Venture firm Afore Capital first splashed on the scene with the aim to institutionalize that angels, friends and family round. Now, after investing in over 80 companies over five years, the eight-person team has landed on a more specific way to do so: Offer a standard deal and raise what it claims is the largest dedicated pre-seed fund in the market.
Afore general partners Anamitra Banerji and Gaurav Jain tell TechCrunch that they has closed a $150 million fund fueled almost entirely, around 85% to be specific, by existing LPs. New investors account for the remainder of the capital, which brings Afore’s assets under management to $300 million.
With the new fund, check size and valuation won’t be invested on a deal by deal basis. Instead, Afore is launching Afore Alpha, what it’s calling a standard pre-seed deal that offers founders a $1 million lead investment via a $10 million post-money SAFE. The money, as well as resources and advice from Afore’s team, is offered in exchange for 10% ownership of a company.
The new standard terms will apply to any startup, regardless of geography, that gets accepted into Afore Alpha.
While it’s not novel for investors to give more money to startups earlier — just take a look at the growing size of early-stage rounds — it is rare for a venture firm to offer the same deal to a number of startups. Venture firms have increasingly started launching their own in-house accelerators — take Sequoia and Andreessen Horowitz for example — but many are still investing on a deal by deal basis because of a focus on multistage, Jain thinks.
“It would be tempting to hedge our bets and say, 'hey, look, maybe we should also be investing in companies that have significant traction because we can now write big checks,'” he said. But, the firm knows what they’re good at and thinks that founders care more about investors who are focused on one stage. Most of Afore’s portfolio companies to date are first-time founders, a focus it plans to continue as assets under management scale. 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 bet. Startups in the pre-seed world don’t have revenue or hard metrics so it can be hard to value them beyond weighing supply and demand. Regardless, Afore thinks that the $2 million post-money valuation that traditional accelerators offer is just an “unfair lowball valuation in 2022.” But, that's not where the subtweeting ends.
Afore Alpha puts the firm 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 more capital, and five times the valuation, compared to what other accelerators offer.
While Jain noted that Afore has often invested in startups before they go to Y Combinator, he thinks that some of the best founders want more out of their first-check writers. He noted that even with Y Combinator’s new standard deal, startups will only receive the extra $375,000 if there is a follow-on deal and alongside a most favored nation clause — while Afore gives the money upfront and doesn’t have any MFN clauses. Y Combinator reached out to TechCrunch to correct the record, saying via e-mail that "every company gets the extra $375k when they join YC, but at terms that are negotiated with future investors."
“The challenge with raising just a couple $100,000 is that you're forced within a couple of months to go to Demo Day and try to raise more capital and you're just sort of this constant treadmill of fundraising,” Jain said. “We think it is very disruptive to founders. They should get a good amount of capital, and then go heads down and build the business.”
One risk of a standard deal is that Afore’s portfolio may start to look homogenous. If you only invest in startups that deserve a $10 million valuation, I’m guessing you can’t funnel checks into an unproven moonshot without a name. In response to this qualm, Jain said that not every founder will land a $10 million valuation, only those accepted into the Alpha program. That means that all of Afore's deals won't be standardized, only those within the program (which the firm expects will make up the vast majority of the investments). It's a noteworthy, yet fair, hedge.
At a glance, Afore’s bullishness feels very 2021, even as 2022 reminds the broader venture and startup community that valuation re-corrections are inevitable after a period of elongated hype. Afore’s larger check size could help startups navigate a period of uncertainty with a longer runway and save them from having to fundraise when terms may not be as friendly. However, high valuations come with tough expectations — and startups could also buckle in trying to grow into their prescribed worth.
Banerji thinks that, cycles aside, companies need $1 million to hit early milestones.
“Raising $125,000 means founders have to raise in 90 days guaranteed. How can that be the best option? How can you build a company like that?” he said. “In 2022, the venture community should be able to offer founders at the start of their journey a fair, transparent and meaningful deal.”