Afore risk company Capital burst onto the scene for the first time with the aim of institutionalizing that round of angels, friends and family. Now, after investing in more than 80 companies over five years, the eight-person team has come up with a more targeted way to do it: offering a standard deal and raising what it claims is the largest dedicated pre-seed fund on the market.
The general partners of Afore Anamitra Banerji and Gaurav Jain tell TechCrunch that they’ve closed a $150 million fund fueled almost entirely — about 85% to be specific — by existing LPs. The new investors represent the rest of the capital, which brings Afore’s assets under management to $300 million.
With the new fund, the size of the check and the valuation will not be reversed according to agreement. Instead, Afore is launching Afore Alpha, which it calls a standard pre-seed deal that offers founders a $1 million principal investment through a $10 million post-money SAFE. The money, in addition to the resources and advice of the Afore team, is offered in exchange for 10% ownership of a company.
The new standard terms will apply to any startup, regardless of geography, that is accepted into Afore Alpha.
While it’s not novel for investors to give startups more money sooner — just take a look at the increasing size of early-stage rounds — it’s rare for one venture firm to offer multiple startups the same deal. Venture firms have increasingly started launching their own in-house accelerators (for example, Sequoia and Andreessen Horowitz), but many are still investing on a deal-by-deal basis because of a multi-stage approach, Jain thinks.
“It would be tempting to hedge our bets and say, hey, look, maybe we should also invest in companies that have significant traction because now we can write big checks,” he said. But, the firm knows what they are good at and believes that the founders care more about investors who are focused on one stage. Most of Afore’s portfolio companies to date are first-time founders, an approach it plans to continue as assets under management. Of course, the company has experience cutting first checks, estimating that it has led more than 80% of the rounds where it has invested. Portfolio companies include BetterUp, Modern Health, Petal, Overtime, BenchSci and Neo Financial.
The terms are a gamble. Startups in the pre-seed world don’t have strong revenue or metrics, so it can be difficult to value them beyond weighing supply and demand. Regardless, Afore believes the $2 million post-money valuation offered by traditional accelerators is just an “unfairly low valuation in 2022.” But, that’s not where the subtweet ends.
Afore Alpha puts the company in direct competition with accelerators like Y Combinator and Techstars, or programs like A16z’s recently unveiled START. The co-founders noted that their deal is five times the capital and five times the valuation, compared to what other accelerators offer.
While Jain noted that Afore has often invested in startups before going to Y Combinator, he believes that some of the best founders want more from their first pay writers. He noted that even with Y Combinator’s new standard deal, startups will only receive the additional $375,000 if there is a follow-on deal and along with a most-favored-nation clause, whereas Afore gives the money up front and has no buy-out clauses. MFN.
“The challenge with raising just a couple of $100,000 is that you’re forced a couple of months from now to go to Demo Day and try to raise more capital and you’re kind of on a constant fundraising treadmill,” he said. Jan. “We think it’s very disruptive for founders. They should get a good amount of capital and then go head over heels and build the business.”
One risk of a standard deal is that Afore’s portfolio may start to look homogeneous. If you only invest in startups that are worth a $10 million valuation, I guess you can’t funnel checks into some nameless, untested moonshot. In response to this quibble, Jain said that not all founders will get a $10 million valuation, only those accepted into the Alpha program. That means that not all Afore operations will be standardized, only those within the program (which the company expects will make up the vast majority of investments). It is a remarkable hedge, but fair.
At a glance, Afore’s optimism feels very 2021, even as 2022 reminds the broader start-up and start-up community that valuation corrections are inevitable after an extended period of hype. Afore’s larger check size could help startups navigate a period of uncertainty with a longer runway and save them from having to raise funds when terms may not be so friendly. However, high valuations come with difficult expectations, and startups could also cave in trying to grow to prescribed value.
Banerji believes that cycles aside, companies need $1 million to hit early milestones.
“Raising $125K means founders have to raise in 90 days guaranteed. How can that be the best option? How can you build a company like this? he said. “By 2022, the venture community should be able to offer founders at the beginning of their journey fair, transparent and meaningful treatment.”