The Triangle Tweener Fund has a unique strategy. Before investing, it’s important that you understand the strategy because it is significantly different than any other startup investment vehicle in the Triangle and the first time it’s been tried. This is a great time to remind you that investing in startups is a highly risky endeavor and it’s entirely possible this strategy won’t work. Obviously I believe that’s not the case, but until we try the strategy, we don’t know how well it will work, thus there is a relative high (compared to other investing alternatives) chance that there could be loss of principle with this strategy.
Also, the pitch deck is here.
When you’re ready to invest, instead of a paper-based system, the fund uses an on-line platform and you can read more, see all fund documents and start the process here.
That being said, the Tweener Fund has three pillars to it’s strategy:
- Index strategy
- Early stage, but not too early, high-tech (Tweeners)
- Focus on the Triangle geographical area
Said in a mission statement: The Tweener Fund’s strategy is to build an index of early-stage Triangle-area Tweener companies and we believe this activity married with the companion Tweener List, will accelerate the Triangle startup flywheel.
Sometimes understanding a mission statement with what you ‘won’t do’ can be helpful. Here’s investments the fund won’t make:
- Companies outside the Triangle
- Biotech (drug/device companies)
- Late stage, series C, D, E companies
- Putting the entire fund into a small number of companies.
Hopefully that helps clarify our focus for the Tweener Fund, but it probably raises the obvious question: Why do you think that very specific intersection is an interesting investment area that could generate strong returns?
In each of the following sections we unpack the three pillars and explain the rationale.
Looking back the last 3-4yrs, these companies have three things in common:
- Virtue Labs
(I could go on, but that’s a good list). What do they have in common?
- As you probably have guessed, they are all are/were Triangle Tweeners
- They all now have valuations or exited for > $100m
- No single venture capital firm invested in the majority of them (Ideafund is in Pendo and BCVP was in ServiceTrade and Spoonflower.
The other thing that I know that you’ll have to take a bit of leap of faith on is that I knew these companies and their founders when they were at the $1-5m ARR range and I believe if we had the Tweener Fund, we would have been able to invest in most if not all of them. In the Triangle, early stage valuations are in the $10-20m range, so these would have been 5-10x investment returns.
Now a skeptic would say: “Scot, ok that’s easy because hind-sight is 20/20.” I agree with that which is why I’ve looked for empirical evidence that an index strategy may work well for early-stage investing vs. a ‘pick the winner’ strategy and here’s what I’ve found.
Startup Power Law Dynamics and Venture Capital
First, it’s important to state that venture investing follows a power law (where the value of one variable corresponds to the power of another). In the Venture world, the way this works is a small percentage of investments drives the majority of the return. There are two bookend reactions to this fact:
- Only invest in companies that can return the entire fund. (get really good at picking winners)
- Make smaller investments in a large number of investments so you don’t miss a winner (aka ‘Spray and Pray’)
Most traditional venture capital models go with the first approach which makes logical since.
What’s the Data tell us?
Because Venture capital is largely an opaque industry, data on the performance of startup investing has been hard to come by. But in 2019 and 2020, AngelList’s data science team published disruptive research that qualitatively shows that based on a deep analysis of the their proprietary dataset of over 3000 early startup investments an index approach should produce superior returns compared to a smaller, more concentrated approach.
This graph is the best illustration of their analysis:
If you’d like to research more here are two articles:
- Power Law Returns in VC from AngelList Data Science by Andy Singleton
- How Portfolio Size Affects Early-Stage Venture Returns by Nigel Koh and Abrahma Othman, Ph.D.
While the idea to pick winners is a good one, it turns out it’s incredibly hard and maybe impossible to predict the winners. One of the most famous VCs, Fred Wilson of Union Square Ventures famously said: “Early stage investing is hard. You lose more than you win.” This is one of the best in the business at picking winners.
Applying the Power Law / Index Strategy to the Tweener Fund
With this data in mind, our thesis at the Tweener Fund is we will favor a larger number of small investments 10-20 a Q @ $50k average. vs. a smaller number of big investments (5 @ $100k) so that after a year, we have delivered to our LPs a portfolio of 40-80 Tweeners with the hopes we catch the lion’s share of the 5x+ power law winners. On top of this strategy we are layering in some signals (The Tweener signals!) and geographical aspects that we think will increase our chances of not only identifying the 5-10x Power Law investments, but also selecting a basket of stocks that have a higher probability of not failing.
Behind building an Index Fund, the second pillar of the Tweener Fund strategy is to invest 70%+ of the fund in companies that meet the ‘Tweener List floor’ criteria – 10 people or $1m ARR. Many early stage companies have a high risk of failure because they either don’t have capital or product-market fit. The Tweener List criteria was created to identify those companies that had what I call “primordial startup soup escape velocity” – they weren’t too early where the failure rate is high, but they weren’t too mature where the returns are low or the opportunity to invest/scale has passed by already. Also at this particular point in a startups life, at least in the Triangle area, the valuations aren’t so high that it eats into a great return if the company is worth > $100m after 5+ years.
Here I have 5+ years of collecting my own set of proprietary data.
You’ve probably seen this table in the Tweener List, but what’s new here is the ‘Closures’ row. The general rule of thumb in early stage venture investing is that out of 10 investments:
- 3-4 fail (25-30% according to the National Venture Capital Association)
- 3-4 return 1x (return the original investment)
- 1-2 produce substantial returns
By planting the Tweener ‘floor’ at $1m ARR or 10 people and focusing on a small enough sample set plus the benefits of our region, I believe we have found a startup dataset that has much better outcomes than the general rule of thumb.
Why the Triangle?
As an NCSU grad and someone that has lived in the Triangle for ~30 years and started four companies here, obviously I’m a fan. There are lots of great reasons to live here which is why the Triangle is consistently on the top 10 places to live or fastest growing regions lists. But why is the Triangle a great place to start a company?
- Universities – As a software entrepreneur, the main input into the company is smart technological hard working people. Guess what the Triangle has a lot of? Guess why – yep our universities are basically ‘smart people factories’ and boy do they produce a great product!
- Diversity – The Triangle has diversity of industry, diversity of people, diversity of university and that has created a very robust startup eco-system.
- Rapidly growing innovation hub – The Triangle is consistently on the top 10 ‘places to live’ or ‘most moved to‘ cities in the USA. This brings a fresh group of people looking to plant roots and grow. Many of these transplants are coming from other larger high-tech hubs.
- Underserved by Venture – While entrepreneurs have been quick to move to the Triangle, the early-stage dollars have been slow to migrate here. Less venture means less competition (more ‘wins’/’hits’) and lower valuations.
There’s a ton of data on this and I could go on forever. As new data emerges on how awesome our geography is, I’ll try to capture it in blog updates. The latest data that I’ll cite is from the Rise of the Rest / Revolution Ventures. You can access their (vintage December 2021) report here and there’s a good summary on TechCrunch here. The Triangle is one of the 12 ‘up and coming startup communities’ they highlighted in the report. I’ve included that snippet here-> (click to enlarge)
Putting it all together: The Tweener Fund Virtuous Cycle
Finally, we believe the three-pillar Tweener Fund strategy, married with the existing benefits and energy around the sister Tweener List will accelerate the startup flywheel for the Triangle startup ecosystem:
- The Tweener Fund will support entrepreneurs in the Triangle that take the risk of starting a company
- The Tweener Fund investors (LPs – that’s you) will provide operational support, mentoring and help the startups scale
- Their success will draw more investment to the area
- The bright light we shine on the Tweeners will help them land new customers and partnerships
- More startup companies that are successful in the area spin off more new entrepreneurs
- (rinse and repeat)
If you’re ready to sign up to be an investor, you can head over to our fund page on Angel List here, otherwise, keep exploring the site.