Investors

We are a seed-stage fund that finds the best early-stage Founders through a sourcing network of partners, accelerators/incubators, and universities. It is this Prime Network that allows us to source some of the most promising, and most exclusive startups for our portfolio.

We invest at the early or “seed” stage. Not too late, but not too early. For some companies, the biggest risk can be market adoption, so we need to see that at least a minimum viable product has been built and is being tested by real customers we can speak with. We prefer to see at least several hundred thousand dollars in annual revenue from customers who are beyond the test phase.

After screening a startup, we will take a deeper dive by analyzing and carefully modeling an expected risk-adjusted return. However, we will do some preliminary calculations based on valuation and market opportunity at this initial screening stage. We are looking for at least a 10x return potential before quantifying risks. If we don’t see that potential, the screened company becomes a quick “no”.

Then we use our 32-factor decision-analysis tool to determine if the company should proceed to the Analyze stage.

A seed-stage company that shows a significant potential return, and solves an important problem, will pass the initial screen and get moved to the Analyze stage.

Once a company passes our screen, we will start the analysis process. We may have one long or several, kickoff meetings with the CEO and other founders to dig in and understand in detail the drivers of risk and value for the company.

We will ask many questions, but they are arranged into four main categories:

• Market –

  • Does it work, and are people willing to buy it?

  • Is there a big enough market for it?

  • How much better is it than existing solutions?
  • Is there a defensible moat?

• Product/Technical – 

  • Will it work?
  • Is there at least an MVP?
  • What are the technical hurdles and risks?

• Team – 
  • Can the founding team execute on their business plan?
  • What are their strengths?
  • What are their weaknesses?
  • What are they lacking in knowledge or experience?
  • Does the team function effectively together?
  • Do they show intelligence, passion, and integrity?

• Economics – 
  • What are the unit economics?
    • How much will customers pay?
    • Has the price been determined and validated?
    • What is the cost to make and sell the product?
    • What is the customer acquisition cost?
    • How long do customers stick around (LCV)?
  • What are the company economics?
    • What is the monthly burn rate?
    • When will they run out of money and need to raise more capital at the cost of more dilution?
    • Are the management salaries excessive? What about other fixed costs?
  • What are the deal economics?
    • What is the capital request?
    • What is the post-money valuation?
    • What is the need for future capital and how will it affect future dilution?

To seed-stage investing, we bring both the art of human judgment and the science of calculated risk. We use the term “calculated risk” literally. We explicitly calculate probability-weighted returns and require a 10x pwMOIC (probability-weighted multiple of invested capital) or a 40% pwIRR to invest.

In the prior Analyze stage, we dive in to learn what we can ascertain about the opportunity. There will always remain uncertainties around product success, market adoption, and team execution. In this Model stage, we confront uncertainty head-on to calculate probability-weighted returns.

Our approach can be broken down into three steps:

1. Describe the tree of possible outcomes with associated probabilities.

2. For each outcome, calculate investment return or MOIC.

3. Probability-weight the outcomes to calculate pwMOIC.

After we Model a company and it clears our high bar, we invest time validating the story. Up until now, we have trusted data from the company, as well as some quick web searches. Now is the time to Validate our information. Here are some validations we perform.

• Verify Contracted Revenue

• Verify Customer Enthusiasm

• Verify Market Size

• Verify Governance and Board

• Verify the Team by Playing Advisor for a Day

• Find a Devil’s Advocate

After we Validate that this deal is the one in one hundred that is worthy of investment, we have a few structural details we prefer to see.

At the seed stage, it is common to invest in a company via convertible notes or SAFEs (Simple Agreement for Future Equity). The problem with those is that they are not equity.

We prefer priced equity rounds. There are many advantages to priced equity rounds. One big one is tax advantages.

The U.S. tax code has many attractive features for investors in startups. But the features only kick in for equity in a company, not for convertible notes or SAFEs.

If you invest in a company and it has a huge exit after 5 or more years, section 1202 of the Internal Revenue Code (IRC) says that you pay zero tax on your gain. The trick is that your investment has to be for Qualified Small Business Stock (QSBS) (not for a note or SAFE). When you invest in QSBS, the date of your investment begins the 5-year timer. When you invest in a note or SAFE, the timer does not begin until that note or SAFE converts to equity in the next priced round.