We’re proud to share the latest in PEVCtech’s periodic series on the tech and analytics stack of investment management firms. We’re fortunate to interview Jonathan Sun, Founder of Horizan VC, a structured finance company.
David Teten: What is Horizan VC?
Horizan VC is a structured finance company based in the UK, utilizing a debt/equity instrument called the Convertible Income Share Agreement (created by Chisos) to invest in highly talented individuals that would otherwise have to get bank loans or fund through other means. In other words- we’re the friends and family most founders would’ve never had. Our investment is secured by an individual’s personal future income, but not their assets.
David Teten: Who are your closest peers?
In the alternative capital space, we are most comparable to Chisos. For a list of other alternative VCs, see Who are the major Revenue-Based Finance VCs? and The Leading Flexible VCs, with structures between equity, debt, and Revenue-Based Finance.
David Teten: How does your structure compare to Chisos and other alternative VC models?
Compared to other revenue-based financing models, we underwrite mainly on an individual’s income rather than business revenue. In addition, we have the ability to invest in traditional friend & family rounds. Compared to the Chisos’ CISA, most aspects are quite similar, except we invest mainly in the UK (and hopefully, down the line the rest of Europe); we convert at a £700,000 (~$850,000) Qualifying Round rather than $2 million; and at the Qualifying Round, the remaining unpaid ISA converts straight to equity (rather than having a 1x repayment cap) with follow on rights.
The reason why we changed up the terms slightly from what Chisos offered were twofold. Firstly, although we believed in the downside protection element of the CISA heavily, we wanted to sacrifice a little bit of that for some more equity upside, which is why we have an earlier Qualifying Round and a follow-on strategy. Second is regulatory. Unlike the US where the ISA sits in a relatively gray legal area, the Future Earnings Agreement (as it’s referred to in the UK) is fully regulated by the Financial Conduct Authority, and since our FEA servicer (Stepex) controls almost every aspect of it, we have certain limitations on how much we can mold terms.
David Teten: What’s your background? How and why are you in your role today?
Essentially, I stumbled upon Alternative VC by chance. Previously, I spent 3 ½ years working on an Edtech app that utilized NLP to match high school students to their best fit universities, while simultaneously helping to host entrepreneurial gatherings in my spare time. After I shut down my previous startup, I spent a year doing freelance “head of community” work (where I would continue to run entrepreneurial events and gatherings) and taking courses in investing. It was during these gatherings that I found out how frustrated entrepreneurs were with the status quo of the investment scene, and that’s what really drove me to find solutions that would creatively invest in founders (1) at the friends & family round and (2) weren’t venture scale but had the potential to be successful. Then came the rabbit hole of researching TinySeed, IndieVC, Calm Fund… before finding Chisos on page 9 of Google. I liked the CISA a lot, and reached out to Will Stringer of Chisos in March of 2021. The rest was history.
David Teten: What are the tools you’re using for your front office (sourcing, LP relations, investing analysis, etc), middle office (tracking, risk management, etc), and back office (settlements, records maintenance, accounting, human resources, etc)? What are the strengths and weaknesses of these providers?
FRONT OFFICE:
Currently, we’re utilizing an internal operating system we built called Bluecean for startup application forms and dealflow analysis, which links to our Slack via Make (formerly Integromat). Built on Bubble, this cuts down the amount of tools that we have to use in our workflow, so it makes startup analysis much more efficient. Long term, we’re working on expanding Blueocean to the point where it will bring other elements as well (LP relations, LP onboarding risk management, etc). This will really turn our operations into one giant supercomputer- where everything is in one location. We’re excited for when this finally gets finished.
MIDDLE OFFICE:
- Stepex (FEA servicer)
- Airtable for tracking contacts and relationships. Solid overall, but sometimes annoying to share permissions with others.
- Canva (pitch decks). Better than Google Slides, but is missing a few graph options that could’ve helped much more.
- Notion (interview notes, fund memo). Integrates into Slack very well so it helps keep things organized.
- Youcanbookme (interview scheduling). Too many features hidden behind a paywall, but at least it does the job.
- Pandadoc (where founders sign SAFE notes). We personally prefer this to Docusign because of ease of use.
Back office:
- Quickbooks for accounting. No complaints.
- DealVDR by Finsight (data room). Again, no complaints either.
- Secret (portfolio perks). Decent portfolio.
- Blueocean (once we build out the functionality)
David Teten: Why did you build Blueocean instead of using an off-the-shelf solution?
We tried a few different providers, but realised that the way we wanted to set up things meant we needed a custom setup rather than something off-the-shelf. It also helped that we have a partner on our team (George) who is skilled in no-code development, which meant building it out would’ve been more efficient/cheaper/tailored to us.
David Teten: What technologies/databases have you found helpful in placing LPs? (I wrote about this in Why Isn’t Sales As Efficient As Online Dating and Fundraising hacks for VC and private equity funds.)
This is an area we’re still working on. The trouble is a lot of limited partners don’t respond super well to cold emails/DMs, so although we’ve experimented with some databases (Crunchbase, private family office Excel sheets) and tools on this end (mostly by typing “limited partner in fund” on Twitter/Linkedin; building some databases; and automating some cold DMs via Phantombuster) we’re still much more in the category of trying to meet them face to face at various events (and then reaching out to them for coffees afterwards).
David Teten: What tools do you find helpful for expediting due diligence? Particularly given even more so than most VCs, you are very dependent on understanding the caliber of the team running a business.
It’s not so much “tools” rather “frameworks.” Specifically on the founder’s business acumen, we currently have a scoring system that revolves around landing page traction (our favorite idea validation method is pretotyping), founder industry expertise, problem/solution fit, upside and moat. We’ll review a deck once to see if it’s interviewable (5 min), then schedule an interview, then review it for about 30 min-1 hr more (those that we want interviewed).
David Teten: A huge amount of valuable data flows through your pipes. What are you doing to capture that data and mine it? Can you share any patterns you have identified?
We’ve been keeping track of dealflow since 2021 and have a few insights (though we haven’t gone through the detailed mining of data yet). What we’ve seen so far:
- 65-70% of founders who apply to us are non-white and/or are women.
- Many are raising their first pre-seed round, and of the ones we’ve invested in, we’ve mostly come in first check
- Most hope to go venture-scale, even though evidence states that less than 5% are suited to venture-scale hypergrowth. More education of the founders is needed for them to understand this.
- In recent months, AI has played a much more prominent role in the technologies that founders hope to build. Before that, blockchain plans were all over the place.
- We get a decent amount of CPGs applying, but haven’t had the chance to invest in one yet.
David Teten: Do you see any room to use AI to exploit your dataset? If so, what are you doing to move that forward?
Down the line, we are potentially working on integrating some AI onto Blueocean to automate initial due diligence by giving the algorithm the basic inputs needed to greenlight/ yellowlight/ redlight a deck (based on minimum traction requirements, minimum years of experience in an industry, etc). This will then filter what we need to analyse ourselves/which ones to skip. The AI tool will have limitations to start (which is why we have to do a secondary filter on those that are green/ yellowlighted) but should be helpful to us right off the jump.
David Teten: What are your unmet technology needs? Places in your firm where you’re seeking a solution and haven’t found an appropriate one? These may indicate room for Versatile VC to build or invest in a startup addressing that need.
Maybe something similar to what Lolita Taub tried doing 2 years ago (the GP/LP Matching Tool) but for alternative capital providers? It’s hard to tell which LPs love alt-financing and which ones like your run of the mill, sector-focused VCs. And the GP/LP Matching Tool is not operating anymore.
David Teten: I would guess Lolita Taub build that in part to support her own fundraising. So maybe you could do it for the same agenda.
Specifically given you’re investing in ISAs- how do you make sure founders pay back?
We have an ISA servicing provider called Stepex, who does all of the financial promotions, due diligence, and regular checks on founders in exchange for receiving 4% of all ISA payments. Stepex utilizes OpenBanking to track portfolio founders’ incomes, and money automatically gets charged if personal income is higher than the threshold we set.
David Teten: I’m an Advisor to Hypercore.ai , a loan management system for non-bank lenders. The CEO, Daniel Liechtenstein, suggested I ask how you’re integrating data from what appear to be multiple silos into a centralized system of record.
We haven’t done that yet. Right now articles go on Slack; numerical data goes in the deck/memo with a hyperlink; founder updates go on a newsletter. We hope to integrate a centralized system of record in our operations eventually.
David Teten: What processes are you focused on improving?
- The LP side of Blueocean
- Automating DD for startups
- Tracking business relationships and their status
- Task management
David Teten:I published research some time ago showing that alternative VCs tend to disproportionately back women and other underrepresented founders. What percentage of the people applying to you for capital are women/underrepresented? What percentage of those who actually receive capital?
So if we use the definition of underrepresented as women, non-white, and/or LGBTQ, about 65%-70% of our dealflow comes from underrepresented founders. We’ve funded 7 founders so far, of which 3/7 of those are women and 4/7 of those come from non-white backgrounds (1 team has both). No LGBTQ founders yet to our knowledge, but that might come soon.
David Teten: Many allocators and Investors who want to support diverse founders have explicitly and publicly targeted founders of a certain race or gender. However, given the recent lawsuit by American Alliance for Equal Rights against Fearless Fund, those race-based models may become legally vulnerable. What do you think the lawsuit implies for your model?
It’s interesting because as we are focused on the UK (Europe in the long run), the Fearless Fund stuff hasn’t really affected us as much. Still- we’ve talked about this, but alternative models like CISA open up access to capital for the 90-95% of founders that aren’t building a venture backed startup, which many minorities and underrepresented founders are working on.
David Teten: How can the PEVCtech community be helpful to you?
- Meet more like minded people in both Alternative VC and the equity only space
- Opportunities to connect with limited partners
- Opportunities to evangelize more about Alternative VC (and the positive implications of our terms)
Already getting a lot from the community/resources- thanks a bunch for what you’ve built!
