EarlyBird April Fireside Chat with Emma Clark from Sweater Ventures

For April’s Webinar, Jordan Wexler hosted Emma Clark, COO at Sweater Ventures, a new type of Venture Capital fund that is built to provide access for anyone to invest into the private markets. They believe the VC community can shape the future, and the right to shape the future belongs to everyone.

We cover the following topics:

1. What are some of the most important factors to consider when investing in startups?

2. How does one evaluate such an early investment into a startup?

3. How do the actual unit economics work and what does the potential return look like?

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Jordan Wexler: Super excited to get started. So we have an amazing individual Emma Clark for this month's EarlyBird Family Finance Webinar. Emma is the COO over at Sweater Ventures, that is a investment firm based in Boulder, Colorado, and it's a really unique model, which I will let Emma explain in much more depth. But Sweater actually is an investor in Early Bird, which is really exciting. It's been a wonderful relationship and today the goal is to really dig into all things investing in private markets and what that really means. What does it mean to invest in a startup? Why do people do it? How do we do it? It feels like it's always something that maybe is far away from what is possible, and really just giving some guidance and answers around the importance of investing in an earlier stage company and the reward as well. So, thank you so much for joining Emma!

Emma Clark:  I'm happy to do so and I'm glad. I'm also an EarlyBird customer myself. I have a 20-month-old and we're big fans of the EarlyBird apps and not only are we investors in EarlyBird, but I also have just been a big fan from the beginning and I'm excited to continue to use it. And when we had another one, I'll put them on the platform and invite my friends and family. So when you guys asked me to come on, it was meaningful for me, not only because we're investors, but also because I've just been a big fan of what you guys are doing in the market as a user and as a parent as well.

Jordan Wexler: Amazing, thank you so much. It would be awesome, I think, to kick it off with a little quick introduction on yourself and then really giving us an overview of Sweater Ventures and the amazing work you all are doing.

Emma Clark:  Yes, happy to do so. So, like Jordan mentioned, I'm the COO of Sweater. At Sweater, our mission is essentially to make venture investing accessible to anyone and everyone. I've been with Sweater for about two years. My background is mostly in early-stage startups, on the operating side myself, out fundraising as well as running some earlier stage businesses, so I've been in Fintech and finance for quite a while. I moved over with Sweater because I really believed in the mission and what we're building. Like Jordan mentioned, we have a unique model of venture investing. Essentially what we've done is create a fun structure and a platform where anyone regardless of whether or not they're accredited – accredited being amount of income or wealth status. Normally for a venture fund, you have to be accredited to invest into that fund or individual startups, but we've created a fun structure where that is not the case.

Part of doing that was this belief that with education, with resources that anyone should be able to invest into private markets and into this asset class. When we talk about this webinar and investing into the private markets, you can think about investing into real estate or art or private credit or private debt but one of the ones that you'll probably see in your research or if you've heard anything around investing venture, is investing directly into startups, and that's what Sweater focuses on. EarlyBird is one of our 30 portfolio companies. What we do essentially, is pull all of that money from individual investors, we pull it into a fund and then we deploy that into individual startups just like any other venture farm. We fully manage that from the due diligence process, sourcing the companies that we want to invest into, running due diligence on them to make sure they're good investments and then working with the individual portfolio companies as well throughout their life cycle.

That's what we do in a nutshell. We believe that VC has historically been a pretty closed-door ecosystem and our mission is to try to change that for individuals. We have one fund right now that we opened up called the Cashmere Fund. That's our first fund and we invest into all sorts of different companies.

Jordan Wexler: Amazing. In the most layman's terms – walk us through the journey for a parent who maybe is pretty new to investing, period. Let's take myself as a user persona, so maybe I just opened up my first investment account with Robin Hood. I just learned about EarlyBird after I had my first kid and so I'm just starting to put away $50 a month and now I'm getting more exposed and interested, I'm searching for more things and how to maybe put my money more to work. Walk me through investing and where Sweater maybe comes into play and how that looks from a user journey perspective.

Emma Clark:  Yes, that's a great question. So I mentioned accreditation and that's kind of where it starts. If you think about asset classes that you can invest into and where you can put your money, traditionally, the most accessible is the public markets. So, you put your money into an account, maybe it's an EarlyBird account or you're on Robin Hood, and there's some level of managing that – or you can decide which stocks you invest into yourself. Investing into private companies, which we consider just part of the venture asset class itself – is really mostly for credited investors. So I'll break that down first – and I say mostly because these are kind of historical SEC rules that were created many years ago. Accreditation was the SEC's way of saying 'Hey, we've highly regulated the public markets, we can keep an eye on those. We know what information is being put out there for the individuals".

For private companies, there's not as much regulation put on the information they provide to individual investors, so we only want those that have a higher level of income or a certification, a series license to actually be able to invest into those companies. Traditionally if you wanted to just go and say, 'Hey I have a friend, my friend started a company. I'm really interested in it. I'd love to buy some shares in that company'. You really can't do so unless you're what's considered 'accredited'. Accredited means that your annual income is above $200,000 or your joint combined income with a spouse is above $300,000 or you happen to have a cool million dollars sitting on the sideline, outside of the assets in your home.

For most individuals in America, that is not the case. There are a few exceptions. If you're looking at the landscapes you might have – if you've ever watched Shark Tank, you've seen Kevin O'Leary started a crowdfunding platform where individuals can go and find companies and say, 'Hey, through this regulation called Regulation Crowdfunding, REG CF, you can actually invest directly into those companies.

Jordan Wexler: And what would be some examples of those for people who are interested?

Emma Clark:  Yes, you go to Republic, you could go to WeFunder. Those are great examples of places where an individual company goes in and says, 'I'm going to go through the process of listing my offering to the public on one of these platforms'. They can't go directly to you and do that. They have to go through the platform. There's a lot of regulation around it and for a founder, it can be a little difficult to navigate that process. We actually just did it at Sweater ourselves for our parent company because we wanted to provide an option for anyone to invest into our parent company. That is an option. So that's one option, if you're unaccredited. That's the unaccredited pool, if you fall under that $200,000 in income, you can go to one of those crowdfunding platforms. Pros to that, you can go and look at all of these different companies yourself and choose which ones you want to invest into. Cons to that, you then need to be comfortable assessing if that's a good investment or not.

From a diversification standpoint, I also believe that you need to be willing to put in money into enough companies. The law of how the numbers work in VC and private companies in general and startups, is that most of them end up failing. It's just the reality of how the numbers work. Eight in ten companies end up failing and then usually, one of the ten does okay, and the other one of the ten might do a little better than that. So you need to feel –one of the things is: Are you comfortable going and doing research? Are you comfortable looking at the companies in that platform and assessing? Maybe it's something in an industry that you work in it so you know it really well so, you can say, 'Yes, I feel comfortable going and putting money into that company'. But then the question is: Can you put aside a little bit of money to put in maybe five to ten companies to diversify your risk? So that's an option for unaccredited.

If you're accredited and you meet those qualifications, you have a few more options. So typical of venture capital funds, the ones that pool money together into a fund and say, 'Hey, I'll do all the work for you'. Most VC funds are structured this way where they say, 'I'll source the deals, I'll run the due diligence, manage the companies'. They only allow credited investors and normally because they're capped at the number of investors they can have in a fund, they normally only allow really high net worth individuals or institutions, like a university endowment. Let's say the University of Colorado has an endowment and a bunch of money that Alumni give and they put that into venture capital –

Jordan Wexler:  So even if you wanted, even if you had this money somehow, it's not very easy to get into venture.

Emma Clark: Exactly. It's hard. It's really hard to get in. The everyday person, myself included, I can't get into a traditional venture fund and I've been in the industry, too. It's just really difficult.

Jordan Wexler: And some of these funds – just everyone knows on the venture side. There's the large names out there like Sequoia or Tiger. These are companies that luck may play a little bit of a role, but as you said, you're diversifying investing in hundreds of companies and then you get the Uber, the AirBnB. But for every car transportation company, there were hundreds that failed. These companies, that of course are successful, that's why you know those names. But then there are other tiers of VCs that are less – I mean, with not as large of a brand, but that still have that limitation that not everybody can get involved because I don't have a cool million dollar sitting on the sidelines as Emma said –

Emma Clark: Yes and they only allow 99 individuals, and so if they could only allow a small number, they're going to only take big checks.

Jordan Wexler: Yes.

Emma Clark: So then your last option is if you are accredited, you actually can invest directly into companies and so a lot of –we see this in really early stage companies – will open up a friends and family rounds. They're looking for angel investors and an angel investor is essentially just someone at a very early stage of a company that says, 'I'm going to put money directly into this company. I believe in it'. Often they're involved – they might be an advisor, or they're just sitting with the cap table, the equity stack and they're putting in enough money for that founder to feel comfortable that they're a benefit to the operations of the business.

Jordan Wexler: What kind of check sizes are you generally seeing in that?

Emma Clark: It really depends on the round but I'd say that most founders feel comfortable with not having hundreds of people on their cap table. The reason I say that cap tables matter is that it's actually just a lot to manage in terms of the number of equity investors you have in a company and founders are already pretty squeezed in their time. Sometimes they'll say, 'We're only going to allow someone in if you're going to write a $10,000 to $25,000 check'. That's pretty common.

Sometimes an individual will pull together what's called a 'Special Purpose Vehicle' where they say, "Hey, I'm going to grab all my friends together. You each can throw in $5,000. I'm going to lead the special purpose vehicle. It's going to show up just under my name on the company's cap table and I'm going to take a fee on the money that you put in, since I'm managing this whole process'.

You might have a friend who's interested in this and says, 'Hey, I have a deal for you. I'm going to pull together an SPV'. That happens as well in the industry but again, what I'd say is for the everyday investor, that's very much – Who do you know? Do you happen to know someone in tech or someone in venture? There's some nuances to it. It's not easily accessible to everybody out there, is what we've found.

Jordan Wexler: Another interesting resource along those lines is a Special Purpose Vehicle, also known as an SPV. You might have heard those three letters put together. An interesting resource to look at is called Angel List which generally has a lot of consolidation of these angel investors that create these groups and then invest in startup. So it's another interesting resource. Basically for access you have crowdfunding, which you can look at Seed Invest, Republic, WeFunder. Definitely a very difficult model to invest in because although they do their due diligence, the success rate with those platforms is unfortunately, pretty low, because of just the general success rate of startups. Then you have the angel investing, SPV world, you still do need to be accredited, but it's a little bit more accessible. Then the third is a new model that you have that is better. Talk to us about how that looks, and then again, how one of us would be able to get involved.

Emma Clark:  That's a good question. Sweater was started with the journey of saying, 'If the only option to an unaccredited investor is to go the crowdfunding route, that's not good enough'. This isn't to say anything bad on crowdfunding but it's just the realities of being a parent, being a full-time working person, just the – anything, the complexities of life that come along, it's hard to put aside the time to do due diligence in every single one of the companies that you're going to invest into. Sweater create a fun structure unlike other venture capital firms, where an unaccredited investor can put money into the fund. We open that up so unaccredited and accredited investors can do it as well.

The value proposition for us, for someone who's not accredited is great. You can put it as little as $500 and as much as $5 million. There's no cap but we start at as little as $500 and then we essentially pool all of that money from thousands of individuals together. Then we manage the process of making the investment, and then we bring people along the way and say, 'Hey, here's what's happening with your money. Here's what's happening with the investment in EarlyBird'. We had an event out in New York last week that Jordan joined us for where he gave an update to some of our members on what's new with EarlyBird and what's happening with the investment that they've put in to Earlybird, the company. We try to bring people along on the venture education piece as well. The value proposition for accredited investors is, again, you might not have the resources to find individual deals, and may not have enough money to get into a different fully-managed venture capital fund that has a limitation on the number of investors they can have. For Sweater, that's not a concern. You can also put your money in.

And then our plan is, you put your money in, we'll invest that to startups and then we'll start to also offer individual SPV opportunities, like Jordan talked about, where you can double down and put more money in if you're interested in that company. So, we fit in this middle unique space which is why it took a while to get this type of fun structure figured out with the SEC because we've essentially opened it up to everyone. The fund is open forever, it's evergreen. I think about it a little bit like a cousin to a mutual fund. If you've ever invested into mutual funds, you buy in at a share price and then as the value of those companies goes up or down, the share price goes up or down. That's essentially how it works.

Jordan Wexler: Awesome. So cool. We've been tracking Sweater forever. If you guys have not taken a look, I would highly recommend – go look now. It really is a unique model to create an entry point into a historically very closed world. So talk to us though now about – I want to put $500 in and maybe do it reoccurring on a monthly basis just like you would on investigating an ETF, maybe $500 a month or maybe I put $2,000 in. How do I make money? What's the upside here? How does it all work? Now that money is in, what does this look like now? What's next?

Emma Clark: Great question. I think first it makes sense to talk a little bit about venture returns in general and what that looks like, because I think that there's this perception that – venture is risky, I'm not going to say it's a perception – but there's ways to diversify that risk. Then there's ways to talk about why it's worth it to diversify some money into venture because of the potential returns. I think the first thing I'd say is – so you put your money in and then what essentially happens is we put that into a startup. We then have shares in the startup and then when we look at the trajectory of that company over time, there's two ways that they can exit for us to essentially make money on that investment. Then that money, that income that we make, is returned to all of our investors into the fund once that company exits.

I'll talk about that first, I think that's fundamental and then talk about how that translates into historical returns for venture and startups in general. So the two main ways that companies exit, when a VC makes money, they're essentially saying, 'We own equity in this company'. When they exit, they can do that in two main ways. The first is a lot more common than people really hear about. You all hear about IPOs, but really, it's getting acquired by another company. Acquisitions are the most common way that a company exits and when it comes to venture returns, that's a very profitable way for a company to exit. Not every company is ready or will get to the size of an IPO. That doesn't mean that it's not a good investment.

The second, as I mentioned, is their initial public offering on the public markets and one of the reasons –and that also produces its own 'liquidity event', as we call it, or an exit for the company. Then cash is then returned to the venture firm and then it's returned to investors. In a traditional venture fund structure, most VC funds take what's called a 'two and twenty' on that, in terms of what fees does an investor take from you as an individual putting money in their fund? Usually that means they take 2% of the money that you put in the fund and then they take 20% of the profits when that company exits. So, for example, Company A, we invested their seed very early stage. They go along, and they get acquired by a company three or four years later –

Jordan Wexler: Not to interrupt you…but let's take this example – very, very concretely. So Company A goes and raises their first round called – there's a lot of different rounds for everyone. You can do a friends and family round which is really, really early. That's the idea phase, and then you could do a pre-seed round, which is maybe just going out to market, but you still need some money to keep going.

Emma Clark:  Exactly.

Jordan Wexler: You can do a seed round. That's kind of the established first real round for a real startup. And then you have the series A, series B ,series C and then, at some point you either get acquired or go public. Let's take a look at the seed round. The company is worth $1 million dollars. They're saying that's our valuation. Sweater comes in and invests $100,000, so you guys get 10% of Company A. Then continue to what? What would be the journey?

Emma Clark: Then what happens? So then we own 10% of Company A. Company A then continues, it grows and raises another round of money and it might be that we put more money in but other investors might put more money in and as they put more money in, that can dilute our investment. However Company A also might raise from – I think you said $1 million. They may raise to $3 million or let's say, $10 million at their next round. So the value of our equity is increasing even if more shares come into the company to dilute that value. And so your hope – and this is generally what happens with companies that have a successful exit, meaning a multiple return is that valuation increases enough, so when they exit, even if my initial 10% gets diluted down to 1% over time, that 1% on a $1 billion company is a massive return. Over time that's essentially how the equity stack works, is what it's called. I'm glad you brought that up because in any industry, there's jargon speak.

Jordan Wexler: Of course, there's so much. To actually wrap that one up, so as Emma said, it was a $1 million valuation and then we raised our series A to $10 million valuation. So that $100,000 that Sweater invested, that you all put money in is now – we're 10x almost what was put into it. And then now at series A,  Company A is really flourishing. Let's say we're a financial technology company like EarlyBird and some of the massive companies out there in the world like Fidelity or Vanguard, or CitiBank or anything, financial institutions go, 'Oh wow, EarlyBird is such a great company, helping young families start investing, we don't do this very much. We don't have access. They built this whole brand, they have this great user base. We believe if we bought them and brought them into our ecosystem, it would make us a lot more valuable'.

So then they would come to company A and say, 'Hey, we will buy you guys for $15 million. What do you say?' and then Company A decide is this worth it at that point? Are we worth $250 million, because we're growing so fast and so exciting? Or, 'Oh my God. This is an incredible event. This is the time to do it. There's a great partner, let's say yes and if we say yes, that's the liquidation event'. Now, we could pay that $50 million, Sweater makes out for almost 50 times the original investment and then that's distributed back to what are called LPs, which is where you all put money into it and you see a really exciting return on your investment over time. I think one of the really important things I might find interesting, what have you been talking about to people that put money in, because this might not be in 12 months? What's the general thought process as you're having those conversations?

Emma Clark:  As we talk to individuals about it, it's, 'Be prepared to have your money in for 7 to 10 years. Right now, the average companies are staying private longer and so the average time before a company exits is increasing, which sounds like a bad thing, but it's actually a good thing if you're investing in the private markets. I say that because right now venture has produced historically larger returns over time. So let's say, post-2007 to 2022. So post the last recession  to today, venture capital exceedeed the public markets by 55%. So, whereas you could get a 5x return on average by investing in venture, you get a 3x return by investing in the S&P 500.

What that actually means with companies staying private longer is, if you're not in the private markets, you're losing out on capturing the value from those high growth years. So companies like Rivian,  the electric car company, Coinbase, Lyft, Uber. These were all companies that had massive returns for venture capitalists and the investors and LPs – the limited partners, the people who put money into a fund. They had massive returns for them but they had lackluster post-IPO performance, and so what we've seen is that as companies stay in the private markets longer, we can get individual people access to the private markets. They're actually capturing a lot more of that value and that's not just reserved for wealthy individuals.

That's a piece of it, and I think there's one thing – I know we're almost at the end but that I think it is important to touch on Jordan, around returns, and it's like, great if you can get a 'unicorn'. 'Unicorn' is a $1 billion valuation. You may hear that used in anything from New York Times articles to TechCrunch articles. Most startups do end up failing and so, the typical venture portfolio looks a little bit like this. It's basically 50% of the companies in a portfolio return a loss. 25% of them will return 1x, get your money back. Around 15% of them will get a 3x return and then the last 5-7% is really where you're relying on these outliers, these companies like Company A that we just talked about or Uber or Lyft to do so well that they are pushing up the returns of the entire portfolio of companies.

I mention this because one of the things that we fundamentally believe in at Sweater is that having a broad portfolio that invests, that puts a lot of bets into a large number of companies is how you actually get to diversifying that risk of only ending up with the 50% that return a loss, or those that only return 1x. If you put your money in a bunch of different places, it's just like indexing any sort of market or putting in an ETF or putting it in a mutual fund. Essentially, what you're doing is diversifying risk and so one of –  venture can be a risky asset class, investing in startups can be a risky asset class because of those numbers I just described, but there are ways to do it through, in our belief, creating a large portfolio of companies where you increase your likelihood of getting one of the big winners, essentially.

Jordan Wexler: Yes, and I think it's really important too – that philosophy of diversification is something that, of course, we preach all the time at EarlyBird, which is really the philosophy around all investing. When you look at your own portfolio, if I have $10,000 that I can invest – you don't want that all in one thing. That's why we look at having ETFs as a segment. If you're feeling on a higher risk profile, potentially some crypto, potentially some exposure to private markets through Sweater, some exposure to maybe real estate – you decide to buy your first home.

Emma Clark:  And you look at a reap.

Jordan Wexler: Exactly. And so you have this – you're always thinking about how to diversify that portfolio because you're not sure what going to happen. It's impossible to predict but the more boats you have in play that are going, the higher likelihood you have of various things hitting and being successful there. So that is huge advice, and I know we're at time. I have so many other questions, one of them is definitely digging into what is exciting Sweater the most, but I know we're at time so I would recommend anyone to go to SweaterVentures.com

Emma Clark: SweaterVentures.com and then if you guys do have questions, Q&A, I'm going to throw my email in here at the end. You're welcome to reach out and ask individual questions.

Jordan Wexler: Yes, that'd be awesome. We will, if people are interested and love this, we will definitely have you back as I think this stuff is fascinating. I'm clearly within the startup world but go to their website, they have their different portfolio companies they've invested in. They do an amazing job of telling the story of these companies, really digging into why they chose a company like this as of course, there are hundreds of thousands, millions of startups now out there that are all trying to make it. It's an incredible selection process for someone like Sweater or a firm like Sweater that is able to look at – how many companies are you guys generally looking at per month?

Emma Clark: Oh man. At least at a broad level, we're probably looking at 20 to 30 companies a month. We're just turning through – it's hundreds over the course of a quarter. We're going through so many right now just to –that's an initial look and then you decide, do they go to the next stage? Do you dive deeper? That's part of building a large portfolio, you have to look at a lot of companies.

Jordan Wexler: Totally. So part two of this could also be: what are those stages to get a startup through that?

Emma Clark: Yes, what do you look at?

Jordan Wexler: It's fascinating.

Emma Clark: Yes, happy to chat about that too.

Jordan Wexler: Thank you so much Emma. You are the best and we deeply appreciate it. Thank you, everyone, for joining our webinar today and we will do it again next month with another awesome guest. So appreciate everyone's time.

Emma Clark:  Thanks Jordan. Thanks everyone.

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