Top 3 VC innovations


Innovation is a buzzword amongst venture capitalists.

Yet amid the transformative innovation in their portfolio companies, the “all or nothing” equity financing model has remained largely unchanged since its inception. As the venture landscape changes, some VCs and accelerators have catalysed new funding models to create a positive-sum outcome for investors and founders alike. 

Let’s take a look at three of the best:

Share earning agreement (SEAL)

The problem:

The traditional VC investing approach can be limited. VC firms invest with the intent of placing many bets, hoping that a few of their portfolio companies grow into unicorns. The theory is that even though 80% of the businesses may fail, the few home runs will return the fund. In this model, only massive growth and outlier outcomes qualify as a success and even thriving, profitable businesses can be a “failure” for the fund. 

This approach has worked well thanks to investor demand for mature VC-backed companies in public markets. But it excludes robust businesses with smaller Total Serviceable Markets that can quickly reach profitability, without blitzscaling towards an IPO.

The solution by Calm's fund:

The basic principle behind a Share Earning Agreement is that investors make an initial investment and then get a share of what is known as "Founder Earnings." 

What do Founder Earnings look like? Most business owners see sales come in, expenses go out, and whatever is left over is an amount of money that founders may split into three categories: salaries, dividends, and retained profits (which are held in the firm but can be turned into #1 or #2 at any moment). 

The Share Earning purpose is to align the interests of investors and founders, while allowing founders complete control of their firm. In equity funding, the lines between salaries, dividends and retained profits are arbitrary. In the SEAL model, the founders salary is defined even in the early days, alleviating governance issues. Unlike the revenue financing model where investors take a percentage of annual revenues in perpetuity, the SEAL expires once an earnings cap anywhere between 2-5X is reached.

You can check out their article that explains it in more detail here:

The SAFE and the AIR

The problem:

When you are a startup raising your first round, it doesn’t make sense to spend $30,000 or 10% of your raise in legal fees.

The solution from YC:

A simple, open-source, standard agreement to raise a pre-seed round. Y Combinator released the Simple Agreement for Future Equity ("SAFE") investment instrument. This simplicity is the primary motivation of a SAFE. "Safes should work just like convertible notes, but with fewer complications". 

These simple agreements have been a massive success and have helped get a lot of startups off the ground in the US. In Europe, the only initiative I can think of is the AIR, launched by The Family & SB Avocats which is a reproduction of the SAFE under French law. 

European accelerators are well positioned to legally adapt the SAFE to their jurisdictions, helping more startups get past the ideation stage.

VC with benefits / Co-investment program

The problem:  When Tribe Capital looked at the traditional VC fund model, they found three problems: 

  • More and more LPs want to co-invest directly in start-ups alongside VCs.
  • Founders expect VCs to be able to support them throughout their journey.
  • VCs are presented with appealing opportunities that do not necessarily correspond to the funds’ thesis. 

The solution from Tribe Capital: Co-investors receive an opportunity to gain deal-by-deal exposure to Tribe-vetted companies, via SPVs.

For LPs, a wider array of deals outside the thematic confines of the main fund.

For the founders, they know that Tribe Capital can help raise capital throughout from a global network of co-investors.

You can read more about their co-investment program here:

More to come

As the European venture ecosystem booms, it’s great to see some of the VC innovations from the US percolating into the continent. Traditional equity funding has, on the whole, been remarkably successful, but doesn’t always match the diverse needs of founders, LPs and GPs.

Here at Vauban, we’re hellbent on providing standardised solutions for these groups. Watch out for more disruption of VC fundraising as capital continues to flow into the region's startups.

Ulric Musset