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QUARTER IN REVIEW: THE CASHMERE FUND
While summer months tend to be slower in the world of venture capital, our investment team kept busy in Q2 by continuing to make new investments and build on the Cashmere fund thesis of investing in companies that are network affectable, scalably impactful, and broadly understandable. As a reminder, our team is interested in disruptive startups that the Sweater member community can elevate by promoting, purchasing or championing within your respective workplaces or personal lives. Unlike other seed stage funds, we have a huge community of thousands of investors from a variety of backgrounds, and together we have the power to drive meaningful growth for our portfolio companies.
As we continue to build our portfolio, there are a few verticals that we believe are ripe for disruption and have the potential to impact substantial returns. We’ll continue to provide updates on portfolio construction as we get further along in the life of the fund but today we would like to highlight our excitement around investments in healthcare technology, consumer technology and marketplaces, and consumer products.
You can watch the recording of the Sweater team reviewing Q2 2023 and answering Q&A below.
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HEALTHCARE TECHNOLOGY (22% of Current Portfolio)
At the end of 2022, Andreessen Horowitz, one of most prominent VC firms with early investments in Airbnb, Facebook, Lyft, Pinterest, and Slack, published a blog post on their thoughts behind a belief that the biggest company in the world will be a consumer health tech company (source). The article goes on to discuss how patient demands are changing as Americans expect more convenient, personalized, and affordable healthcare. Further, today’s biggest technology companies (Google, Apple, Facebook, and Amazon) are currently looking at ways to incorporate the $4 trillion healthcare market (20% of US GDP) into their product roadmaps.
With that said, there’s still a tremendous amount of room for innovation as legacy health systems and payers still operate with painfully slow, tedious and frustrating patient engagement platforms (or lack thereof) – think paying for medical bills, finding a new provider, or booking an appointment. This all makes the thought of taking care of your health more of a chore than a priority, leading to a lack of preventive care, increased illness and more money spent on reactive medical practices. From this end, there are two sides of the equation: making health systems more efficient and making patients more engaged in their health. This is why we’re so excited about health tech investments like Pear Suite and Grapefruit Health, who are working towards creating a more efficient ecosystem, as well as investments like Cabinet Health, Wyndly, Parallel Health and Hone Health who are hyper-focused on creating consumer-centric solutions.
CONSUMER TECHNOLOGY AND MARKETPLACES (17% of Current Portfolio)
There are clear reasons why Sweater seeks investments in consumer technology and marketplace businesses. Community is at the core of our ethos at Sweater. Not only do we believe in the power of community as investors, but we also live it as startup operators ourselves.
Network effects (the concept of networks becoming more valuable to users as more people use it) sit at the center of most consumer tech startups and become more impactful as a community grows. Almost every major technology company is powered by network effects - from messaging apps and workplace collaboration tools like Slack and Notion, to marketplaces like Airbnb and Uber. However, as competition enters a market, saturation of network effects becomes a threat. The quality of a community, and the connections it fosters, become increasingly important to maintain positive retention.
The strength of community feeds into a startup’s ability to successfully accomplish and maintain network effects. We see these fundamentals demonstrated in EarlyBird with nest engagement, SweatPals in wellness community management, Hearth Display in inter-family communication and scheduling, and Nada in using the power of community to open more opportunity for generational wealth.
CONSUMER PRODUCTS (15% of Current Portfolio)
Consumer product businesses require less upfront capital to find product-market fit, and once found, these businesses have a faster, more capital efficient path to profitability. Since CPG startups raise less venture capital money, early stage investors have less risk of later stage dilution than they do in technology investments, taking home a larger piece of the pie when these companies exit.
Further, consumer startups with the right capital stack and scalable unit economics have many opportunities for successful exits. These exits could range from $300 million acquisitions or PE buyouts to $1 billion IPOs. While these exits look different than a $10 billion technology exit, an investor can take home equally impressive returns based on increased ownership.
When we look at CPG investments, we search for founders who understand the importance of capital efficiency and the fundamentals behind maintaining a strategic capital stack. We see these qualities in the founders of IQBar, Graza, Frances Valentine, and Nomadica.
PORTFOLIO PERFORMANCE HIGHLIGHTS
Wyndly rounded out a great allergy season as revenue grew 77% from March to July. Providers are now actively approaching the Wyndly team to provide allergy drops to their patients, creating substantial opportunity to further enhance efficient acquisition strategies.
Hearth Display launched Routines, a new product feature that allows families to set and customize dynamic routines for each member of your family. The product feature comes following a successful first half of 2023, with 87% of onboarded units checking Hearth 2x per week.
Accredible successfully closed a Series B of $15 million, resulting in a 20% increase in valuation. We’re thrilled to watch the team continue to drive towards strong growth with 51% increase in year-over-year revenue and over 2,000 customers using the platform.
Shappi launched AI technology that automatically creates an international delivery request in seconds when the customer uploads their invoice, reducing user time and friction between purchasing and alerting the warehouse. The team is committed to sustainable growth while also reducing marketing costs by 30%.
How to Evaluate Venture Returns?
When it comes to building wealth and diversifying investment portfolios, today's investors have a variety of options to consider. From traditional savings accounts to the more dynamic world of venture capital, each avenue presents distinct opportunities and challenges.
If you're invested in the Cashmere Fund, you’re likely drawn to the venture capital landscape for a myriad of reasons, like owning a piece of innovative companies, the opportunity to support visionary founders, or the potential for outsized returns. Whatever your motivations, one key aspect that likely influences your investment decision is a venture fund’s ongoing performance in relation to other investment options. The aim of this update is to highlight key things to consider when evaluating the risk and reward profiles of venture capital against other available investment options like savings, real estate, and public stock markets.
Things to Consider:
Some crucial things to consider when evaluating investment options is the expected time horizon and return profile of a particular investment.
Traditional savings accounts and certificates of deposit offer short-term, predictable, low-risk options, but the returns are limited, especially when adjusted for inflation. These investments are more conservative options that prioritize liquidity and safety. These tools can help preserve wealth when balanced with a diversified portfolio.
Public markets on the other hand, represented by stocks and bonds, offer a medium-term investment horizon with the potential for higher returns than savings or certificates of deposit accounts. However, the volatility of the market can lead to substantial gains or losses depending on timing and portfolio concentration, making it suitable for investors with a moderate risk tolerance.
Real estate investments generally require a longer time horizon. Real estate can provide steady income through rental properties and potential capital appreciation over time. However, it involves significant upfront costs and can be susceptible to market fluctuations and interest rate risk.
Venture capital (VC) is distinctive, characterized by its focus on early-stage startups with substantial growth potential. Venture capital caters to investors willing to bear the risk of individual portfolio failures for the opportunity to receive potentially exponential returns as exits and value appreciation take place. Venture capital investments have a longer time horizon compared to savings, stocks, or bonds. While the potential returns can be significant, they often take many years to materialize. Looking at some examples, Google took 5 years to IPO, Facebook took 7 years to IPO, and Spotify took 10 years to IPO, according to public S1 filings. While these instances highlight the potential rewards of venture capital, it's essential to acknowledge that not every startup culminates in a successful IPO; many opt for other exit strategies (e.g. mergers and acquisitions (M&A), secondary transactions, etc.). When the timing of these various exit routes is combined, the average span from initial investment to exit tends to hover around 6 years (Source: Statista).
The J-Curve:
One key concept often associated with venture capital investing is the concept of the J-Curve.
Andreessen Horowitz outlines the concept, highlighting that the J-Curve results in initial negative returns followed by a steep upward trajectory as successful startups mature and generate value. Early-stage startups require significant capital outlay to develop their products, hire teams, and achieve market traction. This upfront investment often leads to initial losses, which are then offset by the success of a few standout companies. Patience and a long-term outlook are essential for those embarking on a venture capital journey.
The chart below helps visually illustrate the concept by showing the venture rate of return over time relative to time invested. As venture funds deploy capital through initial and follow-on investments, returns turn negative until capital is returned through growth in fair value or portfolio exit events (M&A, IPO, etc.).
High Risk, High Reward
Venture capital investing carries additional risk due to the uncertain nature around building and scaling successful startups. A significant percentage of startups will likely fail. However, the potential rewards are significant. Companies that achieve successful exits can generate returns that far exceed those offered by other investment avenues. Average venture capital returns have significantly outpaced the returns of other asset classes over the past 15 years (Source: Preqin).
On the other hand, real estate and public markets tend to provide more predictable and stable returns over time. While they may not offer the same upside potential as venture capital, these asset classes boast a level of stability that appeals to many investors. Ultimately, these investments should also play a role in developing a well-rounded and diversified investment strategy. According to J.P. Morgan’s Private Banking Group, investors typically allocate between 15% to 30% of their total portfolio to alternative investments (source).
Final thoughts
Venture capital's role in any portfolio requires a long-term mindset. As startups work to create value, the potential rewards can be substantial. Patience, however, is the cornerstone to this strategy. The timelines of Google, Facebook and Spotfiy's IPOs serve as a reminder of the duration of these types of investments. The concept of the J-Curve aptly describes the pattern of initial hurdles and eventual growth potential venture capital has over time.
It is also crucial to highlight the unique structure of the Cashmere Fund. The Cashmere Fund structure requires that it distribute 90% of its investment income and capital gains annually, highlighting the importance of maintaining a position in the Fund for those interested in tapping into potential exit events and the long term upside of the Cashmere portfolio.
Venture investing offers substantial potential, but it thrives within a diversified portfolio. Designing a strategy that balances risk and stability is paramount. By thoughtfully intertwining venture capital's potential with the Cashmere Fund's interval structure, real estate's steadiness, and public markets' reliability, you forge a path that capitalizes on opportunity while fostering financial resilience. As you navigate this dynamic landscape, remember that the journey's success hinges on embracing the potential of venture capital while keeping an eye on the broader canvas of diversified investments.
