Why You Should Invest in Veteran Entrepreneurs, According to Veteran Investors

By Jules Miller

Originally published here on LinkedIn on September 7, 2017

After World War II almost half of veterans went on to start their own businesses, in large part because GI Bill from that era offered attractive low interest loans. Today only 4.5% of post-9/11 veterans have started a business, despite more than 25% expressing interest in starting their own business. Limited access to capital is cited as the major deterrent.

This latent need for funding has not gone unnoticed; the veteran community is waiting anxiously to see if The Veterans Entrepreneurial Transition Act (VET Act), originally proposed in 2015, will be passed by the new Congress. This Act would allow the SBA to conduct a 3-year pilot program for up to 250 veterans to use their GI Bill benefits as collateral for a loan to start a business, similar to the original post-WWII GI Bill.

“When I see veterans and talk to them, I see an entrepreneurial spirit there. That they have a lot of the makings it takes to be successful business-runners...We have an untapped resource of economic growth, of job creation, of GDP contribution in our veterans. We need to tap that resource."
-New Jersey Senator Cory Booker @ 2016 LunaCap Ventures Veteran Pitch Event

In addition to the uncertainty on public funding for veteran-owned businesses, there is very little private capital actively investing in veteran entrepreneurs. This is somewhat shocking, considering the data. There are more than 3 million veteran owned businesses in the US employing 5.8 million people, and generating more than $1 Trillion in sales. Veteran entrepreneurs are also 30% more likely to hire other veterans.

At LunaCap Ventures, investing in veterans is a core part of our thesis. In honor of our 2nd Annual Veteran Entrepreneur Pitch Event in NYC tonight, here’s why other investors should consider investing in veteran entrepreneurs too, according to the incredible veteran investors on our investment team.       


PAUL CAPON - Managing Partner

Why you served? I entered the Air Force Academy in the summer of 2002, not too long after 9/11. For me, the service provided a chance to gain leadership experience, work with people from all different backgrounds and serve my country after a national tragedy. I knew that the military experience would be relevant to my future career, but I highly underestimated it’s impact as I built my businesses and found myself relying on many of the skills I developed in the Air Force.   

Education: Air Force Academy/Columbia Business School/London Business School.

Service: Two tours in Afghanistan. Kandahar - Logistics lead for FOB build out for TK, Dwyer and Wolverine. Kabul - Convoy Commander and lead Embedded training team commander training the Afghanistan National Police.

Current affiliations: Co-Founder NYC Military Officers Association of America (MOAA) Chapter, CFA Society of New York’s Veteran Round Table member, Joint Service Academy Network (JSAN) NYC Air Force Lead, Air Force Reserves.

Why invest in veterans? Veterans are trained to be entrepreneurs. We know how to make tough decisions in an uncertain environment and build teams to reach a common objective - the hallmark skills necessary to build a successful company.


TIM KOPRA - Venture Partner

Why you served? I initially attended West Point knowing that it would provide me with a great education. I soon learned that training to serve as an Army officer would offer so much more. I began to understand the value of dedication to duty and service as a leader, lessons have been part of me throughout my career.

Education: West Point/Georgia Tech/US Army War College/Columbia Business School/London Business School.

Service: Army aviator, experimental test pilot and astronaut; 101st Airborne Division (Air Assault), 3rd Armored Division - Desert Shield/Storm, Comanche Helicopter Program and NASA.

Current affiliations: 1836 Veterans - Combined Arms.

Why Invest in veterans? Veterans are mission-focused, team-oriented, know how to lead and will work tirelessly to get the job done.



Why you served?

I come from a modest background and was an imperfect secondary student with limited aspirations. As I matured I corrected course, worked hard and eventually gained admission to Yale for my undergraduate education. I recognized and appreciated my good fortune, however I was not aware that my improbable story of upward mobility was simply impossible in most countries. After studying abroad in China and Central America, I realized I owe a great debt to our country for affording me the opportunity to succeed. Serving in the Marine Corps began my lifelong journey to repay it.

Education: Yale/Chicago Booth.

Service: Marine Corps Infantry Officer. Two tours in Afghanistan - Platoon Commander, 1st Battalion, 9th Marines in Marjah, Helmand Province, Afghan Army Advisor in Nimruz Province with II Marine Expeditionary Force.

Current affiliations: Bunker Labs Mentor, Veterati Mentor, Yale Veterans Association.

Why invest in veterans? Many veterans are intelligent, highly-trained and wield a more adaptable skill set than most civilian counterparts. Numerous well-intentioned managers want to hire veterans to thank us for our service, but this perspective is flawed. Skilled veterans do not need charity, they need opportunity. In the correct roles, veterans will add value beyond expectation.



Why you served? I was 12 years old and living in New York City when the Towers fell in 2001. The attack devastated the city, and several of my family friends lost their lives. I was left with a deep desire to join the effort to rectify the wrongs that had been committed to the people of the United States. Growing up I was always fascinated by the Marine Corps; my older brother was a military history buff and when I was eight, he taught me about their core values and shared stories about some of their major battles. Ultimately, I was compelled to fulfill my childhood interest after the tragic events of 9/11.

Education: Boston University/Columbia Business School (2018).

Service: Marine Corps Infantry Officer with 3d Battalion, 2d Marines. Weapons Platoon Commander, deployed on the 26th MEU in support of OEF. I also had the privilege of leading a Combined Anti-Armor Team platoon.

Current Affiliations: Vice President of Columbia Business School’s Military in Business Association (MIBA) club, Service 2 School mentor, MOAA member.

Why invest in veterans? Veterans have the skillset necessary to adapt and succeed in almost any scenario. The business world may be a different setting, but the principles learned by veterans still apply. The ability to overcome uncertainty, make decisions with less than perfect information and win in challenging environments make veterans well-suited to start and run successful businesses.


Veterans - thank you for your service. We can't wait to see...and fund...the amazing companies you build next!

VCs should find Pegasus, not hunt Unicorns

By Jules Miller

Originally published here on LinkedIn on August 14, 2017

This month the entire LunaCap Ventures team and I have signed on to the Founders Pledge, a global community of founders and investors who have committed to donating a percentage of our personal proceeds from the business or fund to charitable causes post-exit. 

As a mission-driven fund with an “impact-light” thesis of investing in the best military veteran, women and underrepresented minority founded business, signing on to the Founders Pledge was a no-brainer for me. It’s aligned with our mission and values at LunaCap Ventures, and generally who we are as people. 

We’re proud to join more than 35 other venture firms as signatories, and believe that giving back to charitable causes is something that all venture investors should do, especially right now. 

Instead of hunting for unicorns that may lead to forgiving bad behavior from founders, and consequently normalize bad behavior for investors as well, the venture industry should focus on finding Pegasus. I’ll explain more.

What is the Founders Pledge?

By way of background, the Founders Pledge is a global initiative launched out of the UK-based nonprofit Founders Forum. Signatories legally commit to donating a minimum of 2% of their personal proceeds to charitable causes of their choice.

Since launching just over two years ago in June 2015, Founders Pledge has confirmed commitments valued at more than $310M (actualized donations of $10M) for charitable causes across 950 pledges in 21 countries. They have a partnership with Y Combinator and notable pledgers include companies such as Spotify, Shazam, Commonbond, SoFi, Funding Circle and WeWork. Though this initiative started with Founders, now partners at more than 35 VC firms have signed on, many with their full teams. Instead of equity, investors pledge their personal proceeds from the carried interest of their fund. When we win big, so do the causes we pledge to support. This structure aligns extremely well with the risk/reward profile of venture capital.

Making the World a Better Place (Sort Of)

The power of Silicon Valley, and of entrepreneurship in general, is the allure of having an outsized impact on the world in a short period of time. Entrepreneurs create new products and services that will significantly change the lives and behaviors of people and companies within a few years. The best entrepreneurs I’ve seen are almost maniacally mission-driven. The specific mission varies, but they have a clear vision of how they can make the world a better place. When I started working in Silicon Valley nearly 15 years ago, the power of these mission-driven companies was intoxicating. Everywhere I looked there were founders who truly wanted to make the world a better place, with the side benefit of creating a big business and making some money, in that order.

Lately, I’ve been getting the distinct impression that the priorities are now reversed. The entrepreneurial fever pitch has reached it’s peak. Being an entrepreneur is glamorized in the media, and people who otherwise would have worked on Wall Street, taken a corporate job or started a lifestyle business are launching new startup businesses and seeking venture investment. Many of these founders have little or no prior experience running a business of any kind or managing teams and other stakeholders. There is still a lot of lip service around being mission oriented and wanting to change the world, but making money and feeding individual egos seem to be the real priorities now.   

There is absolutely nothing wrong with wanting to make money, and as an investor that is the business I’m in. But the true magic of Silicon Valley, in my opinion, is the alignment of mission-driven idealism with ambitious growth goals. The quest to build products or services that have a world-changing impact at scale can result in massive financial success. Unfortunately it seems as if some of this original magic has been lost with the industry shifting priorities to financial success first, mission later (if at all).   

The Role of Venture Capital

Venture capital is and will continue to be a fundamental enabler of these world-changing entrepreneurs. Since the Small Business Administration Act of 1958 in the US allowed for direct investment into private companies, Venture Capital has been used to finance some of the most innovative companies in the world. Apple, Google, Microsoft, Facebook, Genentech, Intel, FedEx, Starbucks and many more household brands used venture investment to grow their businesses quickly and fundamentally change the way we do business, consume content, and enjoy daily life.  

VC-backed companies also continue to drive the U.S. and global economies. One-fifth of public U.S. companies received venture capital financing, and they account for more than 11% of total employment in the US. With $121 billion in dry powder looking for more investments, the venture industry will continue to be an important economic driver of innovation and growth. The question to me is whether venture capital will continue to be a leader in funding mission-driven companies that will change the world for good with the new single-minded hunt for unicorns, or will we fall prey to our own greed and lose the underlying soul that made our industry so special...and so successful.  

Why Now?

The venture capital industry has a real image problem right now. Historically VCs have preferred to be secretive, avoid the press and work behind the scenes. Lately we’ve been getting a lot of media attention for the wrong reasons: rampant sexual harassmentUber drama and general lack of diversity among our investment teams and portfolio.

This is not how it used to be. In the past 10-ish years, the culture of VC has notably changed.

It started with the casual acceptance that it was ok to fund jerk founders. This was a byproduct of the VC industry moving to a model of chasing unicorns, companies valued at more than $1 billion, in order to make their desired fund returns. This became one of the only ways that the venture model could provide returns higher than the S&P 500 (though many funds still don’t) by compensating for the high failure rate in a fund portfolio with one big win.

Atrocious founder ethics and offensive personalities started to be normalized as “you have to act that way to build a great company,” but this acceptance of the jerk founder didn’t used to be the case. Investors used to have a “no assholes” policy - some still say they do but in the same breath brag about their Series D or E investment in Uber. 

An example of a conversation I’ve had many times with folks who have been in the industry for years: 

A senior partner at a top firm recounted a partner meeting at breakfast recently.
“Why are we backing this guy?” he said to a younger rainmaker at the firm. “He’s an asshole.”
His partner replied: “Hey, you gotta get over it. It’s no longer about whether someone is an asshole it’s about can he make money.”
That conversation happened a year ago. Said this multi-decade veteran of the business: “It didn’t use to be that way.”  
Source: PandoDaily “ Venture Capital and the great big Silicon Valley asshole game.

The acceptance of the “jerk founder” has unsurprisingly led to more venture capitalists being assholes too. The fallout around sexual harassment in particular surprised no one in the industry, as it’s been a well known “secret” for 10+ years. The bravery of the people who have come out publicly and risked their careers and fundraising prospects - and the resulting action by LPs and firms to oust the offenders - were the biggest surprises. 

Now the VC industry faces an important challenge. The reputational damage caused by the events of the last few months is real, and there is an opportunity to repair the industry’s reputation by reminding people of our real desire to do good in the world. A little tikkun olam would go a long way these days. The consequences of not doing so are devastating: founders will stop turning to VCs for funding, LPs will stop investing in venture funds and the most talented investors will leave the industry. 

What Should We Do About it?

It should be obvious, but the most important two things that VCs can do to start repairing our industry’s reputation is to 1) stop funding jerk founders, and 2) stop being assholes ourselves. 

As a third priority, I suggest that the venture community should take it one step further and regularly commit to giving back to charitable causes. This allows the profits from our ventures to also tackle problems that are not necessarily addressable with “venture-backable” businesses. Things like poverty (paradoxically demonstrated in the Tenderloin neighborhood of San Francisco only a few blocks from many unicorn companies), education (such as tackling race and gender foundational issues at the source rather than aftermath of problems that arise once the bad habits are ingrained) and the arts (to keep creativity and performance in our culture as inspiration) are not typically able to provide the type of returns required with for-profit businesses. If the venture community gives back to these causes regularly, it will be as world-changing as funding the next Airbnb or Dropbox. 

This is not a novel concept. Many in the venture and tech startup world already generously give to charitable causes. Some trailblazers have even recognized the privileged position investors and entrepreneurs are in to create wealth quickly and have aligned the philanthropic model with the risk/return profile of startups and venture capital. 

The Salesforce 1:1:1 model of giving back 1% of time, 1% of equity and 1% of product to charitable causes solidified the importance of charity for me personally. When I was working there in 2009 and 2010 it was a revelation to see the positive impacts on culture, brand and performance from a company-wide commitment to giving back. Many VCs also donate personally, such as the partners at Andreessen Horowitz committing 50% of their income to charitable causes. There are also innovative “venture philanthropy” models such as Omidyar Network and the UCLA Ventureswhich use the venture model to have a positive impact on specific communities. Venture funds that focus on impact investing while achieving market returns are also becoming more prevalent. Finally, there are great Limited Partner examples, most notably with Legacy Ventures, a venture fund-of-funds with more than $1.5 billion AUM that is fully (principal + gains) committed to philanthropic causes. 

Many entrepreneurs and investors have signed on to the 1:1:1 model, the Founders Pledge or something else to commit to giving back. This tends to happen in pieces, with individuals making their own choices independently of their organization. I would like to see this happen on more of an organizational level at VC firms, with buy-in from the full team and co-development of a firm-wide philanthropic strategy, so that giving back becomes an integral part of VC culture as a best practice. 

Find Pegasus

As an overarching thesis of how we can do better, I propose that VCs focus on finding Pegasus instead of hunting unicorns. I mean the following:

1. Pegasus organizations lift good people up and help them achieve their potential

In the Greek mythology, Pegasus is a winged horse that is masterful both on land and in the air. With these skills he helped his rider Bellerophon, who was strong and talented in his own right, to conquer many incredible challenges, most notably slaying the fearsome Chimera monster. Similarly, investors should look to partner with businesses that are not a cult of personality around the founder, but a vehicle for allowing talented people to work together and achieve the mission of their company. This also fundamentally means contributing to and/or partnering with charitable organizations tackling problems that lift communities of people up, and may have business models that are not suited as a for-profit enterprise. 

2. Pegasus organizations don’t get carried away with hubris and greed

Bellerophon started to develop a massive ego after achieving amazing things with Pegasus at his side. He got greedy and arrogant when he attempted to fly Pegasus up to Mount Olympus, the home of the Gods, where he thought he was worthy of belonging. This was his ultimate downfall, as Pegasus threw Bellerophon from his back for this blasphemous behavior - assisted by Zeus and a gadfly - after which he wandered the Earth blind and crippled until his death, hated by humans and gods alike for his arrogance. This is a cautionary tale for investors and entrepreneurs, where hubris and greed seem to be the norm lately. (Uber, with Susan Fowler as the gadfly?) The best practice should be to focus on Pegasus companies who stay humble, with their investors as a critical part of maintaining this humility. It is difficult to predict the human reaction to success and this must be an ongoing effort between founders and investors. One excellent way to internalize this humility is to embed philanthropy into a company or VC firm’s core culture. I saw this first hand working at Salesforce, where every employee had 6 days off of work per year to volunteer for the nonprofit of their choice. This seemingly small benefit helped to ingrain a strong and grounded culture that valued giving back, and also provided incredible support to many worthy charitable organizations. This type of model can be powerful in startups and VC firms as well.  

3. Pegasus organizations inspire people and leave the world a better place

Pegasus “sprung” from the head of Medusa when he was born and whenever Pegasus put a foot to the Earth, a flowing spring of water was created. This symbolized inspiration, and one of springs (Hippocrene) even became a sacred spot for the Muses. As investors, we should filter for companies that we believe will leave an important mark on the world and inspire others, both with their products and their people. If the company is successful, the people who are involved will go on to create or grow other businesses, and if they have seen success in a culture that focuses on inspiring people and leaving a positive impact on the world, they will continue to build companies this way and the overall results will be exponential.  

There is a new sense of urgency to remind people that, despite the headlines, the vast majority of venture investors are good people. Reevaluating who we fund is an important first step. We can also escalate this effort by making a commitment that doesn’t have a 10 year waiting period to see the results - donating a portion our returns to charitable causes is an easy and powerful option. The best hope for the VC industry to continue its good work and strong performance of the past is to invest in and donate to Pegasus organizations, starting now.   

What the F just happened and what am I going to do about it?

By Jules Miller

Originally posted here on LinkedIn on July 7, 2015

Wow, the last two weeks were a wild ride for the venture capital industry. There were public accusations on the record, lots of shocking shakeups, and a seemingly never ending series of blog posts on Medium. New information continues to pour out at a blistering pace, and many are now left with their head spinning.

One thing is abundantly clear: this is a pivotal moment in time for Silicon Valley and startup/investor communities around the world.   

Rather than focus on what happened or why, I’d like to focus on what we can do about it. Specifically what I can and will do about it as an investor, entrepreneur and member of the global startup community.  

While it’s extremely important to to speak up against injustice and hold people accountable, and I am in awe of the brave souls who have done and continue to do this, I choose to focus on the future. Many of the best entrepreneurs have a bias toward action, and JFDI is my own personal and professional mantra. So as a small step forward in the healing process I am making the public statements below, and holding myself accountable, on what I will personally do to be the change I wish to see in the world.  

What the F Just Happened?

For those who haven’t been following, a quick synopsis to get you up to speed:

Just a week and a half ago, The Information posted an explosive story with 6 women - 3 on the record - accusing Binary Capital Managing Partner Justin Caldbeck of sexual misconduct. People had a lot to say about this (hereherehereherehereherehereand many more). A lawsuit was filed by a former employee claiming that she resigned due to the sexist culture and that the Binary partners actively threatened her ability to find new work. Also, while Caldbeck was an Associate at Lightspeed Ventures, Stitch Fix founder Katrina Lake accused him of sexual harassment. Lightspeed’s reaction was to require her to sign a non-disparagement agreement in order to prevent them from sabotaging her next round of funding...a deal that Lightspeed wasn’t even participating in. Thankfully, Binary’s LPs took swift action and voted to dissolve the fund early last week - within just 5 days of the story breaking. 

To me, the most disturbing thing was a demonstrated pattern of (alleged) behavior specifically focused on Asian women over the course of 10+ years. This seemed to be an “open secret” known but overlooked by employers, LPs and other VCs.  

People seemed to be waiting to see whether this incident would be quickly forgotten as a slight blemish on the VC industry with the continuation of business/bias as usual, or whether it would herald in a real, and desperately needed, change in culture.

Then The New York Times article came out on Friday with several more women naming multiple investors, including high profile folks like Chris Sacca - who cast a pre-emptive strike acknowledging his bad behavior and suggesting ways to make up for it - and Dave McClure - who resigned as GP of 500 startups due to being “a creep,” with more than a dozen allegations of sexual misconduct mostly directed at women of color. There were some truly awful apologists, and a reminder that the degree of harassment matters, with disturbing details.

It’s still early days, but I am hopeful that this moment in time has created momentum that will usher in dramatic, lasting, positive change. We are now in a post-Binary world.

My Personal Experience

For anyone who’s been working in the tech or venture world, this behavior was not a shock. It’s not just Caldbeck or the other investors named recently - unequal treatment of women and people of color is a pervasive problem in the venture capital industry. I’ve been hearing these types of stories and seeing them first hand for the past 13+ years. Most people in the tech industry know it’s a problem and talk openly in private groups but, until now, few have been brave enough to talk about it publicly for fear of it destroying their career, their company, and their ability to ever raise capital. 

As a former founder who raised money for my prior company, I have personally experienced two specific incidents of sexual misconduct during the fundraising process, in addition to hundreds of small, daily examples of being treated differently than male founders in a way that I believe was detrimental to successful fundraising. These "million paper cuts" - highlighted often by the brilliant Yin Lin and Lisa Wang at SheWorx - are often worse than the overt examples of harassment and stem from a culture that is not willing to reprimand this behavior. I would often joke that “one day I’ll write a book, but right now I just need to focus on closing this round and building the business.”

I knew that calling out the inappropriate behavior would have been the right thing to do, but there was always a fear of retribution, of getting blacklisted, and of not raising the capital my company needed to grow. So I overlooked it. When you put everything you have – your time, your money, your career capital – into a business, you’re willing to deal with a lot of pain to make it successful. The uncomfortable comments, propositions, discounting of ambition, etc. are just a few of the many painful things women entrepreneurs deal with when building a business. However, I was always very aware that the overt and subtle acts of sexism on a near-daily basis were things that my male counterparts did not have to deal with.

There is solid research that investors treat women founders differently, ask them different questionstalk about them differently, and are impacted by physical appearance. This directly leads to fewer investment dollars going into female founded companies and dissuades many women entrepreneurs from seeking venture capital. It is important to note that this is not just male VCs - women VCs engage in the same damaging behavior (though usually with fewer overt sexual advances). There is also a wealth of data (hereherehere) showing that women-led companies are, in fact, a smarter investment. There is a clear gap in the market.

What I Will Do About It

This type of behavior and the culture that supports it is a big part of why I joined LunaCap Ventures, a NYC-based fund that provides both venture debt and equity financing to early stage companies with women, people of color (POC), and military veteran founders. We also proudly have a team that represents the diversity in which we invest. I’ve dedicated my career to solving the problem highlighted in the news of the past two weeks, not because I think this behavior is atrocious and needs to stop (I do), but because I’ve seen first hand that there is an enormous opportunity to fund exceptional founders who are not receiving funding. These investments offer tremendous potential upside to investors.

“A little less conversation, a little more action please.” -Elvis Presley 

The 9 actions I will personally take:

1. Invest in Women:

I will use my privileged role as a professional investor to provide capital to as many amazing women founders as I can within the current structure, thesis, and return thresholds of LunaCap Ventures. I will also invest in women-founded companies as an angel investor in companies outside of the LunaCap thesis. 

2. Make More Women Founders Massively Successful:

I will actively help the amazing women founders in my portfolio to grow their businesses by rolling up my sleeves to help them with whatever needs to be done to make them massively successful. This includes actively helping them to raise follow on funding, ideally from funds who hold the same commitment to decency and diversity. I believe that the best way to convince VCs to invest in women is to show them the money to be made. More massively successful women entrepreneurs will also create more women angel investors, VCs and serial entrepreneurs. 

3. Remove Barriers:

Many founders who come from diverse backgrounds simply don’t have the same access to investors as the archetypal “Stanford CS bro.” There is generally a requirement to get a warm introduction from someone a VC knows, and generally an extremely high quality senior contact, or the investor will not take a meeting. I believe that this puts diverse founders at a disadvantage since their networks of investors and successful entreprepreneurs may not (yet) be very strong. As a result, I will no longer require a warm introduction to seriously consider an investment opportunity.    

4. Create a Whitelist:

A blacklist - such as the one created by Y Combinator - can be helpful to know who the bad actors are, but I think a whitelist of good actors is even more helpful. I will publish a public list of venture capital funds I’m aware of that have a woman General Partner. This can serve as a resource for LPs to know who to invest in, for entrepreneurs to know who to raise money from (why should we be making money for ass holes?), and for other VCs to know who to partner with on deals and/or try to recruit to their own teams.

5. Be Transparent & Report Publicly:

I will report publicly on a variety of diversity metrics for our portfolio at LunaCap Ventures, going beyond simply tracking founder diversity but also a broader list of metrics and “softer” self assessments. This isn’t an exact science and I will learn how to do this better with practice, but I will start. 

6. Create Standard Metrics:

I will help to create a standardized framework for VCs to report on portfolio diversity. It’s early days, but the initial work is already starting on this thanks to the self-organized “Inclusion Crew” of nearly 60 investors from the Kauffman Fellows program, where I’ve recently joined the newest class. This group authentically and passionately cares about being part of the solution and is tackling a variety of initiatives supporting diversity and inclusion (add your suggestions here).  

7. Provide Support:

I will actively listen to founders who have experienced some form of bias or harassment during fundraising, or in the general course of building a business, and do whatever I can to help. 

8. Engage in Dialogue:

I will engage in dialogue with people who do not believe sexism in tech/VC is a problem, normalize it, or acknowledge that they may be part of the problem but don’t know how to change it. I’ve already had several private conversations and welcome more. 

9. Stay Woke:

Even when the media attention to this topic dies down, I will continue to make diversity and inclusion in tech and VC a priority.  


This is what I’m doing. For entrepreneurs, VCs, LPs, and anyone in the startup community, I encourage you to think about what you can do, commit to do it, say it publicly, and JFDI.

The VC Landscape

By Paul Capon

Where is the VC environment heading and how do you avoid getting caught up in the pitfalls?

Today’s venture capital environment is more robust than ever before. Business school graduates are turning down consulting and investment banking offers from top tier firms in hopes of joining or creating the next Facebook or Uber. Hollywood is producing shows and movies like Silicon Valley and The Social Network, fueling the hype and interests of budding entrepreneurs. I greatly support the entrepreneurial spirit, and applaud folks who take a bet on themselves to create something and add value to others. I do, however, caution investors and entrepreneurs that over the next 3-5 years, returns to traditional VC’s might take a hit and access to capital will prove to be more difficult to come by. I have outlined the trends below and discussed what I believe their impact to be on the industry at large.

 1) Increasing number of startups entering the scene

According to the National Venture Capital Association (NVCA), in 2009 the number of companies looking for first round institutional investment was ~1,010. In 2014 this number grew to ~1,500. While there is much debate around the cause of this growth, advances in technology, access to capital, and the millennial mindset play a big part. Today it’s easier and cheaper than ever to create your own website, market your product, and support your back end needs. Companies such as WeWork, and other co-working spaces further facilitate this growth by enabling companies to establish themselves without the traditional high cost of office space and other associated costs. Mix this with investors fighting among each other to invest and you’re off to the races. Lastly, as a millennial, many of us were told our entire lives that we could achieve anything we want, do what makes you happy and the money will follow. As the millennial generation joins the work force, their motivation and personality tend to favor the structure (or lack thereof) provided in the startup environment.

2) More capital in the VC markets

 In 2003 the total venture capital investment was $19.7 Billion. In 2014, this number grew to $49.3 billion (NVCA). With interest rates at an all-time low, institutions and individuals are seeking to deploy capital in the equity markets. Additionally, to facilitate the already aggressive demand in the space, platforms such as Seed Invest, Funders Club, and Kickstarter have increased the exposure of deal flow, and greatly eased the ability to invest in start-ups as an institution, but more importantly as an individual accredited investor. The combination of the current economic environment and an increasing number of ways to invest in the VC asset class, has led to the large available pool of capital we see today.

 3) Exit opportunities and numbers for VC backed companies have not grown. Leads to a surplus of companies and lower exit opportunities.

In 2010, the number of venture-backed exits were 525, and fell to 459 in 2014 (NVCA). Exits, whether it’s through the M&A market, IPO, or private buyout, are needed for funds to eventually realize a return for the later stage VC’s. For the VC industry machine to maintain its returns, the number of exit opportunities would need to increase to match the corresponding number of companies entering the pipeline. As this mismatch between entry and exit persists, a higher percentage of companies will fail to exit and as a result, lower the returns to the VC industry as whole.

 Putting it all together

While we will not encounter the same losses as we did in the dot.com bubble, there will be a hit on the industry return because of this imbalance in the VC environment. Because there are more companies entering the race, and more capital justifiably or unjustifiably funding them to later rounds, fewer companies are falling out of the race when they should be. Since the number of exit opportunities hasn’t increased to meet the exit demand, a larger number of companies will reach a stage in the race where they will compete for fewer exit opportunities. Companies that are not able to exit successfully will hurt the returns for the industry as a whole. Portfolios are doing well so far because the capital available in the market enables companies to raise follow on rounds at higher valuations. I argue that many of these valuations aren’t based on the actual fundamental performance of the company, but rather based on the surplus of capital in the investor market and competition to join the deal. If the exit opportunities don’t increase to meet the next wave of companies looking to exit, I fear that the capital markets will pull back, and send a shock through the funding pipeline. Companies that were unjustifiably carried through the funding rounds will be hurt the most, along with the VC’s that backed them and LP’s will look elsewhere to deploy their capital.

 How do you avoid this?

As an investor, I see a number of folks set on seeking out the next Facebook or Instagram, and investing at ridiculously high valuations that I find hard to justify. Valuations are based on over idealistic and aggressive assumptions. “If we get 100MM users we can do…XYZ”, that’s a big IF. While some companies may succeed with this model, it lends itself to an all or nothing game. Either you reach the critical mass of users to generate revenue through selling data, advertisement, or any other revenue stream associated with user numbers or you don’t. As an investor, I try not to invest in these types of companies, and tend to focus on the companies that have revenue associated with an actual product and sustainable cash flow.It’s harder for these types of companies to be overvalued, and if the capital availability dries up, companies that fall in to this category will be better positioned to continue forward.

In closing, I’m not advocating that everyone pull out of the start-up world, and predicting doom and gloom. I am just trying to highlight the trends that are materializing and providing food for thought. I do suggest that if you decide to invest, you carefully think about the types of companies you want to invest in, and highlight that the sexier, great idea (shiny object), may not be the best investment in the long run. The start-up environment is here to stay and unlike the dot.com bust, it is founded on a number of well-established companies with great business models and actual products. Just be cautious when hearing these incredible valuations and ask yourself if the company truly deserves it, or if it’s a company that should have dropped out of the race.

Venture Debt Vs. Traditional Venture Capital

By Paul Capon

What’s My Valuation?

Over the past 6 years, interest rates have remained at historic lows, fueling the economy with cheap capital.  Low fixed income yields have pushed investors to search for high returns in the riskier equity markets.  This unbalanced risk-to-reward ratio has ballooned already over-capitalized private equity and venture capital markets; inflating valuations and producing a bubble. 

Moderate risk-taking investments provide the capital foundation for innovation, economic growth, and prosperity. Mispriced risk, however, can be catastrophic.  Overcapitalization is driving the inflated valuations and oversized investment checks that are prevalent in today’s market.  To make matters worse, a number of additional catalysts will lead to a sell-off and loss in the VC industry within the next 2-3 years.

Overinflated valuations are the largest catalyst. These valuations resist rebalancing due to the illiquid nature of VC investments.  VCs often invest in companies that have never generated profits (or even revenue in some cases).  The capital invested is typically through investment instruments in the form of convertible notes or straight equity.  Investors’ capital is generally locked up for a period of 5-10 years and turns liquid only when equity positions are bought out.  Until then, an investor’s only metric for investment performance is based on either priced rounds or comps.  

Conventional VC pricing methodology is flawed, with incentives that are improperly aligned and a process that provides no counter-weight to create valuation equilibriums. Most priced rounds typically consist of additional investments from similar (and/or existing) investors at each round, and it is in the interests of both new and existing shareholders for the valuation to increase at each capital event.  

Actual numbers

The going market rate for a new company’s valuation with an idea (pre-revenue) is in the $1 - $5 million range.  This means, a company looking to raise $200K to build its first line of code would part with 4-20% of its equity.

Let's assume that same company, one year later, is successful and can show sales of $500K and an annual burn of $300K - it looks at raising an additional $500K.  The company compares itself to another company in a similar space and industry that shows the same economics and raised a $500K round at a $6 million valuation. Our company points to that valuation to justify the price of their current raise and, additionally, argues why they are better positioned to justify an even higher valuation, enabling them to retain more equity for the same raise - the deal gets done at an $8 million valuation.  Current investors (excluding dilution), would mark their investment as having doubled in one year.   Our company, with sales of $500K and a loss of $300K, it is now valued at $8 million; all due to the current state and structure of the VC financing market.

Keep in mind that no cash has actually been returned to any investors and no sale has been made for full price.  In this case, the sum of the parts does not equal the whole. This is the fundamental problem and it will come back to haunt many of these companies and VCs at the end of their investment period.

Why invest in losses?

Let’s go back to the fundamental elements present in today’s economy: low-interest rates due to government intervention led institutional investors to allocate capital towards riskier assets, generating larger returns to justify their fees.  It is a seller’s market, in favor of companies raising capital, and because recent historical valuations continue to grow “on paper”, investors are willing to invest at astronomical valuations regardless of a company’s economics. 

To make matters worse, many platforms enable both accredited and non-accredited investors to invest in companies they never talk to, meet, or understand.  These platforms will carry out the due diligence on your behalf and offer you documents if you ask, but they are also incentivized to promote transactions to feed their revenue model.  For many novice investors, the “invest in 10 companies and 1 win will cover my loss” mentality is enough to deploy capital on recent historic valuation performance; the same valuations we just learned are not necessarily a function of a company’s economic performance.   Betting on a self-fulfilling prophecy where the first company to walk the path becomes the benchmark only reinforces the cycle and dilutes the next investor.  

Snowball effect

In order for all investors to get their money back and actually realize their perceived returns, there has to be an exit or buy-out at that final valuation.  Companies are approaching private equity groups, the IPO market, and potential acquisitions proudly waiving a $100 million valuation and expecting a check.  While a few companies will make it through and justify their valuations, many companies will not come close to having the revenue, cash flow, or profitability to warrant such an exit value.  Private equity funds and larger companies are correctly questioning valuations and only bidding a fraction of the asking price.  

What is the result? A company on paper that showed growth for 7-10 years with an ending valuation of $100 million ends up selling at $50 million, creating a huge loss for the investors.  This will most likely affect later-round investors, who are usually the ones writing the larger checks.  Once this happens VC firms will struggle to redistribute capital to their LP’s, forcing a sell-off of other portfolio companies and creating a snowball effect throughout the industry with large selloffs at discount prices. 

The case for hybrid growth capital

LunaCap Ventures’ investment thesis enables us to generate yield and return capital regardless of paper valuation, all while maintaining exposure to the potential upside of the VC world.  LunaCap invests with a hybrid growth capital instrument.  We provide a non-convertible term loan with multi-year amortization and equity participation, typically in the form of warrant coverage.  The term loan, and regular payment requirement, simultaneously filters for companies that prioritize cash-flow and provides our economic foundation.  It enables our investors to receive cash yield on their capital allocations to LunaCap. The term loan mitigates risks with a short term maturity, and as protection, often sits senior on the capital table – providing downside protection.  Additionally, our warrant coverage is generally 5 times smaller than the equity a company would have to part with in a conventional VC investment of comparable size, yet helps drive an average LunaCap return commensurate to that of early stage investing. 

On the company side, overall cost of capital is much lower than the classic VC model when accounting for the value of the 80% equity retained.  For LunaCap, this provides the most important filter.  If the company believes they are going to do extremely well, then our debt instrument becomes very cheap.  If the company does not believe they are going to grow, then we are expensive and it may not make sense to take our investment.  As a rule of thumb, if you don’t believe in yourself as a company, I don’t think we should be partners in the first place.

Averages and exceptions

There are about 500 active VC firms in the United States and a number of top VC firms will continue to enjoy great success. In general, I caution one should understand the value of the company assessed before investing. Make sure the valuation is justified on its own merits and not because someone else is willing to invest at the presented terms and valuation. You can do well riding the wave for a bit, but that is a risky game to play.  I love the start-up space and highly respect any VC firm or individual willing to take a bet on a team or company.  I have full faith in my colleagues and peers who are fund managers and investors across the industry; they are investing with good conscience and a deep understanding.  However, it is also important to highlight the dynamics and forces in play, informing investors’ decisions for both their benefit and that of their portfolio companies.