Ask A VC #3

Question:

How do you evaluate a company pitching to you?

Are there any critriea or specific metric you look for?

Answer:

These are always loaded questions since there is no one answer to them. It also depends on the company and the market and the team. Context is everything to be honest.

That being said at seed stage I, but I am sure my SeedPlus partners will have their own opinions – look for market, team and strategy. Market is super important since we only want to fund things that can go big and that means having a product that goes for a large adddressable market size. Team is huge. We look for a team that likes to be with each other, is open to being challenged, and appears to enjoy a healthy discourse peppered with honest feedback. Strategy is a big deal as well. I like to see that the team has clear thoughts around what they are trying to do, how they plan on winning and what they might do when things go wrong.

There is never one specific thing or metric but obviously if the product is launched then it is good to see stats that make sense and that clearly articulate what the team wants to show. It is also good to properly portray things – for example, don’t show me CAC is just your google adwords bill but calculate for me a fully loaded CAC. This is a big subject and one we hope to put more material out on at SeedPlus.

Ask A VC #2

Question: 

How can female founders be empowered by being aware of this obvious bias in the market?

Answer:

I assume you mean the obvious bias is that VC is too male oriented. As a man myself I think even trying to answer feels treacherous. Let me state the lens that I look through a bit before I even try. I have a daughter, I think about this problem all the time and I work hard to find female foudners to fund.

That being said I don’t think I can give you a good answer since my assumption is that folks you might be pitching too or talking to should do their best to look at you and your team and your idea for what they are. My best advice though would be to find the angels and the other founders and VC’s in your area who have expressed interest in defeating this bias. They are out there and they would be the best to help you deal with it. There are plenty of female founders who are kicking ass.

On facebook I follow some folks that are leading the #ladybadass movement in Asia. These ladies are kicking ass and taking names. I would reach out to folks like this and get their advisory on how best to find your personal empowerment.

Example here :: https://www.facebook.com/photo.php?fbid=10154248092125933&set=a.192639120932.141229.531860932&type=3&theater

More on SAFE’s

Wrote this yesterday :: https://seedvc.blog/2017/03/13/good-read-from-fred-on-convertibles/

Term Sheet referenced this in rebuttal:

https://twitter.com/octal/status/840997956996202497

I don’t think Fred is saying never use them but I do agree that they can be used incorrectly. I think Fred is talking more about how they get overused and there are some seriously messy cap tables with rolling notes and no easy way to price anything or calculate dilution properly.

I think it goes without saying that there are clean cap tables and not so clean ones and in my experience the not so clean ones have a bunch of notes with no simple way of sorting them all out. This happens less with equity rounds.

I think there is a much broader discussion to have here around founder friendly techniques but also having to weave in doing stuff right for the good of all current investors and investors to come. Always a fine line.

Go ahead and ask 

Here is the general idea. 

You might be a startup person with a legitimate question you would like an answer to. Or you are the curious type and want to know how something works in VC land.

I won’t claim to be an expert but I might have the answer, could point you to the answer, or I can ask the folks I work with who probably have the answer or I may not have a clue.

If I answer your question, I will post it on the blog but will not print names and emails. This way everyone benefits and the community can help keep me honest or challenge it. 

Comments will be open.

I have played with whale, snapchat and other platforms for this but figure I might as well just use my blog. 

Have at it :: https://seedvc.blog/ask-a-vc/

Good read from Fred on convertibles

Not cars but notes :: http://avc.com/2017/03/convertible-and-safe-notes/

His reasons about why not to do are so good.

2. They obfuscate the amount of dilution the founder(s) is taking. I think many investors actually like this. I do not. I believe a founding team should know exactly how much of the company they own at every second of the journey. Notes hide this from them, particularly the less sophisticated founders.

This one is good. Many times I find even that the founders don’t know what they are talking about and have not figured out their own dilution. They also may not have carved out something for the ESOP and are not taking that into consideration as well.

3. They can build up, like a house of cards, on top of each other and then come crashing down on the founder(s) at some point when a priced round actually happens. This is the worst thing about notes and doing more than one is almost always a problem in the making.

This is the one we see too many times. Rolling notes or extended notes that take a serious Excel expert to figure out how each round is actually priced and who owns what. You have to be careful about this so that you know what each round is doing and how to calculate the dilution.

4. They put the founder in the difficult position of promising an amount of ownership to an angel/seed investor that they cannot actually deliver down the round when the notes convert. I cannot tell you how many angry pissed off angel investors I have had to talk off the ledge when we are leading a priced round and they see the cap table and they own a LOT less than they thought they did. And they blame the founder(s) or us for it and it is honestly not anyone’s fault other than the harebrained structure (notes) they used to finance their company.

Yup. Also, see this. They over promised angels with too high a valuation cap and once you see a few rounds of this by the time you actually calculate it all one will find the dilution and ownership.

The list of stuff he says to do is gold. Freaking gold:

Here are some suggestions for the entire angel/seed sector (founders, angel investors, seed investors, lawyers):

  1. Do priced equity rounds instead of notes. As I wrote seven years ago, the cost of doing a simple seed equity deal has come way down. It can easily be done for less than $5k in a few days and we do that quite often.

  2. The first convertible or SAFE note issued in a company should have a cap on the total amount of notes than can be issued. A number like $1mm or max $2mm sounds right to me.

  3. Don’t do multiple rounds of notes with multiple caps. It always ends badly for everyone, including the founder.

  4. Founders should insist that their lawyers publish, to them and the angel/seed investors, a “pro-forma” cap table at the closing of the note that shows how much of the company each of them would own if the note converted immediately at different prices. This “pro-forma” cap table should be updated each and every time another note is isssued. Most importantly, we cannot and should not continue to allow founders to issue notes to investors and not understand how much dilution they are taking on each time they do it. This is WRONG.

Again. One can do notes. They serve a purpose but I think most founders don’t know what they are doing with them and assume that it is better than equity but in fact dealing with a proper equity round might make more sense. Normally the reason to do a note is speed and you expect that pricing the round later makes more sense than pricing it now. Regardless one shouldn’t do many rounds as notes, leave notes open for too long and delay the hard work of pricing and converting.

Obviously, I am new at this but Fred isn’t!