Red Flags and Green Flags for Pre Seed VCs

And let me let everybody in here. Okay, I'm letting everybody in.

Whoa.

We got a bunch of people. 51 people. Oh, here. I'm gonna just. Oops. Mute a few people. Oops.

Ah. I think we should turn left here. Let me just try to people here. Yeah.

Okay, let me try to get a few more of these. Stop the video. Okay, how's everybody doing today? Let me just stop this. Here we go. Hi everybody. Thanks for coming to another one of these webinars. I'm Martin Tobias. I'm the founder of Incisive Ventures, precede venture capitalist. And I'm here with my friend Ihar and he's also a pre seed or seed venture capitalist out of New York. And we thought we'd have a quick little conversation today talking about from our perspective as early stage VCs, what we look for in red flags and green flags for pre seed and how maybe that's a little bit different from what you hear people talking about venture capitalists looking at series A or seed rounds or something like that. And then we'll take. We'll Talk for about 20, 25 minutes and then we'll take questions. And as always, I publish a transcript of this on my blog. So if you have any want to follow up or we'll publish this on social later, we can do that. So why don't we start. Wow, we got a lot of people today. 60 people and we had about 80 that are coming. So why don't we start and say, Ihar, tell me about your fun Geek Ventures and what you' been up to.

Sure. Hi Martin, thank you for inviting. Really glad to see so many people here. What? 60 people right here. Awesome. Yeah, so yeah, I'm running Geek Ventures for a fund in New York. We are investing in immigrant founded US companies across different sectors, mostly related to AI precedent seed stages out of 23 million dollar fund. Before that I have operational experience working in software engineering, AI roles in Google, Facebook and startups and investing experience of more than what, almost 15 years by now with about 200 startups invested, including Instacart, early stage and so on. Super Arlene. Is there a way to like hi. Darn. By default, everybody.

Yes. Oh, wait a minute, I think I just muted you.

I've unmuted myself.

Okay. Yeah, I'm not very good at managing all these things here. We'll keep letting people in. Okay, so yeah. So you had an operational role in the past too, and this is your first fund?

My. Yes, yes, my first one.

Now, did you do angel investing before this or syndicates or anything like that.

I did angel investments. I did something like more than 150 angel investments before the first one.

Yeah, right. And I remember one of those was Instacart.

Yes.

And a few other interesting ones. What were some of the other early investments you made?

Oh, plan the doc, precede people. AI Jeeves and Airbyte are the ones that went all the way to unicorn couple that are future unicorns, like zero area and so on.

Yeah, I think we're both in Jeeves. I really like what they're doing.

Yeah, they're great.

Cool. God, more and more people joining. Well, what I thought we'd talk about because on Twitter I get a lot of these questions like what, you know, how do you underwrite a pre seed thing? And you know, you know, you hear different numbers of traction metrics and stuff for, you know, all sorts of different stages. And I wanted to talk just about, first of all, what's your definition of precede? Let me give you my definition of precede. I wrote a post about this. I define precede as after the angel round. So I just do B2B software and I typically want to see somebody raise 2 to $300,000 from friends and family to create an MVP. And then I want to see the company after they've had that MVP in the market for a little while. And then the pre seed is really the first institutional round where venture capitalists after the angels come in. Some firms define pre seed as an idea, even just sort of including angel round. How do you define precede?

So I. So for me the precede is more like bounded from the top rather than from the bottom. Right. So I can consider companies for pre seed as soon as they just incorporated and depending. So what's important is that depending on the founders and their track record, they might be able to raise without MVP just based on deck or not. Right. So typically the founders, that stronger track record, some previous startup under the belt don't need to have an MVP to raise a precede institutional round. People who are running their first startup probably need an MVP before they raise any vc. But for us is like anything that's, let's say under 200k ARR counts as pre seed.

Okay, yeah, I would agree with that. You know, I see my.

Another thing that I would say is the age of the company is fairly important. So while the company might be 3, 4, 5 years old and be at 100k ARR, to me the company is way too old to be a pre seed. Right. So after all precede should be the first round to help you to achieve some initial proof. Initial, let's say poc initial traction in order to raise a proper seed and then go to csa. If the company is more than two years old and it's still raising precede, something is off. Right.

So yeah, they're missing some sort of traction. And what do you think needs to be achieved with the pre seed? I typically am telling people that, that you know, the pre seed is anywhere from sort of 20 to 100, $150,000 of ARR. And what you're really trying to do is get that up to 500, $700,000 of ARR which is where the seed type firms start to get interested. And I'm seeing series A companies get interested over $2 million. What do you try to achieve in the pre seed in terms of revenue or traction metrics?

Right. So first of all I want to say that most of the companies that we see are similar to yours, which is like B2B and those are easier to compare on the revenue numbers. But of course there are all sorts of other companies that could be venture backable that would have different approach, like for example robotics companies or hardware, deep tech. They might actually get different type of achievements to see it. But if you are talking about more like software first B2B companies, then typically I would say that they need to get to at least 300 to K ARR. Better 400. So one of the examples, the company, I want to name it, but just that we invested at pre seed when they were at about I think 10k ARR. So they just started, they basically showed us that they could sign a contract, right? Or two contracts. And we invested in pre seed and then they raised I think total 700k or something like that on pre seed. And then it took them some time for about a year to get to 300, 350k ARR. And that was a time when we and some other firms, seed firms were able to give them a couple million seed round. And yeah, that's an example of a right trajectory. And then you see they're already, you know, need to get to at least 8 million to get the next round, which could be a C2 or if they get like 2 million, which I agree with you is more like a serious.

Okay, cool. All right, well that's a little framing there. So let's get to the meat of what sort of red flags and green flags are, you know, and I'm talking about like when you either see a deck or or get an email pitch, preferably when you're looking at a deck from the company, what are, you know, we've heard all sorts of red flags and green flags in the media. Some people are like, I only invest in people that went to Stanford or worked at Microsoft or Google. Some of those are considered green flags. Those are not things I consider green flags. But what are some of the things? Maybe starting with red flags, I'll start with some of my sort of pet peeves of things that I see in deck X and then maybe you could tell me some of your red flags in a precede. For me, if I see a slide in a deck that's talking about an exit in a precede round, I think that's a bit of a red flag. If I see, because I do B2B software, if I see a bunch of advisors in a software company, I think that's also a little bit of a red flag or a yellow flag for me. If it's a deep, deep tech company, maybe they'll have a bunch of advisors in there. The most important one for me though, red flag is, you know, if the slide that's talking about what the thin edge of the wedge and the why now is not in the deck. Because most precede decks that I see spend a lot of time talking about the problem area but not so much about what is the inflection point or why does this company need to be built now? What has changed or what is the insight? What is the way that this company is going to get into the market? What are some other things you've seen?

One thing that I want to double down that the biggest threat like for pre seed is age. So if you are, if you are coming to me before without having like a proper MVP or some customers and find out that your company is like 3 years old or 2 years old even it's, it's a problem, right? So you need to, you have this like window between starting a company and about one, two years. We need to try a few things and raise the precede. If you cannot raise a precede then it's probably better to close the company and start from scratch. So yeah, another thing is that the team slides, right? The pre seed. The most important thing that you can have and you should have is a team slide. Because after all if we invest in pre seed, we invest in the team and it's, we invest in first time founders, we invest in founders without like a amazing track record. But it's important that there is something to latch on, right?

So let me talk about red flags and green flags specifically with the team flag. So what are some green flags on a team slide for you?

So first of all it should be not crowded. I think another red flag is that if somehow if I find out that your company has like 15 people and you're raising the precede, that's bad precede teams. The whole team should be probably no more than four or five people if you're raising right. But better even if it's like two, three people. But it shouldn't be also one person. Right. So I think single person companies cannot really raise it's work. You should have.

That's a red flag.

Yeah. It should be clear who is the CEO. I really. And not every VC agrees with me by the way, but this is my own approach and my own pet peeve is that before you get institutional money you need to figure out who is in charge. It doesn't mean that we don't like equal distribution of shares. It's totally fine to have equal 50, 50 or 33. 33. 33 distribution but you should have somebody with the title of CEO. I have seen decks when there is not clear who is CEO and it's a huge red flag. You need to figure who is the CEO and the CEO information. Bullet points on the team slide are the most important for me. And one thing that I'm looking for green flag is founder market fit. I would say not every startup requires founder market fit, but vast majority of them need it. Right. And some need more. Like if you are doing healthcare startup and CEO has no healthcare experience, that's horrible. Right? That's the pass. If you are doing the startup and logistics and CEO has no logistics experience, that's pass. Right. There are some startups where like, I don't know if you're doing a task manager, it probably doesn't matter what your experience is. Right. But for most startups the founder market fit is important. But then can you describe succinctly in like three bullet points what is impressive about this person? Every person has something impressive about them even if they're 18 years old. Right. So it's like, you know, maybe it was like, you know, winner of a school debate competition, doesn't matter. But if you, if you don't focus on like achievements or something impressive and you focus on something very superficial then, or you just don't include it, then yeah, it's a, it's a problem.

Yeah, yeah, I'll say a few green flags that I look for on a founder slide. I Agree with you. It has to be more than one person, preferably two or three. I think in pre seed you have to have four things included in your founder slide and it could be two people, three people, four people. You have to have somebody who can raise money, that's the CEO, a good storyteller. You have to have somebody who can build the product, you have to have somebody who can sell the product, have customer experience, and you have somebody who has to be able to operate the company. So I want to see at least two people split between that, usually three people. The other thing that's a green flag for me is in between the founding team, if I can see what their connection is. Did they work together before? Did they go to school together before? I think it's a bit of a yellow flag if the team has less than, you know, a few months together. There has to be some connection. It is a much stronger signal to me if this team has somehow worked together before either or been to school together before. I think at least two years. And so I'm looking for common workplaces, common places they went to school. One of the questions I always ask them is how did you meet your co founder? It's not necessarily terrible that they met him in a YC matching thing, but there has to be some other connection like you know, prior school.

Totally agree with that. And most decks actually don't include on how founders met together, how they, how long have they known each other. Right. So I don't pre seed there's basically nothing else besides the founders. Right.

So that's true. Well, what, what do you look, what, what do you think of in a precede deck when you're looking at the red flags or green flags related to the market size.

So I think it's important that market size is there in some way. Again, if you don't include it, then you are missing on something important. But I think the one important red flag is when your market is too generic. I've seen a slide of company that tries to sell some software related to food to restaurants and they had a market size of $10 trillion spent on food. Yeah, it's not your market. Right. That people spend trillions of dollars on food. Right. Similarly, trillions of dollars spent on travel is not your market. Right. So it's like you're saying that your market is trillions of dollars spent on software. No, it's not. Right. So what I really, really appreciate is that the market is very pinpointed, very clear to you. It's also shown that it's growing. One thing that most people forget to show that the market is growing year over year, it's very few Dax actually have it. But if you say that there is a growing market is more important. Another thing that I like is and it's hard dance is that you can show that the market is niche but it's at least $10 billion. I mean $10 billion is like the kind of a magic number but five is also fine. But if you end up having a market size where Your market is $500 million then it'll be a turn off and it might be correct to market but you need to understand how to reframe it so that the VCs see that there is a path to a 10 billion dollar market.

Yes, I agree. I, I totally agree with you that if the, the market that's the total market size is too big, I, I, I define that as people doing a top down market slide versus a bottoms up. I prefer to see a bottoms up. Like there are, you know, I, I sell to dentists and there are a million dentists in the United States. My average contract value is this and market size or the current customer makes this current competitor makes this amount of revenue. I'd rather see bottoms up things versus grand top down. You know, global category market slide size slides. What, how do you look at or what is green and red flag things for you around the go to market slide?

So I think that's specifically I would leave it to you because you spoke a little bit about the wedge and I think that I really agree with your point about that. They have to have some sort of wedge of how do they approach go to market initially. But while I remember in the market size, one thing that I want to talk a little bit is competition if you don't mind. Right. Because I think what do you want.

To see green and red flag on a competition slide?

Yeah. So I think that first of all I, when you try the very simplistic kind of a table when you have five, 10 competitors and you have you and you and your company has like.

All the X's and nobody else has.

Any X's and everybody else has like red crosses, it's horrible. Right.

Also the checking XE box is terrible because it's self defined terms.

Yeah. Or XY chart where you have a bunch of logos and yours is in the top right. Everybody else in the bottom left always bad. I think the very important thing is to understand are you in competition with a lot of companies that are similar to you or Are you somehow unique? Right. And it's important to, before you come to a competition slide to be very realistic with you because VCs will be. Right. So for example, I see regularly a company that says we are using AI to help you schedule meetings. I think I've seen like 10 companies like that at least. Yeah, right. And if you are doing a company like this, it doesn't mean that your company is bad, maybe your company will be great. But you need to realize that you're coming to a VC hub that have seen other companies that have the same goal. Right. And at that point it's important to take a competition slide. But it's even more important to realize that it's harder to raise pre seeds when you have such a, when you operate in such a competitive space with young startups. I would say I would rather. And also it's important to understand is your competition other small startups or are big companies? Right. For example, if you are building, I don't know, competitor to aws, right. So. Or competitor to Amazon in general, maybe your competition is big companies and then you need to talk about how you like going to, going to upset the incumbents. But if your competition are the 10 companies that I've looked at last week that are all at your stage, then your competition slide is actually less important from perspective of specific logos. It's more important from understanding how do you differentiate from everybody that's kind of rushing for the same idea. Right. And you need to focus more on the market rather than specific logos. Does make sense.

Yeah, it does. I think the competition slide is one of the least important ones for me in pre seed. I expect them to show the big name brand competitive competitors that people have seen. I also expect them to not know. All the other small companies that are building us as VCS probably see way more. I tell founders this all the time. I've seen this pitch, you know, 50 times and they're like, well, there's only two competitors. And I'm like, no, literally I've gotten it 50 times.

But they crunch brazier.

Exactly.

So.

It'S a little weird sometimes for a VC to have seen more pitches than the founder has seen in this space. But it's also not unusual. That's why for me I focus on the thin edge of the wedge. The go to market. There's, there's really two ways you can differentiate yourself from competition. Either you have some unique product invention, you know, some, some, some unique thing that you've built. That is an insight that you think is A, you know, a feature or a way that you've designed it, you're doing something on the desktop instead of in the cloud, or you're doing it in the cloud instead of of the desktop. There's some technical feature and, or you have some distribution advantage. So and, and that's what I want to hear about because the reality is everybody's had this idea. Every idea I've ever been pitched, I've been pitched more than once. So the question is not is the idea unique? It is what is unique about your execution of that idea into a product and, or your ability to execute that into the market. For example, the last deal I just did was this company called Lease up which is a vertical market software for commercial real estate broker. Well, what's different about it, they do have a product that's in the market. They have seven of the top 10 real estate brokers already buying their product. But more importantly they have the national association of Realtors venture capital arm as their lead VC and they are introducing them at all the conferences and on webinars. They have a direct distribution channel to all the commercial real estate brokers in the country through one of their major investors. That is a potential distribution advantage that's huge compared to anybody else who comes up with another software idea to try to sell to the same customers. And that was one thing that was a very green flag for me is that they had a cornered resource on the distribution potential cornered resource on the distribution side.

Right, Okay, I agree with that. So here, here's the one thing that I would want to add here is that to kind of double down on uniqueness of the idea, it's important to understand that depending on the uniqueness of the idea will depend on how much you need to prove that your customers like your solution. Right. So when you, when there are 10 other companies that kind of do exactly the same, it's even more imperative to show that you can close some initial customers. Right. So and as opposed to ideas that are a little bit less dime a dozen. Right. But also this is where the track record is also a differentiation. So why some founders might be half might have to kind of skip a pre seed and bootstrap to seed or just run on like a small angel round because specifically it's if they're in very crowded space and they don't have a strong name brand personally or track record from the previous companies to get pre seed VCS to invest in them, they need to show sometimes that they will just not get any precede money and they get 300k, 400k ARR and then they actually receive the money right away. And that specifically happens a lot in the crowded spaces where I don't know which of the 10 AI schedulers will be the best. Right. But after they get 300k ARR. Then I can back it up.

Exactly, exactly. Let's talk about another slide. What do you think is a green or red flag on the unit economic slide? I think it's a red flag in precede if we do not have a unit economic slide and it's surprisingly missing out of about 50% of the decks that I see.

I don't think unit economics is that critical for Preeed. Right.

I, well then we disagree. I, I want to see what is proposed and I want to see it compared to the competition right now.

Right.

Like let's say you, this is the way people are doing things now. It's a manual process. I'm going to sell them software. It's going to cost 1 10th and it's going to take the time. But I want to see the before my product, after my product.

And then I think what you are saying is rather the way I would say what the benefit your customers get from this. Right. So that's the way I will benefit.

And then, and then can I operate that solution at a positive unit economics too, right?

Yes, yes, yes. Right.

The benefit to the customer in terms of the economic benefit to them and then the positive unit economics of my thing. I actually since I wait for MVP vp I also you know, want to see a little bit of what's your cac? What's your potential ltv. I don't think lt no one really knows in precede what your LTV is but you should at least have an opinion of what it could be and at least an idea of what your CAC is. I, I, I want to see that. I think it's a red flag for me if the CEO doesn't at least have a North Star or a model for what he wants to do. I saw a company last week and we got to their unit economic slide and he's like, you know I'm gonna make a 30% margin that those are my unit economics. And I'm like that's not a venture fundable business. That's, that's not a software business. It's 30 margin.

This is important because then you, if you have this economics slide then you can collect feedback. We are actually looking at a deal right now that I think the company is like two months old. They don't really have an MVP because it's more like, you know, involved. It's not a pure software company. But the founder has had startups before and even though I believe that the founders could have probably raised just based on their track record, they're taking it seriously and they prepared a really strong model. Of course it's all based on assumptions. They don't have actual numbers at all because they didn't launch anything. But this assumptions really goes deep into how much they can sell for what will be the cost structure, what will be the margin. And we can look into it and we can test it and understand if, if you think that the founder makes sense. And in general, I'm all for financial models at Pre Seed just for the reason to understand if the founder can think straight and if the founder just makes crazy assumptions.

I agree. And that's why I want to see the financial projections and the unit economics slide at Precede is because I want to hear their thinking behind it, their rationale and how, how they came up with, with what they, you know, they think it is. That's much more important to me. What if, what are some other slides that you focus in on in Precede?

So I think that I don't have a very specific like, you know, list of slides in my head, but as I said, team is extremely important. Vision. It's important. It doesn't have to be like one slide named Vision. But in general, I want to understand where your company is going to be in five, eight years. Right. Do you have something that you know, that makes this company big? Because if you want to have this little tool that will always be a little tool, then, you know, somebody pitched me a company that's superhuman for LinkedIn. I'm like, that's it. Right? So maybe I don't, you know, if that's the vision, then it feels too small to me. I might be wrong, but that's my problem. Right? Your vision in 5, 8, 4, 5, 8 years from now should be something that's a billion dollar company, right?

Yeah.

There should be very clear slide about what you have achieved. Maybe it's not traction, but it should be. Maybe you have mvp. Sometimes I see as deck and my first question is like, okay, I see what you want to do, but where are you now? Because I don't see it in the deck, especially at Pre Seed.

I have seen that slide missing a lot in Pre Seed too. It is, that's timeline slide showing where we started, where we are now and what we're going to do in the next sort of 12 months. Because basically 12 months is what you're funding in precede and I see a surprising lack of that. And that's what I want to see is where did you start, what did you do and where are you at now? Did you make an mvp? Did you not? And I want to see milestones on there like you know we did 100 customer discovery calls, you know, we signed two POCs or whatever it is. But I want to see a timeline slide that shows what they've been doing.

So another slide that I really really would like to see always is all information about your customer discussions or Lois or anything. Right. Because another thing is that I only invest in companies where I believe they can sell. Right. It's very important at pre seed. I cannot invest in companies where I just see a good idea or good technology even. Right. I'm not really just investing because you have a nice mvp. It's extremely important that you have a proof of some sort that you can sell. It could be that you are saying that I've already founded this company before another company before same customers. I've already sold 100 million ARR. I'm going to sell the same customers. That's good enough. But if you didn't do that then you need to have like 100 customer interviews or like some Lois or wait list, anything like that.

Yeah, that gets back to me to the thin edge of the wedge, the market entry. The distribution trick. What is the distribution trick that you have? What is the cornered resource you have that relates to distribution? Is it that you did 100 customer interviews and you've got 10 POCs out of that? Is it that you worked in the market before? Is it that you have a distribution partner who's an investor who's going to introduce you to customers or what is it? Yeah, I completely agree. So what is just to summarize things here then maybe we'll go to some questions. We have about 25 minutes left for you. What are the top three green flags in a precede deck and the top three red or yellow flags for you?

Top three green flags. I think one is CEO has amazing market founder market fit. I don't know. Like we had this for example. Right. So like one of our portfolio companies, Pyramidal, It's a Brainwave LLM company and CEO has been a PhD postdoc working on brainwave research for 10 years. Perfect. Right? Perfect. Pre seed. There is nothing else here in the company yet but there is a great CEO number one, Number two slide with customer information, right? So like something like you have 300 customer interviews, we have Lois, or we have 10,000 wait list which we collected from even before we started this company. Right? Something number three is perfectly formulated, why now? And something that can really resonate, right? And of course it changes like every month. What is why now? But I think, for example, one of the companies we invested in was doing checking generated AI ads on brand safety. Like perfect. Why now Is like very clear. Generated AI ads started appearing, we need to check them. Right? Things like that is an example. So these are three green flags, three red flags. I say one red flag is that the team is too large or too small or the team slide doesn't exist. I actually seen Deck recently without a team slide at all. I don't know who is on the team. It's crazy, right? So it's rare, but it happens. So second red flag. It's not clear where you're at in your journey. It's not clear, do you have mvp? Do you not have mvp? So yeah. And a third red flag I would say mismanaged slide with market size. Right? So if you don't understand, your numbers just don't make sense. Like you have trillion dollar numbers, then it's better, it's better not to have it at all rather than have it completely nonsensical.

Okay, those are all good ones. For me. The top three green flags would be first, a perfect. I agree with you, founder market fit. I would sort of add to that that the founder has got a really good story about why he or she is starting that particular thing. What is their insight to the market? I funded a company that they're in the AI cloud management space and he had run a managed service provider trying to solve the same problem with the Same customers for 10 years with systems engineers. And he was rebuilding that company in software. So he had been trying banging his head against the problem with one approach, changed the approach and was taking this new approach to a problem he'd worked on for 10 years. So, you know, I think the CEO, the founding team, somebody on the founding team has to have somehow a personal stake in the problem, a personal insight into it. You know, I'll put my red flag on the same side of that. If the founder said, and then the question is, how did the founder find the idea? A red flag would be, I read a Gartner report and it seems like a good market. Or I was in business school and you know, I read this, you know, this tweet about something that's A red flag about how the founder found the problem he's solving. I want to see a green flag is a founder with some personal stake in it and also that that that founder has been able to attract other very intelligent people. So a business focused founder with a strong technical founder or a technical founder who's been able to attract a strong business person, you have to have been able to attract some other people to follow your vision on the founding team. That's the first green flag for me. The second one is some, I call it a thin edge of the wedge, some distribution trick, some go to market trick, some way to get your product and service attention in the market. Because even if you have a completely unique idea, there will be people who try to copy it. And how are you going to get your first 10 to 50 customers and you should have those somehow connected on your founding team. A red flag for that thin edge of the wedge go to the market is we're going to run Google Ads, we're going to run Facebook ads. You know, we're going to, you know, do some consumer type, attraction type thing. You have to show me that you've got some way to get your first 50 customers that's really cheap and really easy and that they're already somehow in your ecosystem. They're LinkedIn friends of yours, you've worked with them before, your co founder worked with them before. I call that the thin edge of the wedge, some distribution trick. And the red flag part of that is not having a distribution trick. When I ask people like how you're going to get your next 50 customers, if they say we're going to run Google Ads, that's a red flag in my opinion. And then I think the last thing is a realistic, you know, set of expectations on all the, on all the things that are awareness of the market. So that goes onto the slide of not having a $10 trillion sort of food market, having a reasonable market size slide, but also it relates to valuation. I think it's a red flag if somebody's trying to raise a 30 million dollar pre product company, there are teams that can do it. But not having a understanding of the size of the market and the current state that you're in in terms of the venture market valuations and fundraising sizes. A red flag for me on fundraising size is, you know, they're saying I'm going to raise $2 million because I think I can raise $2 million. I want to see somebody raising $2 million because they have a clear set of KPIs they want to do in the next 12 months. They've estimated how much it costs in terms of people and go to market and everything like that. I want to see them funding KPIs with their round instead of just saying they're raising an amount of money because my friend raised this amount of money.

Let's talk a little bit about the round sizes and valuations because one, it's a very interesting thing. For example, most decks I don't really include the size of the round or the valuation, but some do and sometimes it's good, sometimes it's really bad, right? So for example, if it's a clearly precede deck, and I mean like precede by that you don't have 200k ARR, but you already have in the deck that you want 10, 15 or 20 million valuation, or in the deck you're writing that you want a three or four or five million round, which I always will compute in my head that you want it for 15 to 20% of the company, then this is a red flag. So I see that you're overpricing your company at your stage and it's not going to work, right? So here's an interesting thing that especially if you are doing the cold outbound, here's the interesting thing, when you are doing a cold outbound or you're talking to vc, you don't know. The important questions that are always coming in at precede is like who is already invested? But not because necessarily we only want to invest after somebody else, but to understand where you at with your round, right? And also this will help us understand what are you doing and what's your connectivity and network. For example, when the repeat founder comes to me, then it's always one of two things. Either I knew that founder before and they come to me because I'm in their network, or maybe I invested in a previous company or I know them for a while. They come to me as trusted person or they come to me when already they're trusted, which is already invested. For example, we are looking right now already raised the million from their previous investors because it's like their third company. And I'm like, oh, okay, so their previous investors invested. I'm taking a look and I'm just meeting the guy. But the previous investors invested. But if you come to me and I don't know you and nobody else invested, then you need to be careful with your valuation, right? It's like, okay, your valuation 15 million, then it will probably be 5, right? So it's very Important. And when you fill a form, for example, on our side, you're all welcome to fill the form on our website because we do look at all cold pitches submitted through our website. But one of the fields there is the valuation and it's easiest for us to reject the company if there are no investors on board. And the founder expects 15 million valuation. Right. Because it's very, very unlikely that it makes sense.

I agree with that. The other thing I would just mention before we go to questions, we've got four people that raise their hands. I tend to want to invest. I never ask who else is investing before I make up my mind whether I'm interested in the founder in the company. But to your point, I do want to know that the founder is able to attract, you know, multiple investors. I want to invest in a complete round. So like let's say we agree on the KPIs that you have to do for 12 months and that's going to take a million dollars. I want to participate in a million dollar round. I don't want to be the first $250,000 where the other 750 is nowhere is, you know, some three months away. I want to participate in a complete round that is going to fund the objectives we both agree to. I never participate in these hand to mouth rounds. I raised 50,000 last week, I'm going to raise 50,000 two weeks from now. I'm sort of collecting checks every week. Those rounds are terrible and tend to fail. So for me it's a red flag if you're doing a rolling round as opposed to trying to get a whole bunch of people together to do to fund a real set of KPIs. Let's go to some questions here. Let me start first with.

And there's like five people.

Start with Vassal.

Oops. Hi. Hi. Thank you very much. Great conversation. Happy to see you here. Nice to meet you. Martin. Hi. I'm a serial entrepreneur from Silicon Valley. Actually right now have launched Raisable Founders Hub where I help actually entrepreneurs to, to shift their mindset and prepare their business for the fundraise. So it was quite interesting to listen and hear your two different approaches, how you identify founders that you can invest in. I make a lot of, I made a lot of notes. But my question is what is the number one mistake every founder, the majority of founder make and when they launch their business when they early stage. And another question is I've been to a meetup with Doug Leone from Sequoia Capital and he shared that his number one question Is, is this a mission driven founder? So, Martin, you covered this topic a little bit, but I want to dive deeper. If you have a, if you can, what does it mean for you to be a mission driven founder? How important is for you on the press seed station? How would you identify, is this a mission driven founder? Thank you so much, guys, again.

Yeah, thank you. I, I wouldn't use the word mission driven. I would say that the founder has to have some personal stake in the problem they're solving. Like I said, not that they read about it in a Gartner report or, you know, did some research and think this is an interesting market, but they have to have a compelling story as to why they are the only person in the world that can solve this problem. They look for a solution. They tried to buy one from somebody else and they're building it themselves because they got frustrated and they know they can do it better. There has to be, they have to have to have that personal motivation because you're going to be crawling over, you know, glass and going to have all sorts of problems, not just the financial returns, but you have to have a personal reason. I find that a lot when I'm looking at healthcare investments because people are like, my mother had dementia and I'm doing a solution for dementia because I'm trying to help my mother. This kind of thing you find a little less in B2B software. But I'm looking for that extra motivation that's going to get the founder through the hard times. That for me is the most important thing. Ihar.

Yeah, I think this is, it's very important for me to see that the founder is in this for a long haul. Right. So if I ever get a whiff that the founder here is opportunistic and he is not really connected to the goal and mission of his or her company and they will probably leave with the first opportunity or get or exit in a couple years and I will not invest. And the founder market fit that I spoke about is one of the ways to test it. Right. So for example, if the founder has been in healthcare for 10 years, probably healthcare is their life's mission and they will continue this. Right. But if the founders just. I've seen these founders that jump here and there all the time. Now they're doing real estate startup. Last two years they were doing healthcare startup before. Yeah, you know, it's, it's very hard to believe that this will be for a long time. Right. So this is very important for me. Of course, sometimes people can fake it Right. So they can fake that there's a mission passion and in reality they just opportunists and it's our job as VC is to try to figure this out.

Yeah, I agree. Thank you, Vassal. Let's go to Saeed.

Okay, great. Thank you. Well, thank you for all the insight. I'm just curious, like I'm a lawyer, startup lawyer and I work with startups and also like a lot of financial institutions. I think what you described works great with a lot of extrovert people, but not necessarily introverts like that might have either great technical skills or business acumen, like to actually understand the needs, but maybe they are not the best salespeople. And I think that issue is reduced when they are repeat founder. But if they did not prove themselves yet, I'm curious how you approach it. Maybe it's easy and you just eliminate them right away, but what else you're looking in there like just, you know, to give them another chance.

So what's the question?

I mean what you described in terms of being a good salesperson, like you know, when they present the idea or when they are like mission driven and just being able to show that to you, I think that's a lot easier if someone is more comfortable like in social interactions or an extrovert, whereas it's a lot more difficult like if they are an introvert. And like I understand that like just for especially precinct investments as you pointed out, like just the background, the school and so on is already playing a big role and it might be already big plus, but for example one, I mean there are different theories but like one contributing factor for 2008 crisis was that, you know, a lot of extroverted people made a lot of big decisions that turned out to be not so great. And for startups as well, I think sometimes there's benefit for someone to think more than they like talk.

So let me jump at it a little bit. Right. So first of all, I'm personally an extrovert and it's difficult for me to give advice how to sell or pitch for an introvert. And I'm pretty sure there is a bunch of other introvert successful founders that can give a better advice than I can. But here's an important thing I don't believe in. I mean it happens sometimes, but it's extremely rare for a CEO that cannot sell. To build a successful company, CEO has to be able to sell and it doesn't mean they have to be extroverts. There are plenty of CEOs that are successful that can sell, that are introverts. I think, by the way, Mark Zuckerberg is a great example. He's obviously an introvert, but he can sell the vision, right? And it's very important for the CEO to be able to sell to employees, to be able to sell to clients, to be able to sell to VCs. And it doesn't mean they have to be like, you know, out in your face, very, very clear. Like, you know, like Zuckerberg was extremely awkward just a couple of years ago and he went to IPO like 15 years ago already or like 10 years ago. What is important there is figure out your message and test your message before you Even go to VCs. Test your message on finding co founders, on finding employees, on finding the customers. And if you cannot convince people, then you will not be able to convince VCs. And then maybe somebody else should be a CEO or maybe you, you know. But in the end it's, it's about ability to sell and less about personality.

The CEO has to be a good storyteller and that storyteller can be an introverted storyteller. There's actually been research on this, you know, technical founders versus business founders and there's actually no difference. There are technical founders that are awkward, you know, in social situations that have created great companies, but they're selling a technical product typically to a technical audience and that works well because they're still able to communicate to their audience. The CEO has to be able to tell a story to the VCs and to their customers. That is going to get people excited about joining the mission. And their exact personality might be different, but they have to be really, really good storytellers. Thank you for that, Saeed. Let's hear what Prashad has to say.

Nice meeting you guys here and thanks for your insights. My question is about financials, especially about the valuation you are talking about. So about myself, I am a founder and I'm working on a based consumer electronics. So in terms of pre seat, what are the KPIs you consider in the product evaluation, in this, in the slides?

Well, I want to, I do B2B software and I want to see that you have an MVP with at least five customers that have been using it for at least three months, hopefully paying you something. And you've got a little bit of user data, a little bit of feedback of what sort of features you need to build before you can start charging people real money. For me, the KPIs are you've got an MVP, you've got some customer feedback and you've got a good handle on your development milestones to ship the next version that people will pay for. It doesn't have to have a lot of revenue, but in my model you need some revenue to, to, to raise a pre seed. I think other VCs might say that you can raise, you know, without revenue.

I think it's important to understand that every precede company is unique and the fact that somebody else can race without revenue doesn't mean you can. And for us, we look at every company individually and we underwrite the risk individually. And in one company we see that, okay, this particular founding team with this particular idea, we have very high conviction that they will be able to get to the, to the revenue and go up. And by the way, the valuation that you can come in supports it. Like for example, when we invested at a company, we invested even at one company without MVP because we were able to get into great smart people at 2 million dollar valuation. And okay, and then when they will have MVP, we will invest again at probably something like 4 or 5, I don't know. Right. And when they will have customers will invest at the gain at probably 7 or 8. But it's very important to not forget that the valuation you discussed with VCs is also an important lever to likelihood for them to invest. But sometimes when we look at the company and they have no revenue, we have no belief yet that they will be able to. We don't have no data. We cannot say that. We cannot say for sure they will not get revenue. No, we cannot say that. We can say that we are not sure they will get revenue. So we will wait. They'll say come back to us when you have customers, then they come back to us with customers. And then we analyze, okay, how many customers they have where they can grow. Sometimes they come to us with something like 10k annualized revenue and they're like, well good, but based on your market and your product, it's still not enough. And based on the revenue valuation you want, sometimes by the way, the companies shoot themselves in the foot with this partial rounds when they tell us oh, but you already raised 200k at 7 million valuation. But we are like, well, but we think you are worth $3 million right now. If you want, we can potentially discuss a deal of like 100k at 3. But otherwise in our mind we need to grow into your 7 million valuation that you already established. Right? And then it looks like rejection to the company. And obviously we didn't invest, but probably Sometimes it's just a question of valuation.

Prashad, I did want to mention something there related to valuation. I have seen this as a yellow flag, sometimes a red flag a bunch of times. And that is exactly what you said. Ihar, which is a founder, raised 2 or $300,000 pre product, pre revenue from their friends say at a 10 or 12 million dollar valuation because the angels were price insensitive, they didn't understand what the market was. That got back to my point of not having awareness of what the market is. They raised at a high valuation because they raised from friends that didn't understand what the valuations really could be or should be relative to traction. And then they go to try to raise from institutional guys and it's mispriced and they're unwilling to lower the valuation because their friends rate put in money at a higher valuation. That is a common mistake that I see a lot of founders make and it's especially more common in the last year when valuations have come back down to reasonable levels. So I would say even if you have offers from your friends and family to give you money, talk to some professional VCs like Ihar and me and figure out what the valuation would be from us and try to price it in a way that will still be attractive to the professional VCs.

I think I want to add one insight that not all founders understand that a lot of later stage VCs are the VCs to whom you want to approach is that we will discuss and the market will set the valuation and send me a termship. And this is a very normal discussion with VCs that have ownership targets that will need to get 10, 15% that can invest millions of dollars. But if you are raising precede vast majority of VCs you will meet do not want to actually negotiate with you because they will invest 50k, 100k, 150k 200k and they want to invest on safe and they don't want to get into negotiation, battle, deal. And here what happens is that they ask you what was the last round you raised that or what are you raising at? You tell them a number, 10 million and then they will pass. They will not to give you a counteroffer, they will not negotiate with you because here's the problem. There are so many pre seed companies, just too many, that negotiation is just not worth it. It's just a waste of time. And when I hear that the company that has pre revenue already raised 200k at 10 million and I think well, maybe I would consider it at 4, but they already have 10. So it's a negotiation. I'd rather pass and look at the other company that comes to me from the perspective of four or five and then I'll spend more time on that one. So be very clear that it's you, the founder who is setting the price on pre seed way more than a vc. And don't overprice yourself.

Don't overprice it. Yeah. So you Ihar do you have. I said we'd go to 6 o', clock, but I have another 15 minutes. You can you take.

Unfortunately, because I'm in New York. Yeah. You know, it's 9pm here already. I have to jump. I can do like one more question.

All right, let's do one more question from John R. And then we'll wrap it up.

Hey, Martin Ehart. Good to see you guys. Real quick, going back to the CEO situation. So have you come across situation that's green flags. It's, it's founder market fit. But it's just obvious that the founder or neither of the founders can really be the CEO and that they, you know, don't have people management skills. They don't just, they can't be the CEO and even potentially they recognize that themselves. What have you, have you tried to address that situation?

I've definitely seen a situation like this and for me it's like, you know, if I'm not an investor, it's not my place to tell the company what to do. I'll just pass and you know, that's it. Right. And the last thing that vcs want to tell is that I don't think you're the right person. Right. So as a vc, I cannot really tell the founder you're not the right person or I don't believe in you personally. Right. Because people take it personally, people get offended and it's not good for anybody. But I definitely see a situation like this and then I pass. And you know, look at other companies.

If I see some, a founding team that doesn't have somebody that could clearly be the CEO and I think in precede, I'm not talking about the CEO like forever. I'm talking about for the next three to four years, which is getting product market fit, developing the product, getting your first 50 customers, getting the company up to basically $2 million or $3 million of annual revenue. If I don't see somebody on that team who can be in who I'm confident can drive the company to three or four million dollars of Revenue, raise money, tell the story, hire the team. That's the CEO's job. Raise money, hire the team, manage the operations. I'm a pass.

Yeah, I agree.

Yeah, thanks for those answers. You know, it's hard to get to a pass when you really love the idea and the team, but they just don't.

You, you might love the idea, but it's the team. And I don't know about you, Ihar, probably 50, 60% of the teams that I've invested in in pre seed have pivoted within the first year.

Yeah.

And that was because they had management teams that were listening to customers that were iterating and that could pivot. It was the management teams for the quality of the management team that allowed them to pivot. Poor management teams get stuck on an idea and continue to go down a rabbit hole when it's a bad idea. So it's really about the team and precede. So I'm sorry that we couldn't get to everybody else's questions, but thank you for coming. There'll be a post on my site that summarizes all this and the transcript. Thank you for your time. Ihar where can people find you Ihar on the Internet.

I'm very active on LinkedIn and on Twitter. Please reach out to me. But if you want to send your startup for to us, it's much better to just go to Geek VC and click on the pictures button and fill the form.

I agree. And for me of course most people probably know Incisive VC and click the pitch us. Thank you all for your time and enjoy the rest of your night.

Cheers. Bye. Thank you Martin for inviting me.

Bye.