday said the firm was founded in 2014 with a mission to partner with teams to help them “Bring the Invisible to Life”.
Historical norms are being challenged in venture capital due to geography, demographic changes in VC ranks and the rise of alternative funding models, Holiday wrote.
“At 645 Ventures, we are students of the concept of category design, popularized in the book ‘Play Bigger‘, which asserts that the best companies build new categories that result in behavioral change, thus altering the perspective on what is possible,” Holiday wrote. “These companies don’t compete to be incrementally better, but instead, aim to be completely different.”
