Good morning friends! I hope everyone has been doing well. 2024 has kicked off to be a strong year for VentureSouth and I have been running on all cylinders. So, that being said I going to write these on a more bi-weekly basis to allow myself to put more time into my writing.

Fishing in Venture 🎣

If you had the chance to invest in Uber when they started in 2009 I’m guessing you would. Especially knowing what we know today about Uber. Even if you believe you would have invested your money in Uber back in 2009 without knowing the future (because who does) that doesn’t matter. Why? Because you didn’t have access. You see, VCs build their brands off of how much money they return and what startups they are invested in. How did they find these deals? Good sourcing. Sourcing is arguably one of the most important jobs that a VC has to be able to make the returns they promise to make. You have to find the good deals. There are so many startups out there looking to raise cash and the overwhelming majority will fail to return money to investors.

So how do you find good deals? That’s a great question. For one, I don’t have the answer. Nor does the popular VCs like Sequoia or Andreesen (although they are very good at it). Investing in startups is commonly compared to as an art and not a “science”. Now don’t get me wrong, there is a lot of “science” behind investing and you can invest in a bad company very easily if the math doesn’t add up. My point is - finding good deals takes time and repetition. You have to know what to look for in a company and ultimately in a market. If you believe the world is shifting one way in the next 10 years then it may be wise to start looking for companies that are trying to move in the same direction. Here are 3 things to look for in a startup.

1. Market Fit/Potential: Analyze startups operating within industries showing signs of growth or disruption. The potential for scalability and the ability to capture a significant market share are crucial markers of a startup's long-term viability.

2. Strong Founding Team: A diverse founding team with complementary skills, a clear vision, and the grit to persevere through challenges is often a predictor of success. Their background, industry experience, and previous achievements can provide insight into their ability to navigate the startup's growth.

3. Traction: Look for tangible evidence of product-market fit, customer adoption, revenue growth, pilot users, etc. Intellectual property, or strategic partnerships can also be a leading indicator of traction within a market

That is super basic but doesn’t truly answer the question. Where can we find good deals? The most impactful way to find good startups to invest in is simple. Networking. Syndicating on deals is huge in the VC world. If you start to network with VCs, angel investors, corporate innovators, and academics you will start to increase the exposure you have to startups. I try to never be the smartest person in the room when it comes to networking. I want to be able to lean on others to help me grow as an investor. Conferences are huge for startups. Startups are able to meet with investors, strategic partners, and other startups to drive growth. Good deals can sometimes be a lottery ticket. In 2009, who knew that a small startup would disrupt one of the biggest and mafia like market - the taxi cab industry. Only a few knew and believed that Uber would succeed.

Fish of the Week 🐟

This week, I wanted to share the story of one of the most renowned tech executives globally. You’ve likely encountered his name, or at the very least, his brainchild - OpenAI (ChatGPT). In homage to his groundbreaking work on ChatGPT, I’m using it to polish this segment!

You've probably heard of Sam. But what's his backstory?

Sam Altman, was born in Chicago and was raised in St. Louis. His journey began early, developing a passion for computing and coding from a young age. Like some of the most successful founders (not all), Sam dropped out of Stanford University to pursue his startup dreams.

His career started by co-founding Loopt, a location-based social networking mobile app, which was later acquired for $43 million. Sam continued upward as he became involved with Y Combinator, leading the startup accelerator to invest in successful companies like Airbnb and Dropbox. Altman's role evolved over the years, focusing on "hard technology" companies and launching initiatives like YC Continuity and Y Combinator Research.

In 2019, he transitioned to a chairman role at Y Combinator to dedicate more time to OpenAI, co-founded with notable figures including Elon Musk. Under his leadership, OpenAI has made significant advances in AI, most notably with the creation of ChatGPT. Altman's impact extends beyond technology; he's also been involved in various philanthropic efforts and briefly served as Reddit's CEO. Known for his entrepreneurial spirit and contributions to the AI field, Altman's work continues to shape the future of technology.

Cool. Now we know a little bit more about Sam. But what is going on in the news with him? X (Twitter) coined the recent tension with Elon as “Elon Musk vs Sam Altman”. Recently, Musk challenged OpenAI with a lawsuit, claiming it diverged from its initial non-profit mission aimed at benefiting humanity. Musk's allegations stem from concerns that OpenAI, after transitioning to a for-profit model, might not adhere to the founding vision of widely accessible, ethical AI development. This legal move has sparked debates about the intentions and responsibilities of AI organizations, showcasing a clash between two visions for the future of artificial intelligence. Musk was one of the early pioneers for AI and partnered with Altman initially to get ChatGPT off the ground. Musk has given millions of dollars to OpenAI and helped pay their rent for years when they started.

Business Insider wrote a cool story on who they think is winning here

Ebbs & Flows 🌊

What’s the Most Favored Nation Clause (MFN)?

The genesis of MFN was in international trade and serves as a cornerstone principle of the World Trade Organization. At its core, an MFN provision ensures equal treatment among trading partners, preventing discrimination in trade policies. In the realm of contracts for goods and services, MFN clauses maintain fairness by prohibiting sellers from offering preferential terms to competitors of the buyer. So, how does this relate to early-stage investing?

What Does MFN Mean in Investing?

In investing, the MFN clause is a vital component of agreements such as SAFEs and convertible notes. Essentially, it ensures that an investor receives the same favorable terms as any subsequent investor in the future. For instance, if a startup offers better terms to a later investor, the original investor with the MFN clause automatically benefits from those new deal terms.

Quick Note on SAFEs and Convertible Notes:

SAFE: A Simple Agreement for Future Equity is a investment instrument pioneered by Y-Combinator. That allows startups to raise funds without immediate equity dilution and at speed. (I don’t like these)

Convertible Note: This type of debt financing enables conversion into equity at a later stage, typically when the company secures additional funding.

How MFN Works in SAFEs & Convertible Notes

The MFN clause within a SAFE or Convertible Note agreement safeguards the investor's interests, particularly concerning the valuation cap and discount rate. For instance, if a subsequent investor secures more favorable terms, the original investor with the MFN clause automatically receives those terms upon conversion. If you invest in SAFEs then it is crucial that you have an MFN clause for when your “promise for future equity” converts to equity.

Why does this matter?

The MFN clauses provides security for investors and allows for an extra bit of “insurance” on your investment. If you are willing to take on more risk as an investor, the MFN clause will help hedge that risk purely from a equity standpoint.

Capbase has a great article that I’ve read a few times!

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