Kim Banham is a Partner at Connetic Ventures an early stage VC fund. Connetic is reinventing the VC industry by leveraging AI and data to change how startups are evaluated and funded, investing in the highest potential founders in overlooked geographies.
Connetic Ventures has eliminated the bias that exists in Venture Capital, resulting in 64% of portfolio companies have a female or a minority founder. Kim is passionate about leveling the playing field and providing more VC funding to female and minority founder. Kim is responsible for deal flow and making new investments in 14 states and Mexico.
Kim serves on the Board of Northern Kentucky University Innovation and Entrepreneurship, the Board of Advisors for Aviatra Accelerators, and the Board of Advisors of Unbox.
What does the vc investment process really look like?
Why should women founders be wary of VC funds that are earmarked only for women?
When fundraising, what hidden risk might scare an investor away that you as a founder may see as a big win?
In this episode, Kim Banham, general partner at Connetic Ventures, talks about how the vc process can be moulded to remove bias against women founders, the big disservice that women-focused vc funds do to women founders, the founder blind spot that is a red flag for potential investors, and much more.
- How to get venture capital to startups across ALL of America, not just Silicon Valley
- How kids’ chores led to the founding of Connetic Ventures
- The role of AI in streamlining the investment process
- How and why the team impacts the startup investment decision
- The positive ripple effects of AI-assisted decision making for women and minority founders
- Why women-focused funds do women founders a big disservice
- Surprising stories about the impact of founder gender on fundraising success
- The exact ways in which team composition makes or breaks a startup, and how you can leverage this insight to succeed
- After the money is wired – how to manage the investor relationship for long term success
- Factors impacting follow on funding and future startup success
- The one question every venture capitalist cares about before deciding to invest in a founder
- Turning lemons into lemonade – how women founders outperform male founders
- Inside tips from a VC on doing great reverse due diligence on investors – for your sanity and your startup’s success
Links and Resources:
Connetic Ventures: The vc firm in which Kim is a partner
Applying for funding: Application portal for startups wishing to apply to Connetic for funding
Shubha Chakravarthy: Hello Kim! Welcome to Invisible Ink. We’re so excited to have you here today!
Kim Banham: Hi Shubha! Thanks for having me. I’m excited to share a little bit about Connetic Ventures and our process and dive in a little bit deeper.
Shubha Chakravarthy: Excellent. As you mentioned, you are a part of a pretty unique VC firm. You have a very different model. What got you involved with Connetic in the first place and what’s your role in the firm?
Kim Banham: So, I’ve been at Connetic Ventures for over seven years now, and the founder of Connetic Ventures, Brad Zap, was my financial advisor prior to starting a VC firm. So, when he started this firm, I joined on the team, not in an investment role, and quickly learned a lot about venture capital, early-stage investments, and was a principal and then became partner this past year, leading investments in 16 different states and in the European market as well.
Shubha Chakravarthy: So how would you describe Connetic and what is your firm’s investment thesis and focus?
Kim Banham: As you said, we do things very differently here at Connetic. So, we are based in Covington, Kentucky, which is in the middle of America. As you can probably imagine, Kentucky has some great startups, but it is not exactly the tech hub of the US. We realized quickly into investing, that we needed to build a technology platform to enable and allow founders to have access to capital regardless of where they are based.
Connetic focuses on all early-stage investment. We do pre and seed investments. We like to be one of the first investors in a funding round, along with angel groups or other institutional investors. We invest in all different industries and sectors with the exception of life science. We do not do pharma, med device. We are open to any other industries except life science.
Shubha Chakravarthy: You mentioned that your co-founder or your president is a former financial advisor. What led to the starting of this firm? What is the origin story?
Kim Banham: It is actually a pretty unique story as he was running a family office that he started, he was going through a divorce at the time and used this app called ChoreMonster on which kids would do chores and get points to buy something and he sent an email to the company saying, this has changed my life. I had no idea. It was an early startup company that happened to be in Cincinnati close to where our firm is. So, they responded to him, and he learned about this, and it is very interesting because obviously all financial advisors have different levels, but this is the private market, and this is not something that they are offering to their clients being in the private sector.
So, he was like, “This is amazing.” He decided that he wanted to figure out how this worked. That is how he first discovered this. As you talked about it, our process is pretty unique. Along the way, we have constantly evolved and when we built Wendel, which is the technology platform that we use. At the time we didn’t realize, but it completely eliminates the bias that exists in venture capital because we are asking every founder the same questions.
We are using the AI and machine learning to then determine which companies are more likely to be a fit for us. There are multiple steps to this. It takes a founder about 15 to 20 minutes to complete the whole process. One widget as you asked, is the financial background, knowing that you need certain returns and obviously for any investor we want to make money in, how do we calculate and figure that out, which you can do manually, but we can also input an algorithm into our machine learning and AI based on your current revenue, how much funding you have raised in the past, how quickly you are growing. By a click of a button, it can spit out expected return multiples. We’ll see all kinds of different financial information. That’s one step and one part of the process.
Another part of the process is a personality assessment that we call TeamPrint. Every investor that you talk to, they always talk about the team. What we realized is it is very difficult to have a startup company and you have to wear every possible hat that you can imagine as a CEO-founder of a startup. Different people are wired in different ways to be able to adapt to this. Changes or those roles at a very fast speed because if you are hiring a CTO and you hire the wrong CTO, that can literally bankrupt a startup. So, it is crucial to have the right team in place.
So, what we actually did is that we hired a full-time industrial psychologist and built out the TeamPrint personality assessment where we have the CEO go through as well as other leadership members on the team to see how this team works together and what their profiles are. We have data that can now help us predict which companies are more likely to succeed based on how a founder is wired.
Shubha Chakravarthy: It sounds like the underpinning of your differentiator is the application of the AI and the way you differentiate yourself is not only where you apply the AI, but you actually have actively taken steps to de-bias it.
Then there is a financial component that the AI looks at and then there is a team and personality component that it looks at and together that is kind of the secret sauce that helps Connetic do this process differently than, I’ll call it the typical VC firm.
Is that a fair characterization of what you just walked us through?
Kim Banham: Yes. As you said, what differentiates us from a typical VC firm is that if you are an early stage deal and you have $50,000 in revenue and you are talking to a VC, that only does investing companies with a million and up in revenue, you have now just wasted the founder’s time as well as your own time but for us, we want to spend our time on calls with the companies that are more likely to get a check from us right now and save the founder’s time as well as ourselves. So, we are using our time the most appropriately through using technology and data.
We call Wendel a junior analyst. You know, anyone could input certain things, like you can put input that you are doing 5 million of revenue, but we are still doing standard due diligence. So, if it is a fit based on what you put into Wendel, then depending upon where your company is located, between the partners at Connetic Ventures, whichever state, if it is my state, you would be doing the diligence process with me. So, we would have a call and then like every other VC, a list of what items we need for due diligence.
We like to come in at the pre-seed and seed stage. We do not do anything with over a 15 million valuation. So, that’s a big thing for us too. If you are raising million on a 20 million valuation, I don’t want a founder to waste their time. But these are things that I will see in my initial call when a company is a fit. I can get so much deeper on the initial call and in depth because I have all of this data that they have already input, so I know what questions, I want to ask the team.
I’ve already seen your pitch deck because you’ll upload a pitch deck. So, it just makes the whole process quicker and more efficient. For us, we can make an investment, pending a data room and you have all the diligence items we can close on an investment within three business days.
So, we are able to move really quickly. That you have all these documents, and every company is at different stages. Some may not have some of these, not everything applies to every company, so it very rarely happens that quickly. But we have made investments within probably two business days.
Our portfolio has over a hundred companies currently in it, of which 64% of our portfolio companies are female and minority founders. This is by taking a data-driven approach and eliminating the bias that is there with VCs. Everybody has underlying biases that we may not even realize that we have.
Shubha Chakravarthy: I just love that. Basically, two out of every three founders that you are funding are some kind of underrepresented founder, right? Either female and or a person of color. That is fantastic.
I had two big takeaways from the process. One was the removal of bias because you have an automated system for a lot of the issues that might cause rise to bias.
The second was a removal of the law of the friction, especially for women. We hear that they take a multiple number of meetings, more than a comparable male founder to even get to the point where the check is being written. I won’t even talk about the size of the check or the evaluation or the share of equity. So, those are the two big things that you talked about.
First off, how did you develop the search process and what about developing the AI?
At what point did you say, “Geez, we shouldn’t be putting in gender and race as evaluative criteria.” Can you walk us through how you developed that search and funding process over time and what are some of the pivotal learnings through that journey? Were there like big “Aha!” moments and how did they select how you ended up with this process?
Kim Banham: I feel like there are “Aha!” moments weekly here at Connetic because we are very unique. We are a technology-based venture capital firm, and anyone that has ever had a startup, when you are building something from the ground up you are going to have technical glitches.
So, when we first launched, it was one thing after another, and it is still not perfect. We originally created this software because we don’t have the funding to have employees scattered all throughout the United States. So, we needed a way, and everybody knows how powerful data is. We needed a way to actually capture this and use data, instead of our gut to make decisions and to actually be able to look back at data.
Like any type of AI and machine learning, it gets smarter over time. So, we can now go back and look at companies that we did not invest in that have succeeded and companies that we passed on investment and maybe failed. What are the data points? What is this data showing us? When a company is a fit, it doesn’t matter to me if you are a female founder or a male founder, or a person of color. We want great founders and great companies.
These “Aha!” moments when you are looking at data, it is like, “Whoa, look at how many different types of people we have invested in!” This is by taking a data-driven approach. So, that was actually a huge “Aha!” moment because there are a lot of funds out there that they may be investing in females or people of color, which is great.
But I also see this as a bit of a problem because as females, if we are both founders, a lot of times people will say, “Hey, have you gone to this fund that just invest in female founders?” Well, that fund may be a 50 million fund, whereas the bigger part of their fund is a billion-dollar fund. So, now you and I are being sent to a fund that is giving us access to 50 million versus a billion dollars. So, that was a huge “Aha!” moment. Every day we have a data meeting when we are looking at data.
So, as I say, there are constantly things that are coming up in the personality assessment that we are doing of these founders. Yes, we see where they fall in the quadrant, we have a full-time industrial psychologist and our assessment has been double validated for fairness and gender, age, and race, everybody listening has probably taken some sort of personality assessment and we can get into this because Shubha, you took it, and I would like to hear your results on what it said about yourself.
But what is interesting is a lot of these assessments were created in the sixties and seventies when it was mostly for executive level positions at companies, and it was white elderly men in those roles. So, there is a lot of age, race, and gender discrimination and some other assessments out there. So, we had this double validated for fairness. There are multiple people using our personality assessment within their organizations at some larger corporations, some smaller, just because it has been validated for fairness.
Shubha Chakravarthy: I can’t wait to get into it, but before that, let’s talk about Wendel. I’m hoping it’s a girl. Tell me it is a girl. Is it a girl?
Kim Banham: Wendel’s a boy. Actually, I guess we could say we refer to Wendel as a he, but I guess Wendel can be whatever we want it to be.
Shubha Chakravarthy: Okay. One day consider, just ask them, whether they want to be a boy or girl or anything in between. I just couldn’t help asking.
So, there was a big part of Connetic’s process and value proposition at length. You talked about the role that Wendel plays both in the financial assessment as well as in team assessment. How did you make sure as you were developing this AI that you are minimizing the impact of bias because even if you don’t ask explicitly for the founder’s gender or race, there is always going to be implicit bias because of the data that is trained on.
We know that there is a lot of bias baked in the old data. So, what did you do to de-bias explicitly the decisions that Wendel or the evaluations that Wendel would come up with?
Kim Banham: As I said, looking at the data as far as we don’t know. We’re not asking are you male or female? When you go through our process we don’t ask about gender, what we’re doing. We know our portfolio companies, the investments that we’ve made, that obviously, if I invest in your company, I have a female founder and I know that you are a female founder. We actually have a transgender founder that we invested in, which is another “Aha!” moment.
This founder was previously a male, she had a startup and raised venture capital funding and had no problem but when she transitioned to a female, she was having all these issues raising funding. She went through our process. We don’t meet these founders first.
She went through and was a fit and she literally cried when we invested because of all of this discrimination that she first-hand experienced. Her company is actually a DEI training platform for companies, but she said when she was a male, it was so much easier, and this was a first-hand encounter.
So, obviously this founder, we wouldn’t know they were transgender when they are going through, we know once we have invested because we have relationships with these founders and that’s how we know.
But our process doesn’t have a way to take out that bias. It’s just asking every founder the same questions and based on what the data the AI is telling us is how we move forward – with which companies we are going to initiate the conversations and start the due diligence process with.
Shubha Chakravarthy: The founder feeds in all of the data and essentially what AI does is it calculates an expected IRR, right? Then you have some threshold that says either it meets the IRR, or it doesn’t meet the IRR. Is that a fair characterization?
Kim Banham: Yes, I would say that is a fair characterization. You know, as I said, there are multiple steps and some of this, as we talk about the team and, I want to touch on team a lot more on this podcast because it is really important. So, you take this assessment as a founder, we have had 4,500 companies apply for funding.
As a VC you constantly have so many pitch decks sent over to you or calls that you are taking with these founders. But we now have data that you could say, “Have you heard of this company that applied for funding three years ago” By a click of a button I can see hundreds of data points about this company. They were doing this much in revenue in 2020. This was how much capital they were raising.
Other VCs may have an Excel sheet, or some VCs claim to be using some type of AI or machine learning. But I can look at all that and see where this company is. As I talk about the TeamPrint, the personality assessment, when investors talk about the team, what we have realized with the 4,500 companies is that we like to talk about diversification at Connetic Ventures. By diversification we mean different personality types.
So, on our assessment there are four quadrants. There are different colors. There is a red, blue, green, and yellow quadrant. If you have three co-founders that fall into, the blue quadrant, which is what we consider specialist technical, these people, they know their stuff.
So, you’ll see companies with two or three co-founders that might all be different personality types in that specialist quadrant. They have built out a beautiful technology platform that you were like, “This is going to be a game changer” in whatever they are trying to accomplish through their technology platform that they have created, and they want to keep building more features and aspects and making it better which is great.
However, you also need a co-founder or a team member that wants to take that technology in front of the clients that are going to buy it and pay you for it. So, you need a client facing, you also need someone that takes charge, a leader that is saying, “This is where we need to go. We thought we were going to focus on calling on financial advisors, but we now realize that the HR market is bigger for what we’ve created.”
To make that pivot, which some people are like, “No, it’s finance.” But to be able to see this is a bigger window of opportunity by our personalities, this is just naturally how people are wired.
Then the other quadrant are your collaborators. They get things done as your company scales. You are going to see a lot of green personality types because they are your doers. They are going to do the work handed to them. So, if you take a team that has three enterprise leaders, it may seem great at first, but they are all going to be arguing and fighting with each other over who is taking charge. As I said, the technical.
So, it’s diversification. If you can get one of each quadrant early on, you are going to scale quicker because, for example, Shubha, when you took this, you came back as an architect, which is in the specialist quadrant, but really close to the enterprise.
So, you are one over. You know that you are able, which you know yourself, and I’d like to hear your feedback on your results as an architect. What did you think when you took the assessment?
Shubha Chakravarthy: I’m an INTJ, that’s like my signature. That literally is called the architect, right? So, it came back pretty close to what I would’ve expected.
But the one thing that threw me off was it said there is some extra “amplify” something. Then it said “Gutsy.” I don’t know what that means. I’m hoping it’s a good thing.
Kim Banham: That is a great thing. So, as I said, there are so many levels to this. But as a founder, one of the great things about our process is when you go through the whole process, which you only took our personality assessment portion, and when you add team members, so as an early-stage CEO, you know yourself a little bit.
Like you said, this was pretty accurate, but imagine, knowing exactly how your co-founder or other people are. You think you know them, but what is actually really interesting, when we talked about Connetic’s journey from when we started, when Brad realized we need to do some sort of assessment. “How is this founder wired?”
So, when we took these assessments, we were taking multiple ones. I don’t even know how many personality assessments I had to take. I had been working at Connetic for over two years. So, you know a person, but you really don’t know how you are wired. One of the interesting traits that came back is that I was on the extreme leadership side, but you don’t see that when I was in a role just before I was making investments. You are not seeing how competitive or how much I want to win versus “Yes, I’m always willing to pitch in and help if it is someone else on the team doing diligence, give my input.” We are all team players and leaders at times, but this is just how we are wired to our core.
When you talked about the gutsy, it shows multiple things. We call those medals. So that is a very good thing. It means that you are willing to take a risk, which kind of demonstrates why you left consulting and are going down the startup route, that you want more. That is just how you’re wired.
The medals are great, and like I said, if you are on here and you have taken this and you don’t have a medal, it doesn’t pass or fail a founder. We have layers and layers of things that are built into this that we are looking at. All the companies that go through that because you can’t invest in every deal. You’re going to miss out on deals. So, we just want to make sure that we are investing in the best founders and the best companies that we have access to.
Shubha Chakravarthy: To kind of bring it together, can you walk me through a hypothetical situation where you have the financial analysis? I mean, they all come back together so you know what the financial profile is, or at least what Wendel thinks is going to happen. Then you also know the team composition.
So, maybe it is fully balanced, maybe it is not fully balanced. Now it is on your table. You have got to make a call, especially because as you mentioned, you have got a pretty short turnaround time. How do those two balance out and what is the thought process and your decision process that is going to help you say yes or no to any proposal that comes to your table?
Kim Banham: I mean obviously every investment opportunity is unique and different, but as you took TeamPrint, for example, I’ll use you as an example, and you came back as the specialist, as an architect, and if you had one other co-founder and your co-founder was in the yellow quadrant, and we have had a call, I’ve done due diligence, and I’m going to say, “Why are you raising this funding round?” Which is what every investor is going to ask.
If you are saying that you are raising this funding for sales, for example, you want the yellow quadrant, the client facing individuals. They are going to outperform. Yes, you can sell, but you are more technical to your core.
So, if you hire somebody that to their core is more client facing, they are going to perform better for you as a startup founder. So, a part of my diligence would be that you are raising this round to hire salespeople. I suggest that you use our tool. This is another thing we allow every founder – to use this personality assessment to find a client facing individual for that role.
Say you end up hiring other quadrants, they didn’t work out. You said, “I should have listened to you.” You have a little bit of everything, and majority of our portfolio founders absolutely are amazed. Like you said, this was spot on for you. When you are hiring people, even as a founder, you have certain personality types that you enjoy working with better. We call it a dynamic duo. So, my feedback to you would be, if we are investing and you are focused on sales, you need to hire these types of individuals.
When we go to do a follow-up on funding, if you come back a year from now and the sales are there, but you are like, “We need to build out additional features,” or your company is growing and like I said, you need those operational individuals that get things done.
You don’t need someone that wants to come up with a new and better idea for the way that you are building out a feature on your platform. We would give that feedback to a founder. So, it is like, “All right, we are ready to invest here. But these are some things that I think will help you as you are scaling your business.”
In your next funding round, the only thing that’s going to change is the financials. You are not going to change the person that you are. So, if you have hired some other people, we would ask you, a year from now when you are doing your next funding round to have those individuals take the assessment.
It is just to give you feedback that you can act on. It is actual data in front of your eyes that you can see – this is how Kim is wired, this is how Julie is wired, this is how John is wired. So, once we are ready to invest, everyone has seen this data, but how does this team look? What do we see as the strengths of this team and potential weaknesses? We’re looking at the positives and the potential negatives to help these founders and companies to grow and scale as much as possible.
Shubha Chakravarthy: I love how you described it because yes, there is always a financial component, but then you are operationalizing one of the biggest value adds of a venture capitalist, which is, “I’m going to help you grow and I’m going to help you grow faster by giving you the resources and the skills and support that you wouldn’t otherwise get.”
What I’m hearing is that you bring that data-driven aspect to it, which is just saying, “You need X, Y, Z, go find X, Y, Z. Yes, we are investors, and this is the data driven approach to the extent that we are very clear that you need this skill for this function, and therefore you need to make a match.”
So, it is a pretty easy conversation to have in that sense. You have funded somebody and now they have got the check in their bank account. How does Connetic involved in the management of this firm in the next 6 to 12 months? Then secondly, what are you seeing with specifically women and women of color founders in terms of how they respond to this versus maybe other investors they have had or other methods of management that they have seen in their corporate careers or whatnot?
Kim Banham: I’ll answer the second question first. As far as founders and people of color are concerned, I think it is just a breath of fresh air because like you said they are being treated the exact same and to be able to say, “We are not just investing in women and people of color, we are investing in everyone.” As a female or a person of color, why are you not being treated equally and the same, and why do you have to work so much harder to get investment from different VCs or investors?
So, I think for women and people of color, they really enjoy this process because they don’t have to jump through a million hoops and get asked completely different questions than a male that is raising VC funding would get asked.
That is for the most part always usually great feedback, of 4,500 companies I’ve talked about that have applied for funding, we have just over a hundred companies in our portfolio.
So, you are obviously saying no to a lot, but even these companies we say no to, they are like, “That was so unique. That was so fun.” They like the process. You get your TeamPrint personality results back and you also get an answer. So, a lot of founders may be reaching out, sending pitch decks to VCs and they get no response. So, you get a response. Every founder gets a response.
If you go through our process and you are listening to this call, you know it is conneticventures.com and you can apply for funding. We respond to every single person that goes through. If you don’t complete it, we see that you started this application process we still want to learn more about your company. So, every founder is going to get a response when they are going through the process.
Then, about the other part, once they are funded, how do you support them subsequent to the funding? We have a fairly decent number of companies in our portfolio, and I don’t have the time, unfortunately in my day to be running your company. We are giving you the funding that you need to scale your business.
We support our founders as much as we can. If there is something that they want, some feedback, we are always willing to chip in and help, but as I said, we have built technology. The personality assessment is a way for these founders to not make that wrong hire because my resume says that I have been a technical developer at a company for 25 years. I am the advocate. Client facing profile. More of a sales individual would be my type of personality. If I sent my resume to you, you would maybe think, “Oh, 25 years she has been here.”
One of our portfolio companies had two individuals that he had narrowed down to who he was going to hire for this role. And one individual came from Meta, I guess I can say which company and the other individual didn’t have quite the background and they took the TeamPrint, and he hired the person that wasn’t at Meta. He said if he would have gone just off of resumes in the initial interview, he would’ve hired that employee. But the person he hired, based on what Wendel said, she is doing absolutely unbelievable in this role. He is just shocked. He is like, “I’ll never hire another employee without using this.”
This is something that they don’t need as a founder in our portfolio. They don’t need to reach out. They have access to this tool where they can add three different candidates that they are looking at, for a developer role or a sales role, or a marketing role or whichever role they are hiring.
So, you know that is a value add that no other VC is doing anything really like this, as we have talked about how unique our process is. But, when we invest we are trusting in the founder to scale a business.
Obviously we want to help all of our portfolio founders, but I think that is the main difference angel investors and VCs. Angel investors seem to be more involved. They may be part-time or retired and have the time.
I’m looking at hundreds of deals a month. We have a portfolio we are managing; we are building a technology platform where things are constantly changing. So, we are not holding a founder’s hand, but we are always there to support in any way that we can.
Shubha Chakravarthy: One other question on that, and we will move on to some other interesting areas. Clearly the support to hire people, especially early stage is critical, right? Your team is going to make or break what you are doing.
Another thing that founders expect VCs is to offer is connections. I can pick up the phone and call these great people and make all kinds of magical things happen. How do you counter that and how do you address that specific need of founders over and above the technology?
Kim Banham: With every founder when they are raising funding rounds and for venture capital firms, we are constantly sharing deals with each other because very few funds are taking the whole round. We are all friendly. So, when I’ve invested in a company, like today I had a call with one of my portfolio companies. He sent me over the pitch deck. He is getting ready to raise.
I circulated his deck last week with another VCs. They were having a call this afternoon. What I do is when you have your pitch deck, I will send that to VCs in our network. “This company is raising, let me know if you want an introduction.” So, we usually just send the pitch deck.
If it is someone that we are doing a call with, like we have calls with other VCs, they’ll say, “What deals are you looking at?” Or “Anything coming your way?” because when we are a pre-seed and seed investor, we don’t invest past the Series A. So, we want to be your first money in, we’ll follow on. But we need to be very well connected with the Series A and Series B investors because we need our portfolio companies to get funding.
So, pretty much the most common way is circulating pitch decks with other partners at VC firms and understanding what industry they are looking at. So, we are diversified. If it is a consumer product, there are VCs that focus just on consumer products or they only do software, so I’m not going to send them that pitch deck.
We know what different VCs are looking for and we circulate pitch decks for our founders. One thing that I think is every founder needs to understand, “We are on your team. We are investing in you and your company. We want to win and succeed just as much as you do as a founder. Nobody wins unless we both win, and we are doing this together.”
Shubha Chakravarthy: That brings me to a very important point for VCs, which is exits, right? I mean, you are here for exits and you mentioned that you are going only through Series A and not past that.
Have you had successful exits and if so, what have you observed in terms of learnings about these exits given that you may not be as involved once they take on Series B, C, and so on? Can you talk about that a little bit?
Kim Banham: Connetic is only seven years old. With any type of early-stage investment the longer these companies are going, the more valuable they are going to become. So, we have had some exits, but we would prefer for these companies to keep growing because it is going to be more valuable to us as, well as the founder.
One of the questions I ask in part of my diligence process, because every founder is different, if you were asking me for investment and say you are raising a million dollars on a 5 million valuation, and I would ask you if somebody comes to you and offers you 20 million for your company in three months, what would you say?
This is just what I think, this may be a bias with angel investors, it is their own money. So, they are like, “4x my money or 3x my money. This is great.” They can turn around and invest. Well, VC firms are not in this for a 2x or 3x. We want outsized returns. We want to think when we are investing in a company, we are going to get at least at the very minimum, 5x our money.
So, we want even bigger returns. Some founders, and that is what in your personality comes into play here. Sometimes they get hired and it is like, “Oh, I can sell and have a couple million dollars, which is great.” You can have a couple million dollars, but if you are a 30-year-old founder, this isn’t enough money for you to go start your own fund or never have to work again.
So, that is one of the questions that I typically ask in diligence. Just because I’ll get to see what are you thinking as a founder? Is this a short-term thing for you? Like I said, some angel investors think, “This is great,” they would be like, “Sell your company.” Whereas I would say, “If you are already getting these offers after two years in market, keep scaling and keep growing and this is where you say, what is the relationship?”
I’m like, “Yes, you can get 20 million, but what do you think you are going to be getting offered three years from now? Do you want to do this for three more years to walk away with a 100 million versus 5 million as a founder? So, I put that into perspective. I want to know that because we are in this for the long haul. When you ask about our companies, the ones that have had exits, it has been a 2x or 3x, like nothing that is, “Oh, this is great.”
I mean, obviously yes, the company didn’t go under, but it is still so early to even predict, and I mean venture capital and angel investing. It is a roller coaster. One day you think a company is going under and the next day they have just raised a huge funding round or brought on a major customer. That changes the landscape and where the path that the company is going down. It is really hard to predict.
Like I said, we are not trying to predict which company is the next unicorn. We are trying to predict the ones that do not succeed, the bankruptcies, the companies that go under. So, that is what is more important to us – to make sure that these companies that are going under, are there certain data points you are seeing? Is there some pattern here that you know that we have identified? It gives us data to back up what is going on. This isn’t just for our portfolio companies. This is other companies that we are looking at.
Shubha Chakravarthy: I love it because two things – one is it reminds me of Warren Buffet’s Rule One – don’t lose money. Rule Two is “Don’t forget rule one.” It kind of reflects that.
Then secondly what I also like is that it focuses the light very brightly on de-risking your startup, right? As an investor, you are looking at how risky this is as opposed to, “Can I make out like a bandit?” If everything goes well, that is kind of a given because otherwise you wouldn’t be investing in it.
But once that is a given, it becomes very clear to me based on what you said that you are always looking to clip the downside risk and say, “How can you limit the downside while you continue to preserve the upside and amplify it? Is that a fair characterization?”
Kim Banham: Yes. Another thing to point out here is, when we talk about bias and what you will see when you have invested in companies is that you have this relationship, and you want them to succeed. When the company is not doing well, the data helps us to not keep funding something.
You will see a lot of investors that are like, well, if they raise another million, that this is going to get them, past this hurdle. Whereas we would say, “We are already invested in your company. We still believe in you, but we are not participating in this funding round.”
We hope that they succeed, but the data helps us. When you come back we are updating the financials so that is the only thing that changes in future funding rounds along with adding a few team members. But if it doesn’t make sense, we pass on investment.
So, the data helps us because when you really like someone, it is so hard not to be like, “Ah, I still believe in them. Here you go.” You will see that a lot with institutional and angel investors. I think that is a bias because, you like an individual personally or still think their business is a good idea but that doesn’t mean that that company is going to succeed.
So, the data helps us keep on track, to make sure we are not allowing that bias to come in to influence, like funding a company that isn’t where we expect them to be to get a check.
Shubha Chakravarthy: In that case, do you give them any kind of feedback that says, “Hey, you know, you looked great last year, but your numbers aren’t looking so hot right now.” You want to preserve the value. What do you do in that case?
Kim Banham: So, one thing here, we are all about transparency and honesty, and we just tell the founder, “This is where you were a year ago. This is where you told me you would be, you are not even close to these projections. We gave you feedback that you needed to hire salespeople, yet your team isn’t working out.” We will pull up the pie chart from the personality assessment. We would say, “Who have you hired since then?”
We are completely transparent with the founder and as a founder, you get told “No” a lot. But honesty is really important, and honesty is what you need to hear because I’m not here to boost your ego. That is not what the point is. We need to win. That is a part of the assessment, “Are you a team player or you a leader?” Being a team player is, “Okay, we are going to get there.”
But a leader is like, “No, this isn’t acceptable, and it is not that we are not going to support you, but you are not where we need you to be right now. Maybe we pass and the next funding round we participate in. So, we are always completely transparent with our founders.
Shubha Chakravarthy: Got it. That is helpful to know, and it is so good at least as a founder, because you know where you stand at any given point, which brings me to the question of your experience with women founders and especially women founders of color.
There is a little complex dynamic once you get money from someone because there is the money power dynamic and there is also the dynamic of gender and whatever else you want to throw into the mix. It gets pretty complicated.
What have you learned about your experience managing women founders and diverse women founders that can help them improve their performance of their own startups that they may not get elsewhere?
Kim Banham: I think female and people of color are outperforming. I think as women, we have to wear multiple hats every day in our life. What we have seen a lot is the valuations are not at the same level for female founders. The returns, if we are investing in the first funding round at 2 million valuation and they exit for 20 million, that is a win, you know, if we are investing in your round at an 18 million valuation and you exit for 20, you know that and you know that we are not getting excited for you.
But for the female founders, I just think, keep moving forward like all of us do and all female founders do and grow your business. But what women have to do on the amount of funding and people of color, you may have heard.
A million dollars versus a male counterpart getting 10 million in funding. We are able to do a lot more with a little amount of money and I think just being realistic, we need to have a voice for ourselves because we are just as capable as the males.
What we have noticed in our portfolio is that somebody told me, and I don’t know where this came from, but that the funding decreased in 2022 in female founders. A lot of times these women may get initial funding rounds, but what our data has shown us is that female founders aren’t getting those second and third funding rounds that are the large sums, when you are raising a 20 or 30 million round at a 120 million valuation.
As a partner, it is in my relationships with VCs, and I want to make sure that I keep pushing these companies with these females and people of color because they are doing amazing things and they need to be given the follow on funding as well.
So, just breaking down these barriers and understanding that it is about a team and the person, not, “Are you male or female?” Diversification amongst the team, and even for female and people of color, we are outperforming. So why is the money not coming to us?
Shubha Chakravarthy: That is an economic issue for you too, right? Especially if you are not going to do all the funding all the way, the fact that somebody who is female or a person of color facing a differential market for subsequent funding could impact your returns pretty significantly, right?
So, it is not only the right thing to do, but it is completely in your economic interest to make sure that you are breaking down those walls, which is what I like about your motto, because you are almost forced to do that for you, to realize the return. So that is just great.
Do you have any concern that other, large well-heeled firms would come in and replicate or build other AIs that could essentially do what you are doing just bigger and drive you out of business?
Kim Banham: We hope there are more people who need to be using data, so for VCs that are listening, it really is powerful, and it is same with a startup. If you think no one else has this idea is going to do that, this world is a big place, but we believe so much in what we are doing and think other VCs should be taking the same approach.
You are never going to go out of business because companies are always looking for funding. Maybe we end up with a portfolio that is 95% female and people of color, if that is what the data is telling us. But to go out of business, there are always companies and that is why we do not invest in San Francisco.
So, we invest everywhere with the exception, because the majority of deals are there. We are looking for these companies and founders that are spread throughout the US. For example, you are in Chicago, there are a lot of VCs and there are accelerators. There are multiple things for founders in Chicago.
Take someone that lives three hours outside of Chicago, still in the state of Illinois. They don’t even know what VC funding is, they don’t know what an accelerator is, but they are still coming up with a business idea and building that in a small town that is three hours outside of Chicago. So, there is always going to be companies that need funding.
So, it is not a worry of going out of business if other people start building or using AI. We actually hope that more people realize how valuable this is to an investor, to a fund, to be able to show this is real-time data that we can show all of our LPs, how are fund is performing, what we have seen, what we missed out on. As I said, we are very transparent with our portfolio companies and our LPs.
It is one of the pillars that we stand by through and through and we have the data that shows, not that this is surprising, but honest founders, we can measure this through the assessment. They obviously perform way better than people that are not honest. You can’t tell if someone is honest from a few phone calls or even diligence. So, this is something that the data is showing us, which you are not going to ever be able to see otherwise. This is why you need actual data that is showing you that this is a flag that came up and this is through a validated assessment.
Shubha Chakravarthy: Is that coming in the data from the financials or is it coming from the team assessment?
Kim Banham: The team assessment
Shubha Chakravarthy: Give me an example. I’m not connecting the dots for some reason.
Kim Banham: How we are looking at the TeamPrint?
Shubha Chakravarthy: Not how you are looking at the TeamPrint, but how this dimension of honesty versus dishonesty shows up in the team print.
Kim Banham: So, for example, when you went through, it shows that you are honest. So, you are in our system, and you were an honest founder.
Shubha Chakravarthy: But what about my profile told you that I’m honest?
Kim Banham: By how you are answering these words. The personality assessment has a lot of layers and things that we are able to see when a founder is taking this. People that try to game the system, that is going to show up. This is an assessment. It can see. You can’t click that you are outgoing – Yes, and shy – Yes. You are not outgoing and shy.
We have a full-time industrial psychologist, so, this has been studied. What are certain words or things that would show up as dishonest because you are not going to click, “I’m dishonest.” Nobody is going to do that.
But yes, there are a lot of things that we see from our end that it is like, “Oh, this is good.” When you asked about the medal that you were concerned if medals are good, but it doesn’t mean if somebody doesn’t have a medal we won’t – we will still invest.
So, there are several different factors. The data just gets smarter over time, just like our portfolio companies. So, maybe you are grit medal. We come to find out 10 years down the road that people with the grit medal are outperforming. So, imagine founders coming through, if you see that, that is going to be a green light, that this is a good thing. We need to get on a call with this founder and this company right now. So, yes, that is just one of the ways we are using the data in in the decision process.
Shubha Chakravarthy: You have met a lot of founders, especially women of color. What top five pieces of advice would you give whether they come to you or anybody else? I’m a founder, I know I need outside money, and I want to make my startup successful. What five pieces of advice would you give?
Kim Banham: The first thing is you need to have a good relationship and trust the people you are taking the money from because you are going to be working with them. So, yes, you need funding, but as much as you are being vetted in the diligence process, I think it is important for founders to also vet the angels or the institutions that are investing in them because you want to make sure, like I said, that this is a long road and journey together. Have someone that you want to work with. I think that is important.
Number two, I think it is really important to make sure that you keep pushing through. You are going to hear a lot of “No.” This is everyone, and you have a long journey.
Three, surround yourself with a board that can help you. As we talk about the personality assessment, it is really important the things that you do not feel that are your strengths – make sure you are finding a co-founder or other employees you hire that bring your pitfalls out as strengths.
If it is from a board member, as I say, it is very important I think to have a board and people that are not in your company that you can gain knowledge from and that can help you succeed from their experience.
I think that is crucial at the early stage. Then five, you just have to truly be passionate about what you are doing because it is going to shine through and you are going to get funding, you are going to succeed, and you have to have that. Belief in yourself, your company, and the drive to get you through the rollercoaster ride you are on. But it is all worth it.
Shubha Chakravarthy: Absolutely. On the flip side, are there any don’ts that you have observed, particularly from either those you have funded or those you have not funded that would be extra applicable to women and women of color?
Kim Banham: Do your research before you reach out and be prepared. Like the more prepared you are when you are looking for funding, the better your chances are of getting funded. So, having a data room put together, being prepared for what these investors are going to ask you and not be intimidated is important. I think it is easy sometimes for a lot of founders when they are raising funding to feel intimidated by investors or VCs, but look at them as a co-founder, almost like somebody you want to work with and just be honest and transparent and explain why you want to grow this and don’t be afraid to have these women.
I feel like female founders and people of color, their projections are always so much lower. Which, to myself as a VC looking at a deal, we know these are 95% of the time these founders are not meeting these numbers. But when you look at a female founder pitching she is actually probably going to meet these numbers because they are lower. It is not this astronomical ballpark. So, don’t be afraid. It doesn’t have to be exact when you are doing – this is what I think I’m going to do.
Obviously you need to have reasons why you think you are going to get to these numbers, but I feel like women and people of color don’t seem to be as bold with where they are going or where they think they are going to go with their business more realistically which, for me as an investor, I actually like to see that. But don’t be afraid to reach for the stars.
Shubha Chakravarthy: I love it. On that note, is there anything I should have asked you, but I didn’t?
Kim Banham: Well, just obviously anybody that is listening that is looking for funding, you can go to our website. It is conneticventures.com and you just click “Apply for funding.” I’m always willing to help out any founders or answer any questions. As I said, we are always looking for great founders and companies to invest in and are super excited that you are doing a podcast to bring more awareness and want to level the playing field because all of us women on this call deserve to be here and to be heard and to be successful.
Shubha Chakravarthy: Thank you very much, Kim. People like you are the ones who make it possible. On that note, I want to thank you.
It has been a very informative and quite enjoyable chat to learn about all the little nuances of Wendel. Thanks for being here and sharing all of your insights. This has been amazing!
Kim Banham: Thank you for having me. Have a great day!