The Secret to How an Idea-Stage Startup can Raise $3MM... 🤔

In the last newsletter, I put forth the “Venture Investing Expression” below:

✅ Depth of market problem ∝ solution fit ∝ non-obvious insight ∝ traction ∝ business model ∝ market size ∝ go-to-market strategy ∝ team execution potential ∝ status of fundraise ∝ valuation ∝ stage of business ✅

Today, we are discussing the stage of business. 

Prior to becoming an investor, as a startup founder, I never understood the answer to this ONE question... 👇

The question is, “How is it possible for an investor to invest in a startup with several hundred thousand in annual recurring revenue, and then in the same checkbook comes a startup investment at the pre-revenue stage, or even the idea stage?”

These two startups are world’s apart. The first is much more de-risked with a clear sense of value proposition, distribution model, and ability to scale. The other possesses incredible risk and layers of unproven assumptions.

But really, there is something else at play.

There is one fundamental thread between both of these companies which is why this can happen. 

I will tell you, it is not about the stage of the company. In fact, it is almost never about the stage of the company. At least it shouldn’t be. 

✅ It is all about forecasting the future. The future that I believe as an investor will occur. ✅

A View of the Future from Two of our Portfolio Companies

Midwest Games is a video game publisher based in Green Bay Wisconsin. 

We invested in Midwest Games’ $3 million round one year before they had projected to earn a single dollar of revenue.

We invested in the founder Ben Kvalo when Ben was still using his personal email account and the actual website address URL had not even gone live yet. In fact, the entity of Midwest Games had barely just been set up. 

👉 How in the heck was Ben Kvalo able to raise over $3 million at this stage? 👈

Or, take an example with Octane Coffee, which is the first investment that Tundra Angels ever made back in February 2021. 

We invested when Adrian Deasy from Octane Coffee had simply a robotic prototype of what he was developing. They would actually be about two years away from selling their first cup of coffee and dollar of revenue.

Adrian had demonstrated that he was able to develop an algorithm to control the robot and to have the robot make micro-adjustments to the way that the coffee was made end-to-end. If I recall correctly, the element of GPS timing the drink-making was on the roadmap but the algorithm had not yet been developed that would effectuate the drink-making timed to when the customers would arrive. 

There was no real estate secured for the first location. 

There was little to no objective validation of customer demand. There were not any surveys done, as to validate the thesis that consumers would desire this type of coffee experience. (NOTE: If I’m being honest, for one part of me, this scared the crap out of me since I am one who was academically and practically trained to discover risk points and to run micro-experiments to seek and destroy that risk. Yet, good thing I have another side of my brain 😀… see below).

For all intensive purposes, back in 2020, Octane Coffee existed with a working robotic configuration that could make coffee autonomously on demand.  

Startup founders sometimes have a tendency to objectively see stories like this and become bitter. The reaction could be, “Why the heck would anybody invest in that company when I am sitting over here with $18,000 monthly recurring revenue and no investor is even paying attention to me...” 

...Or maybe I was alone in my thinking as a startup founder when I would read stories like this. But probably not! 😉

But, as an investor, I’ve seen how it can happen. That’s why I am sharing what made Tundra Angels invest in both of these near-idea stage companies and others that follow a similar line of thinking. 

To do that, I will tell you a story. 

How Tundra Angels almost didn’t invest in Octane Coffee