Good day. This week’s question: How common is it for venture investors to essentially “outsource” due diligence to a round’s lead investor?

Please email responses to marc.vartabedian@wsj.com.

Last week we asked if venture firms are becoming more interested in seed-stage investing in light of the venture-market pullback. Seed-stage valuations have fared relatively well compared with later stages.

• Alex Notis, an investor at Crossbeam Venture Partners, said: “Many firms are looking earlier as the market pulls back, but we believe they should be looking later. The growth markets are more efficient and have higher beta than earlier stages; therefore, growth valuations are comparatively more attractive during a cold market and less attractive during a hot market than seed valuations.”
   
• Shawn Ellis, managing partner of Distributed Ventures, said: “We’re favoring seed investments not only because of attractive valuations in the market today, but because these companies have modest attitudes related to exit timing and how to build compelling businesses along the way without the same access to capital vs. those that first raised institutional capital 1-2 years ago.”
   
• Adit Singh, a partner at Cota Capital, said: “The market pullback has not hit seed-stage investing, and many savvy investors are getting more active in this segment.”
   
• Bob Ackerman, managing director of venture firm AllegisCyber, said: "With the public and private-equity market corrections, venture investors are looking for opportunities where there is less potential valuation volatility. Seed investments fly close to the ‘valuation ground’ and have materially less downside in terms of absolute dollars.”

And now on to the news...

Tech investment for national security. The Pentagon has established a new unit to lure private funding for technology deemed critical to national security, citing concern over China’s military advances, The Wall Street Journal reports. On Thursday, the Defense Department announced the creation of the Office of Strategic Capital, which will seek to employ loans, guarantees and other financial tools not typically used by the U.S. military, which relies mainly on contracts and grants.

• “The mission of the office is to align and scale private capital and support national-security interests,” said Jason Rathje, the office’s inaugural director.
   
• The effort rides a recent wave of interest among venture capitalists and startups seeking business with the Defense Department and a growing comfort with a U.S. government role in industrial policy.

The company behind the tether stablecoin has increasingly been lending its own coins to customers rather than selling them for hard currency upfront. The shift adds to risks that the company may not have enough liquid assets to pay redemptions in a crisis, WSJ reports. Tether Holdings Ltd. says it lends only to eligible customers and requires that borrowers post lots of “extremely liquid” collateral, which could be sold for dollars if borrowers default. These loans have appeared for several quarters in the financial reports that Tether shows on its website. In the most recent report, they reached $6.1 billion as of Sept. 30, or 9% of the company’s total assets. They were $4.1 billion, or 5% of total assets, at the end of 2021. Tether calls them “secured loans” and discloses little about the borrowers or the collateral accepted. Alex Welch, a Tether spokeswoman, confirmed that all of the secured loans listed in the reports were issued and denominated in tether. The company said the loans were short-term and that Tether holds the collateral.

More:

• FTX Collapse Draws Senate Scrutiny
• Bankman-Fried ‘Wasn’t Even Trying’ to Manage Risk at FTX, He Says
   

Financial technology companies oversaw a disproportionately high rate of fraudulent loans through the Paycheck Protection Program authorized by Congress to provide small business loans during the Covid-19 pandemic, a new congressional report says, WSJ reports. The report by the House Select Committee on the Coronavirus Crisis says “at least tens of billions of dollars” from the federal loan program overseen by financial technology firms were likely given to applicants who were fraudulent or ineligible.

C-suite executives and other business leaders are planning for a period when inflation is sticky, interest rates are rising, the geopolitical landscape is fraught with tumult and the economy is slowing. Here’s a guide on how executives can navigate the challenges in corporate finance, IT, logistics and marketing.

• Zero-Based Budgeting, Currency Hedges Among the Tools CFOs Can Use to Weather Headwinds
• CIOs Can Play Key Role in Guiding Companies Through Slowdown
• Marketers Must Be Flexible, Without Losing Identity, in Uncertain Times
• The Logistics and Supply-Chain Slowdown Has Begun. Here’s How to Take Advantage.

Funds

645 Ventures, a New York City- and San Francisco-based venture firm, raised its fourth fund, Fund IV, alongside the launch of the firm’s first opportunity fund, Select I. The closing of these two funds totals $347 million. The firm now has roughly $550 million in assets under management. The new funds are backed by limited partners including endowments, foundations, fund of funds, family offices and high net worth individuals. Fund IV will make initial investments at seed and Series A stages with check sizes ranging from $1 million to $10 million. The Select I fund will write later-stage checks up to $15 million into the best-performing companies that reach the growth stage from its earlier funds.

UpStream Healthcare, a value-based primary-care services and technology company, said it raised $140 million in Series B financing, bringing its total funding to nearly $185 million. The round was co-led by Coatue and Dragoneer with additional participation from other investors, including Avidity Partners, Define Ventures and Mubadala. Greensboro, N.C.-based Upstream said it supports physicians operating under full-risk, value-based arrangements who provide care to seniors on Medicare, using an integrated platform that emphasizes quality of care, health equity and total cost of care.

Los Angeles-based Bionaut Labs, which aims to use microscale robots to improve the treatment of central nervous system diseases and disorders, said it raised a $43.2 million Series B round led by Khosla Ventures, bringing its total financing to $63.2 million. New investors participating in the round included Deep Insight, OurCrowd, Sixty Degree Capital, Dolby Family Ventures,  What If Ventures, Tintah Grace and Gaingels, along with all existing investors, including Upfront Ventures, Bold Capital Partners, Revolution VC and Compound.

Teampay, a New York-based maker of purchasing software, raised a $47 million Series B round led by Fin Venture Capital, bringing its total funding to $65 million. Other investors include Mastercard Inc., Proof Ventures, Trestle and Espresso Capital.

Sphere Technology Solutions, a Newark, N.J., identity management startup, has raised $31 million in a Series B funding round led by Edison Partners, with participation from existing investor Forgepoint Capital. Lenard Marcus, a general partner at Edison, was named to Sphere’s board of directors as part of the deal, the company said.

ResortPass, which sells day passes to luxury hotels and resorts, closed a $26 million Series B funding round. Declaration Partners and 14W led the round, while existing lead investor CRV also took part. Actresses Gwyneth Paltrow and Jessica Alba also invested in the round as did Brian Kelly, known as The Points Guy. ResortPass also appointed Michael Wolf as chief executive.

Palo Alto, Calif.-based security-software startup Pangea Cyber has raised $26 million in a Series B round led by GV, with participation from Decibel and Okta Ventures. The deal brings Pangea’s total fundraising over the past year to $52 million, which it plans to use to support product development and drive developer and builder adoption, the company said.

Virtual meetings startup CommonGround has raised $25 million from investors including Marius Nacht, Matrix Partners, Grove Ventures and StageOne Ventures, bringing its total funding to nearly $45 million, the company said. Based in Los Altos, Calif., and Tel Aviv, the startup is developing a platform that hosts real-life 3D avatars of users without the need for a virtual-reality headset.

Classified Cycling, a Belgium-based cycling startup developing wireless derailleurs, raised a $23 million round led by Active Partners.

Prophia Inc., a San Francisco-based AI commercial real estate data management startup, raised $10.2 million in Series A funding led by Cercano Management, with participation from SignalFire and others.

Netail, an AI startup for retailers, has raised $5 million in a seed funding round from Magarac Venture Partners, the company said. With offices in Hong Kong, Pittsburgh and Palo Alto, Calif., Netail is developing software that enables retailers to auto-identify competitors and track pricing and other data in real-time.

Buzz Solutions, a Palo Alto, Calif.-based energy infrastructure inspection technology startup, picked up a $3.3 million investment. GoPoint Ventures led the round, which included participation from MaC Venture Capital.

• Kanye West is no longer buying Parler
   
• Twitter offers advertisers generous incentives after many marketers left platform
   
• Netflix to let tens of thousands of subscribers give early feedback on content
   
• Tesla set to deliver semi truck to PepsiCo
   
• The iPhone 14 Pro shortage is real. Here's what you can do.

• Max Levchin’s war on credit cards (Wired)
   
• Rare Vietnam unicorn sets sights abroad after taking on Facebook (Bloomberg)
   
• Lensa AI climbs the App Store charts as its ‘magic avatars’ go viral (TechCrunch)

This newsletter was compiled by Eric Sylvers, Brian Gormley, Marc Vartabedian, Matthew Strozier.

WSJ Pro Venture Capital is a premium service of The Wall Street Journal. We cover venture capital and the global startup ecosystem. Share your tips, comments and questions: vcnews@wsj.com

The Team: Matthew Strozier, Yuliya Chernova, Brian Gormley, Angus Loten, Eric Sylvers and Marc Vartabedian.

Follow us on Twitter: @wsjvc