How to Engage VCs, with Rick Moss of Better Ventures

Welcome to the Founder Insights Podcast from the Founder Institute. I'm Jonathan Grecian, co-founder of the Founder Institute, and on these podcasts we try to bring you useful startup insights from our global network of entrepreneurs and mentors. In this episode, you'll hear from Rick Moss, who's a founder and managing director of BetterVentures and has started many companies himself. In this interview, he's going to share some of the key lessons on how to engage with venture capitalists as a startup founder and go over a lot of the common mistakes that founders can make and how you can avoid them. This interview was done by Mike Supravici, who's an EIR at the Founder Institute and who leads up our graduate support group as part of our Scaling Session series. Enjoy.

Rick, thank you so much for taking the time out of your busy schedule to do this. Would you mind giving the audience a little bit of an introduction on yourself and maybe Better Ventures as well?

Sure, thanks for having me. Yeah, we're, we're, we're a seed fund. We're based in Oakland, California. We focus on the intersection of technology and social and environmental impact. Our thesis is that mission-driven entrepreneurs outperform. So we're looking for people who are, you know, on a mission to do something really important in the world, and that building a big, important technology company is a way to do it. We are on our third fund. We've made— invested about 35 companies so far. We focus on the seed and pre-seed stages. We're not afraid to go really early and pre-revenue, So, you know, your, your founders and alumni are kind of many of them right in our, right in our sweet spot. Our categories are opportunity, which is things like leveling the playing field in society, education, access to good work opportunity, that sort of thing. Health, primarily digital health, things like using information, information technology to lower the cost of care and improve access to care. And sustainability, and that's things like the future of food, clean water, transition to a clean energy economy, etc. And yeah, we started, let's see, 8 years ago in San Francisco when we saw a— we're now in Oakland, but we saw this just incredible sort of— investors look for big changes in society, and we saw people coming out to this place called the Impact Hub in San Francisco in San Francisco. It's a shared workspace for mission-driven people. Kind of like WeWork, but for people on a mission. And we saw just hundreds of people fill up that space, and then they doubled the size, and then they filled that up. And we knew that we were witnessing sort of a major shift in society. And we sort of built our firm around this thesis that people want more from their, their work these days. They want to do good in the world, they want their work to have meaning, and they want to try to solve some of these terrible problems we're reading about and hearing about every day. And so we're backing those people who are using technology as their sort of their method to addressing those big things.

That's awesome. Super inspiring mission, by the way. Very, very different than a lot of the industry, you know. So that's really cool to hear. Um, you know, I'd like to, like to dive right in. Um, you know, venture capital tends to be for a very kind of like specific subset of companies. Um, but, and there's been a lot of things in the media about like, well, what kind of makes sense for venture capital, what not, what, you know, bootstrapping your business versus raising money from VCs. And I'd love to kind of hear your thoughts on it. Like, what kind of companies do you think make like sense for venture capital in general?

Yeah, that's a really good question because venture capital doesn't make sense for everybody. It's an expensive form of capital, and the expectation is that, you know, you're going to take your company to the moon. Venture capital investors are not looking for modest outcomes. Maybe some angel investors and maybe some, you know, unusual investors, but most of them are looking for really, really big outcomes. And so when you sign up to work with someone in the venture world, you know, you're strapping in for a many-year odyssey to deliver something really big and really important. And that, you know, that isn't for everybody. There's a lot of stress. There's a high likelihood of failure. And so I think each founder needs to think, dig deep within themselves and decide, What am I really trying to accomplish here? And sometimes the answer is, you know, a modest-sized company where I have complete control and achieve an exit out, a good exit on my own terms is, you know, is a great outcome. I used to acquire companies for a living. I worked for, among other things, I worked for a big technology company, Sun Microsystems, which Oracle bought, and my job was to buy other companies. And multiple times I bought companies that that were bootstrapped. And, you know, to give you a sense of the range, you know, $20 to $100 million was an acquisition price for some of these companies, and often they raised no outside money, meaning, you know, founders take home almost all of that money, and employees take about, you know, 20%. So that might be a bigger outcome sometimes than, you know, building a— what do they call a $10 billion company, a pink unicorn? Than building a pink unicorn. Sometimes those companies, the founders in the end don't even take that much home given the ratchets, the full ratchets and things of the, you know, the F round. But back, you know, to keep it positive and to focus on what we do is we want people who are so passionate about addressing, you know, aging, addressing a better education system, a better food and water system, that they don't want a small outcome. Building a $10 million in revenue company is nice, but it's not gonna solve these big, big gnarly problems. And so you have to stop and think, what do I want? And am I ready to step up to this like ultra-marathoning or something? Do I wanna go for a jog or do I wanna do an ultra-marathon and possibly need to be hospitalized? 'Cause that's what it's gonna take to solve some of these big problems. And actually we have invested in a team led by a woman who's an Ironwoman, it's turning out to be a good thing.

So how, you know, given those constraints, how do you look at and how do you evaluate like the market opportunity? Everything that seems to resonate with like big, big opportunities, like these markets you're tackling, healthcare, you just mentioned things like that. You know, how do you look at like, you know, the market opportunity when they say a founder kind of like pitches you and how do you evaluate that?

Yeah, we look at 3 big things: team, market, and impact. I can walk you through each of those things, but in terms of market, we want big markets. I can't tell you how many really interesting companies and founding teams I've talked with, and they get to the part about the size of their market, and they say, "It's at least $600 million, and we think we can get a big chunk of that." And while that could be good for a seed stage investor, enough to build a company from, say, $10K in monthly revenue to $300K in monthly revenue, it's often hard to build a business that can go public, that can achieve the type of outcomes that a Series A investor is looking for. And so, at the end of the day, a big market, a really big market like food, energy, transportation, education, water. These are, if you go look up public water companies, water company acquisitions, you're gonna find just some massive numbers that companies you've never heard of that are trading at, you know, $18 billion in market cap. If you're trying to build a big and important company and make a lot of money, having a big pond to swim in is a very good place to start. And so I urge you, it's great to, there's something important here, 'cause it's good to have a narrow focus to begin, You know, it's not good to just focus on the entire food system, right? You need to narrow right into, you know, healthy organic food for diabetics or something. But you, but you need to make sure that you start small. You start with a narrow market that you can really own, you know, like a Peter Thiel Zero to One thing. Pick the thing that you can really do well and sort of dominate that thing, but then make sure that it's an extendable or extensible larger market opportunity. Adjacent markets and other markets that where you can go bigger in the long term. So I think it's okay to find a little one to start with, but you need to make sure that big one is out there. 'Cause if it's not, you're gonna have trouble attracting capital at the A and B and C stage.

No, that makes perfect sense. And in your mind, how do you look at, you know, the kind of like an established market versus like entrepreneurs that kind of create a market, you know?

Yeah. Yeah. Well, they're both, they're both good. I'll give you some examples from our portfolio, but, you know, established markets are known, right? There's money changing hands right now and there's little chance, little risk that no one wants something in that market. But they also have the drawback that they're, they're potentially highly competitive, 'cause they've been established for some time, everyone knows about it. And then the beauty of new markets is you potentially kind of own something entirely new that no one else has done before. Micromobility, something like that. There have been no exciting micromobility solutions until very recently. It's a very new market, and you can, it's explosive, right? But the risk is that there's, you think there's something there and in the end, there's not. There were several micro-mobility solutions that came along before the sort of scooter companies that didn't go anywhere. And then finally someone else got it. So yeah, I'll give you an example. One of our companies is a 3-woman founding team out of Denver, building a company to help employers do self-insurance and healthcare. Healthcare and healthcare insurance are very big markets. They're known, they're giant. And Amazon, Chase, and Berkshire Hathaway have announced this thing, AKA ABC, Amazon, Berkshire Hathaway, Chase, have announced this whole self-insurance, you know, kind of triumvirate where they're gonna implement it for themselves and take it out to the broader world. This company's doing something very similar. So you have very large markets, you have validation from these big players, you know there's a giant market out there. On the other hand, we have this company in micro-mobility doing reporting to help cities tame the sprawl of all these scooters and dockless bikes and soon-to-be drones and autonomous vehicles and everything else just piled up like cordwood on the sidewalks, helping cities kind of address, you know, understand that, control it, know what's happening in their city. It's a new market and it's explosive. And, you know, we knew it was risky, but we're excited to be on board and it's growing really fast. Another one is a company we invested in that's doing cellular agriculture. You've probably heard about companies doing alternative protein like Impossible Burger, companies growing meat in the lab like Memphis Meat. We invested in a company that's essentially growing fat in a lab called Mission Farms. Think bacon without the pig. And there's no market right now for bacon without a pig, but we know that the global meat industry is a trillion dollars. And we know that there's a huge trend toward veganism and vegetarianism and healthier eating. And people know that tipping point is kind of arriving in terms of the carbon crisis and that food is a big part of that. So, you know, we made a big bet really early on a company doing that. And so far it's paying off. So if you're a founder and you're thinking about this, you know, what you're looking for is validation and evidence that, people will buy what you're selling and that there's a big opportunity there. So either way, go out and find it and just know that known markets are, you know, a little less risky but more competitive. And new markets, you know, there might not be anything there. So do your early testing and customer development around the urgency of the problem and the pain point for customers so that you can demonstrate that, you know, there's a really, really big urgent near-term problem there and it's not gonna happen in 10 years after you've had the shutdown.

You know, there's some questions coming into the chat room now related to this as well as kind of like our next kind of segue here, which is just trying to understand a little bit better with regards to the stages of investment, right? So there's like a lot of confusion right now, at least from the founder side. And I see this on our end. What does, you know, this entire seed phase, there's like pre-seed, seed, mango, whatever.

Mango.

Series A, and just, it'd be really neat if you could just kind of give us at least on a high level kind of how you, from your perspective, kind of look at seed, pre-seed, and all these various sectors within this phase.

Yeah, yeah. I think let me cover that and then let's get back to what's important, which is raising what you need and don't get hung up on the terms because the terms are changing. Even the people doing this every day for a living can't keep track of the crazy names and terms and round sizes. But, you know, there was a time when Series A was, you know, that a lawyer somewhere had to think of what, what do I name this thing? And he or she named it Series A because that was, you know, the first one. And then we'll call the next one after that Series B, and we'll just name them in serial order. And, uh, since then, you know, the— and I'd say what, around the 2000s and early turn of the century, we had the rise of the the super angel and the seed fund, and I think it was driven by Amazon Web Services and whatnot, that computing became so cheap. And, you know, with a MacBook and an iPhone and an Amazon Web Services account, you could start a company for, you know, with the money in your pocket or a $10,000 credit card limit. And we see a lot of that. So underneath the Series A, again, this thing called seed, and then, you know, a number of the first seed investors grew successful, you know, for First Round Capital and Floodgate. And what have you. They started to grow up, raise more money. Next thing you know, they're putting bigger amounts of money to work and they're still calling it seed. The Series A investors are investing $10 or $15 million in a first check. You know, so it's all kind of risen. And then this notion of pre-seed has come in under that. And it's just crazy. And every time, every once in a while I hear someone raising a pre-seed round of, you know, $2 or $3 million. It's like, wait a minute, that was the Series A 15 years ago. So let's just not worry too much about the numbers, the letters, and let's just call it, you know, it's my first round, I'm raising half a million dollars, and I'm looking for a great investor who can help guide me through that. And I wouldn't get too hung up on it and, you know, and not, you know, get wed to any certain term. But the most important thing is kind of irrelevant of all these terms is raise what you need. And in my view, it's really wise to raise, to kind of make progress ahead of your raise. If you can, you know, spend $15,000 on a credit card and show initial customer traction, raise a $250,000 to $500,000 round and take that initial traction to something exciting like $10,000 or $20,000 per month or whatever it might be, you know, a good handful of customers, then go raise a million or a million and a half dollar round and get to $100,000, $200,000 in monthly revenue, that's really exciting without a whole lot of capital. And you're kind of demonstrating each step of the way, I take a little bit of money and I show that it works, a little more money and show that it works, and that progress it's kind of right in sync with the money. As soon as you go out and raise like a $9 million round with no revenue and you're just kind of getting started, you've just turned up the dial to 11 on your sort of likelihood of crashing because the next round is, you know, the valuation is going to be pretty high on a round like that. And the next round is typically going to be larger and at a higher valuation. And the bar for those rounds, you know, you want to raise a $9 million round, then the next round you want to raise $20. And people are expecting, you know, you're hitting $10 million in revenue and and growing fast. And that's not, you know, that's a good formula for disappointment unless you're one of the really, really lucky or good ones. And so it's already risky to start a company, a startup company, and to work in the, you know, take venture money and take the venture path. And so, you know, if you want to improve your chances for success, don't go and raise a huge pile of money when you're not quite ready. Once you know it, then you step on the gas, and that's when you raise the money, when you feel you've really just nailed product-market fit and you actually need that money.

Yeah, I see this all the time in our portfolio where, you know, founders are going out at like a, like a 9 or a 10 cap or whatever valuation, right? And the, the part that I have to deal with is like, hey, look, you know, in 18 months you have to beat that and you have to, you know, you have to be able to, otherwise, you know, it's gonna be kind of like a, a down run. It could, no one's gonna be happy when that happens, you know? So it is important to kind of right-size it for the, for the timing.

Right. Right. And there are investors who will look at your last round and say, I'm not going to go anywhere near this, even though they could be a great investor for you. They might want to offer you half that amount at a lower valuation. And it could be the thing you need, but they're not going to touch it because they're going to see that they know that the minute they utter those terms, there will be just, you know, dramatic and flagrant pushback on them. And they've done it before and it doesn't work. And so it just makes it hard for everybody.

It's not worth the extra risk too. So it makes sense.

Yeah, there's nothing wrong with going big. We talked about hitting big outcomes, but, you know, make sure it's sort of like, you know, get it right before you step on the gas and getting it right takes discipline and it takes time and you don't want to overdo it.

So Robert asked the question, you know, what kind of validation are you looking at at pre-seed or let's call it like your first round? Yeah, right. What kind of validation are you looking for? Maybe you can just talk about that more broadly, kind of how you look at validation points in various different companies?

Good question. It kind of depends on your market. You know, for— I'll take sort of SaaS, mobile, consumer software, those markets first, because that's the easiest one to answer. You know, with a credit card and a little bit of money, most smart people can get some initial traction. I think a lot of investors will focus too much on your revenue and your your sort of really exciting growth numbers. But I think smart investors hunker down and look at evidence that you're solving a problem. And you can have lots of revenue, but not be solving a problem for someone. Think about people who download an app, maybe they charge for it, they get quite a bit of revenue, they get lots of downloads, but then people don't continue using it. So for us, the big thing is engagement. We wanna see that people are using what you're selling and they continue to use it. Like evidence that you're solving a problem. That could be on a very small scale. If it's a consumer app, you know, something like 20 or 50 customers, ideally not just your friends and family. And then if it's a business enterprise app, which is our main focus, you know, 1, 2, 3 customers or more. And pilots are good, but pilots are just a very early starting point. Lots of customers are willing to take pilot, but it doesn't mean they're actually that interested. So, you know, a pilot, something that's coming out of pilot, but Are people using it? Do they continue to use it? Is there evidence that you're solving a problem for them? Would they pay money? It's hard to do, but cohort analysis is a good thing. Google it. Look at the charts and tables that you can make. If you can each week or each month track a new cohort, establish how much usage you're getting from that, how long they continue to use it before usage drops off, and each time you start a new cohort, those numbers are improving, that to, I think, a sophisticated investor is magic, and they're more interested in that than that you might have a lot or a little bit of revenue.

Well, you can also just buy growth, right? So it's not that, I guess it's not that interesting technically, right? It's more about like engagement. That's really what you can't really fake that, right? So I guess that's probably the—

Yeah, and we should be able to use the app or the product. We should be able to talk to customers and have them say that, oh my God, before this thing, I don't know what I was going to do. I was in pain every day, and don't you dare take this away from me. If I can even find a couple of customers who say that, then, you know, we're very interested versus, you know, we're at $50K in revenue, but, you know, we're getting just big churn, or, you know, people aren't continuing to use it, and we can't find that evidence of validation.

So just to kind of piggyback on that a little bit, I know I'm skipping around a little bit here, but it is really relevant. How, you know, we just talked a little bit about, briefly touched on, kind of like diligence, right? You said you talked to people like your customers and things like that. So how, you know, explain to me kind of like how diligence works with with, uh, you know, with Better Ventures and, and, and what's the process look like?

Yeah, yeah. So, um, I think it helps to talk about institutional investors versus, um, not individuals, and then lead investors versus, uh, non, you know, followers. Uh, if you're an individual writing a $25K or $50K angel check, you don't need a whole lot of, um, the diligence. And typically you're either just excited about the team, you know the founders, or you're just willing to take really big risk and you don't need to dig in a lot. You might make a couple phone calls, you might meet with the team twice rather than once, but you're going to basically, you know, write a quick check. If you're a following institution, you're going to lean on that lead institution to see, you know, what kind of diligence they did, kind of piggyback off of what they did and maybe do some incremental customer calls and whatnot, maybe a little market research. But the lead institutional investor is bearing a pretty heavy burden. And I know that it's frustrating for founders because you feel like you're— you read the press and you think that money's just growing on trees and that you have one meeting and they write you a check for $10 million and that's just how it goes. And then when someone says they want to do some research and take some time, you think, oh, come on, really? You know, and we raise our funds and we have, you know, anchor investors in our funds and then Way down the road, people are asking for all sorts of stuff from us and we think, "Come on, do you really need all this information?" But when you think about it from the fund manager perspective, if it's an institutional like us, we're going to pick 20 or 30 companies in each fund and we're staking our reputation on those companies and we are signing up to hit some really big return numbers for our investors, just like you are signing up when you take money from an institutional investor. So it's a big deal. That thing is probably going to be in our portfolio for 4 to 11 years, people are going to be asking about it, uh, 3 funds down the road. They're going to say, hey, what's this company and where did that go? You know, tell me about— how'd you— what'd you learn from that if it didn't work out? How'd you make that decision? And we have to be able to justify it. So, you know, we start with market research. We'll— we try to keep the requests on founders light, but it takes us some time to get our heads around the thing. So we'll send a request typically by email with a list of things. Basically, you know, can you send us some articles showing that you're talking about this opportunity? Are there customers you're working with who we could talk to? You know, who are the experts who would know about this? Are there people on your advisory board? Basic stuff so that we can, we can take that information and start getting our heads around, you know, is this working or not? Is there a market out there? Is the pain really deep for customers, that takes us at least a week, 2 weeks, 3 weeks if we're the lead. And then we'll probably make a secondary request where we'll want to talk to the people you worked with in the past, get some personal references. We will almost always call around to people you did not provide as references. So be prepared for that. Most investors do, so don't be offended, to make sure that, you know, there's no lurking problem here, that that some prior co-founder, you know, doesn't have a huge problem with these founders or whatever. And then it takes us, you know, 2, 3, 4, maybe 5 or more weeks before we start to gel that this is really exciting. It's everything we thought it was initially. We're ready to put our, you know, names on this along with the founders and stand behind it and fight through thick and thin and, you know, deal with year 7 when you're here, have a tough sale situation. And so keep in mind how— what a big decision it is for us, just like it is for you. And even if it's a small check, it's just as important to that, uh, that smaller fund as a big check is to a bigger fund later, because it's, it's your reputation on the line. Does that make sense? Were there other more detailed things I could get into on diligence?

I, well, I'd like to kind of piggyback on that a little bit more and just ask, you know, so do you— how do you make decisions as a partnership? There's, there's multiple people in your partnership, and, and I assume that, that there's probably some, some sort of, you know, process to that. And I'd love to kind of hear it because it kind of fits into this whole diligence thing because a lot of people need to understand kind of what the process looks like.

Yeah. Yeah. So typically there'll be a first meeting. Um, you say, all right, we'll start with the first contact. You know, ideally you send, uh, an email through someone, you know, who said someone we know and, you know, who says, hey, I really like these founders. They might have something here. I'd urge you to take a look. And their deck is attached. We'll look at that and basically determine is it in scope or not. Does it have two founders? Is there a technical co-founder? Is it a big market opportunity? Is there a significant social environmental impact here? If it checks those boxes, we'll typically take a meeting. We'll either meet in person or talk by phone, and we'll try to get our heads around this team and their motivation and how big really is the market opportunity. Are these people, you know, willing to go to the end of the earth to solve this problem because they're on a mission? And if we get the sense the answer is yes, we fill out a little scorecard, but it's things like, you know, is, you know, how technical is the team? How long have they known each other? How big is the market? How much competition is there? You know, how far along are they? Do they have a demonstrable product? Is it getting some results? If that scores pretty well, we'll bring it to our Monday meeting, which is the typical thing in venture, is the partners will get together or the team will get together on Monday, talk about all the deals they— companies they came across last week. And then we will essentially advocate and say, I think this is a good one. I'd like someone else to take a look at it. We just have two general partners, but we have a team of about five. And so, you know, one of the other partners will then meet with them. They'll have a similar discussion. And if, you know, both are excited, then we start to go into essentially diligence, pre-diligence, which is digging deeper. We'll want to make sure we're meeting the team in person if it wasn't in person. If they're not in the Bay Area, we'll probably go there to meet with them or vice versa. And we'll start maybe talking around to some other investors, see if they've looked at it. Maybe people have invested in similar things. What's their experience been? We'll start looking up comparable companies to find out like what kind of exit multiples there might be on companies like this. Every once in a while we'll run into one excited about and find out that all the acquisitions are at 1 or 2x revenue and think, "Ooh, okay, let's be careful about this one." We'll look at how much money the other comparable companies have raised over time. We want it to be $10, $20, $30, $40 million to exit, not $600 million. And if that is, for a small fund, that could be a problem for us. And then we expect— and all of this takes about 2, 3 weeks. And then we will go into due diligence where we do what I described. We'll start researching the market, checking out about around the team, and within another 2 or 3 2-3 weeks, we'll set a term sheet. And that term sheet will typically, for us, be very plain vanilla. Here's the amount, here's the round size. It's always things we have been discussing with teams, so nothing really surprising there. And we're going to lead with this amount, and we will help you fill out the— you know, if it's, say, a $2 million round, we're going to write a $500K check, and we will help you fill out the rest of the round. We're excited to work with you, and let us know within a week. And then at that point, we like to think it's sort of, what's the word? It's, we already know that we're both excited and we're both in and the offer's likely to be accepted. It's not like we're just lobbing in a term sheet, but then, you know, from there it's another month or so before we can sort of turn over every little rock and draft the formal agreements and sign the formal agreements. But I don't think we've ever backed out of a deal. In a term sheet yet. And the only reason— after term sheet— and the only reason we would is if there's a really big problem, like a crime has been committed or, you know, something really big we didn't know about. And but other investors might send a term sheet more casually and be more likely to back out. But typically once that term sheet comes, they're in all the way. It's just a matter of getting through the remaining stuff.

Could you, uh, there's a question in the chat room regards to regard to this. Thank you, by the way, that was really awesome and very detailed. Uh, can you run through the initial, uh, checkboxes that you look at once you get kind of like an intro email with, with the deck?

Yeah, yeah, for, for, well, I'll talk about us and more generally for other investors. You know, we're, we're, our, our special sauce is we want these mission-driven founders who are going to perform because of their passion for this problem. We're looking for a personal connection to the problem. Did your sister die from this thing and you're going to dedicate your life to making sure other people's sisters don't die from that? You wouldn't believe how many people we talk to who are in that kind of an incredible situation where it's a really big deal to them. It's personal and they're ready to fight. So is there, on the team, is there a personal connection to the problem? How technical are they? Have they worked in this industry before? Some people are very competent founders. I'm sure some of you listening are doing something completely different than what you did in your past. That's fine. But like the more you understand the market, the better. So if you're coming from the health industry and you're doing something different in health, that's helpful. How long have the founders known each other? Where are you located? How many people are on the team? What's the equity split look like? In particular, how technical is the technical founder and can they really build something important over time? On the market, we're looking for, you know, really big top line number. We're looking for more importantly, the addressable market, 'cause it doesn't help to be in the oil and gas industry or the energy industry and say, you know, it's multiple trillions. We need to know the part you can address and that your product will really help solve. So, you know, how big is that market? How fast growing market? How fast-growing is it? How many competitors are there, etc.? We'll look at the traction. Do they have some initial signs of product-market fit? Do they have some engagement, something that's showing that it works? Do they have a prototype or a demo that's working, an MVP, or are they further along with that? And revenue is in there, but it's not as important. And then impact-wise, this is not for every investor, but we're looking for a really big problem in the world that anyone would recognize. You don't have to squint. It's not like a healthy juice company. It's that, you know, our education system is broken and we're going to fix it, you know, full stop. There are poor kids who are not getting a good education and we're going to help, you know, level the playing field by helping kids learn to read. We actually have an investment in a company like that. And so, and then, and then does it map to, there's a a thing called the United Nations Sustainable Development Goals, and I think there are 15 of them or something, and they basically— the UN has outlined sort of the biggest problems in the world that need to be addressed for us to have a sustainable and just society. You know, clean water, access to clean energy, equal opportunity for women and men in the world, all these types of things. If we can map it to something like that, it helps us understand, you know, is this just a cool gimmick that sounds like it could help people, or is it, you know, identified by some of the most trusted authorities in the world as an important problem that needs to be solved? But I think backing it out to your typical investor, it's team and market. It's really strong team. They've ideally known each other for a while. They're highly technical, and it's a giant, giant market that's growing fast. Fast, or there's some segment of the market or new market that's growing very, very rapidly. There, every deal they bring back to their partner meeting, the questions are around the team and the market. We try not to get too hung up on the product because we know the product is going to change. We want to know that you're technical enough and you have a competitive advantage around building a product, but we try actively not to fall in love with the product. But to look at the team and the market, because over time it's very likely the product is going to change quite a bit. And if we invested in that, it's gone. The team is going to be there unless something goes really wrong, and we need them to be really, really strong, like the woman I mentioned who's the Iron Woman. They're going to get through, they're going to be able to walk through walls, solve problems, their relationship will last, and, you know, that maybe we can even have a little fun. Together doing it.

I'm glad you brought that up because, you know, as I kind of see it from like a high level in our portfolio too, the earlier the company is, the more important the team and the market are. The farther along they get, then, you know, the much more metrics-driven and—

Yeah, exactly.

So it makes a lot of sense.

I like to say it's at the early stages, it's art to make these decisions and to evaluate these companies. And at the later stages, it's science because you have lots of data. A growth equity investor, it's like being a Wall Street analyst. You can dig into everything they've got and find out lots and lots of information. In the early days, there isn't much there. So you're really judging the people in the market. Good point.

Yeah. How do you look at location? You mentioned that you had a really strong company out of Denver. How do you look at location for your fund and where you invest?

Yeah, I think generally for venture investors, it's a, you know, it's a human service in a way, like the capital is part of it, but what you're really getting is people who can help you solve problems. And that, at least historically, has been a very local business. People want to meet in person. They want to be able to— they feel they can be more productive solving problems and understanding, you know, what's going on and building relationships when they can meet in person. And then, you know, networks are local. So a big value that investors bring to you is the ability to leverage their network, introductions to customers, introductions to other investors, help finding other team members. You know, if we're investing in Bangalore and Stockholm and Paris and, you know, somewhere in in Buenos Aires, you know, it's going to be really hard to bring our network to bear on that. So that's why you see so many investors, like Charlie O'Donnell from Brooklyn Bridge Ventures says, I like to be able to ride my bike to any of my portfolio companies. And if I can't, then maybe that's not going to work. When we do invest outside, so we're based in Oakland, we have a very distinct sense of place here. For those who don't know it, come and check it out. Very exciting, robust city right now. Half our investments are in Oakland and the East Bay. It gives you a sense for it. But, you know, it's a local business. Then about a quarter are in the Bay Area, the broader Bay Area, mostly San Francisco, some in the peninsula. And then about another final quarter are outside. And typically the ones outside are where we saw just a tremendous opportunity where we had access or something extraordinary that made it worth going outside our area. Maybe there's a lead investor, this company called K4 Connect, it's a senior, helping seniors age more happily and healthily. And the founder of that started the company that made the Touch ID on the iPhone and sold it to Apple. We know the investors who worked with him on that company. He's coming back for another company to do something around seniors and aging. And so they called us and said, are you interested? It's in Raleigh, North Carolina. We're like, yes, how soon can we meet them? And so, you know, if we had— if there weren't that extraordinary situation where you've taken a company public and sold it to Apple and we knew the other investors, we probably would have been less likely, much less likely to invest. But when it's extraordinary like that, then it can drive making an investment outside of the Bay Area. The one in Denver, the 3 women founded a healthcare startup. One of the people on our advisory board worked with the CEO in her prior company. It did not succeed, but he called and said, if I could invest in this company, it's out of scope for me, but if I could invest in this company, I would in a heartbeat. She was extraordinary last time around. We're friends. I would bet on her, you know, again and again. You should look at it. You know, I think 3 weeks later, we had a term sheet for that company. It was really a really special, you know, opportunity. And that's what helps drive us to go outside the area.

Do you ever lead outside of the local area, like the East Bay?

Yeah, it's rare. We typically would rather follow outside the Bay Area.

Right.

I'll give you an example of one where we led. It's a company called My Village. It's addressing low-cost, high-quality in-home childcare. There are all these as you're out driving around, or if you don't drive, as you're out and about on your scooter, you go by a house that says, you know, Linda's Childcare. And it's literally just a little sign in the front yard of a person providing childcare to maybe 5 kids a day, something like that. There's a very large informal market for that. We met, we've been following, we've known a company called Off Grid Electric. That's been very successful bringing solar to Sub-Saharan Africa. And we learned that the founding COO of that company was leaving and was starting a new company doing this formalizing and digitizing this informal in-home childcare market. And when we learned about that, you know, this woman had just raised over $100 million with her company. She had built out a network of energy providers and partners throughout Sub-Saharan Africa. She had— the company was succeeding and still is, in my view, doing well. And her co-founder was her college roommate. And she has 2 kids, and I believe her college roommate has 1 or 2 kids, and they are what we call problem insiders who have just dealt with this problem of challenge in finding affordable, high-quality childcare. So, you know, all the elements were there, and yet the company was in Montana, of all places, and we could not act quickly enough to invest in that company, given the background of the founders. Once we got our heads around the size of the in-home childcare market and that we were comfortable that it was big enough and was a significant kind of social impact, that's what we seek. And so, you know, we, we, we did that one when and led And every once in a while, something so extraordinary comes along, you're willing to break your rules. And I think good investors have their rules, but they break them too in the right situations. And over time, they learn, I did that 3 times and it didn't work, or it did work. And so it's no longer a rule.

I love that story. And I'm sure a lot of people in our network would love that too. Just there's a lot of mission-driven founders here, and I think that makes a lot of sense. You know, um, Alex asked a question. He'd love to get kind of get your advice on, um, you know, how to overcome this, uh, situation of FOMO, or at least how you look at it, I guess, from an investor's perspective. You know, I mean, there's certainly some deals where you generally like will take the lead and not really look at that versus like, you know, following along. So yeah, how can a founder overcome this, this, uh, lack of FOMO, I guess? From VCs.

If I understand the question correctly, you're talking about how, you know, how do I make sure that there is FOMO among investors, or is it something different than that?

Yeah, I guess that's a better way to kind of frame it. I mean, I guess he's kind of getting going right now from the way I interpret the question, and it's like, how can— and he doesn't have FOMO yet.

Yeah, so fundraising is very similar to sales. In some respects it is sales. You're selling something, you're selling shares in a company. And so I think scarcity is one of the sort of fundamental principles of sales is that this thing is rare and you need to move now because it's going away and other people are very interested. So within the boundaries of being, ethical and telling the truth. You need to kind of tell— put the best story on your situation as possible and create a sense that investors are going to miss out if they don't invest. And it's really your job to create that. We ourselves raise money from institutional investors and family offices to raise our fund. And if we don't say the door is closing and it's ending and this is your last chance, then they will drag out forever. And so it's your job to come up with the— create the real reality that it's a finite opportunity and it's going to end. So start with 1 or 2— if you're applying this to fundraising, start with 1 or 2 angel investors who are willing to make early commitments, who will say, I love you, this is great, I know you, I trust you, I'm ready to give you my money. And start to line up what you typically call a soft commit or a soft circle. If you're raising, just for, say, ease of conversation, half a million dollars, you get $100K committed from angels, then you target 3 or 4 bigger Czech investors who might want to lead, assuming you can raise $500K without any lead, but if you want to lead, you want an institutional investor, you want help from them, et cetera, the brand and whatnot, the kind of validation that comes along with that. It's wise to, you know, prepare your deck really well and go out and talk to a number of them, you know, simultaneously. Find one or two that's interested. And as they ask for a second meeting, a third meeting, you're sort of broadcasting to the other investors, hey, you know, things are going really well with other investors. I'm curious where you stand. You know, should we have another meeting or not? Because you want to be careful not to overstep, but essentially things are really progressing nicely. We're very excited, and frankly, I'd rather work with you than some of the other people we're talking with, but we should go, we should do it soon, because I'm not sure how long things will last. There's a very fine line here. We have this joke internally called things are moving quickly, which is when entrepreneurs come up with sort of a fake reason that we need to move now, and they sort of overplay their hand and say, hey, things are moving really quickly, we need your decision by Monday. And we just kind of look at each other and say, like, we know you're just— you're bluffing, you don't have this. So you have to be careful because as soon as you do that, then you've kind of lost the trust in someone because it's looking like you're really just pretty flagrantly making this up, right? So you want to put into place the real So hunt those real things. Start with the closest people who will commit. Start with the people you know best and you can get a meeting, get a second meeting, a third meeting. And as you're going, you're creating this story that it's working. There are lots of people interested. We're expecting term sheets soon and we're, you know, we just, we'd rather work with you, but we would need to get moving. And are you ready or when can you be ready? And if you do that respectfully and manage it right, You'll talk to founders who have raised 3 or 4 or 5 rounds of capital. They'll tell you, you know, that's what works and that over time they've gotten good at kind of just repeating that creation of a scarce thing and a sense of fear of missing out. It's really tricky though to not overdo it.

Yeah, it makes sense. Definitely, you know, don't lie ever. Yes. You will get caught and you will create like a really bad reputation for yourself for everyone because everyone talks to each other, everyone knows each other, it's a small community. So don't just make things up just for the sake of making things up, you know.

Think about it like projections, you know, when you make your projections, uh, everyone knows that those are quite optimistic, right? But they also know that they're founded in reality and you think that you could do it. So you're not entirely making up those projections, but people know that those those projections are optimistic. So I think optimism is good, you know, and sort of untruthfulness is not. So when you're talking to investors about what your other prospects are, it's perfectly fine to say, you know, I'm having several other conversations and they're going really well and they're advancing, as long as they are. And it's that sense of the— that it is indeed happening with other people, that's your job to create.

What, what key metrics do, you know, I guess VCs look, look, look at when assessing the level of traction for a young company? This is a question in the chat room. You briefly mentioned that earlier in the, in the session, but I'd love to kind of get down to it. Is there specific metrics that you look for, like, you know, retention and stuff like that, or turn?

Yeah. We're not technocrats on metrics, so there are probably other investors who are better to answer this question, especially people who work in consumer software and mobile software. They're just deep, deep into tracking because you have so many customers and you're looking at the data as your sort of main way of knowing whether it's working. But for us, it's, you know, Number of users, number of repeat users, average time before someone stops using. As I mentioned earlier, cohort analysis, that it's not just at a— it doesn't need to be good, it needs to be improving. And so, you know, your usage per user per month, your weekly to monthly ratio of usage, your daily to weekly to monthly ratio of usage, if that number is either good or steadily improving, that's what we're looking for. And then conversion to paid is a big one. You know, lots of people listening or watching are, you know, offering a free product or have something that's a trial that converts, or if it's an enterprise product, a pilot, you know, that may be unpaid. The number that are— the percentage that are converting to paid is a really big deal because that's a sign that someone you know, you're really solving a problem for them and they're in, they want, they really want it and they're willing to pay for it. So that's a big one.

Can we just switch a little bit here as we kind of get to the top of the hour and talk about how people can, what's the process of people getting in touch with you? You mentioned that, you know, you earlier go about an introduction, but you know, what are some good sources for the introduction and how should people basically engage with you?

Yeah, I'd go as far as to say, don't reach out cold to investors unless you have no other option. And if you feel you don't have great investor connections, then spend the time and create, you know, build those connections, find those connections. Because everybody knows somebody who can connect you. And it's just not, I mean, I get so many completely cold emails every day. Every once in a blue moon, I'll end up meeting with company. We have probably invested in one or two that way, but it's not the recommended path to success. And as I say, we too ourselves spent quite a bit of time fundraising and do this as well. Find— first, you know, think about the people you know who have raised money in the past, other entrepreneurs. See which ones might be in your industry or might— their investors might invest in your company, at least in your category. And reach out to those founders and ask for an introduction. The single fastest email return on the planet is going to be an email from a founder to their existing venture investor, possibly board member, who says, I've got a friend who you should meet. That's a very quick response. And for us, the answer is almost always yes, unless there's something that's way out of scope. So work through people you know. Everyone knows someone who's raised money, and if you don't, then start finding people who have raised money and, and work through, you know, them to get an introduction to their, uh, investors. The other one is to then, you know, go the other way, which is identify the investors who might make a good fit for you, especially those who invested in your category. You can find them on, on AngelList, on different online platforms. You can find them on LinkedIn. And then mine your LinkedIn connections to get a warm intro. You know, you might have to reach out to someone you haven't talked to in a while, but do it because an email coming in from someone saying, you know, here's an interesting company I think you should look at, you know, it gets into the, you know, 1 out of 3 pile that we're going to actually meet with. And if it's just cold, it's in the 1 out of 300 or 3,000, and it's unlikely to, to work. Also, keep the email short. No one— people don't have time to read long emails. Get right to the point. Here's what we do. Our deck is attached. We have some great early traction. My co-founder and I have known each other since high school, and one of them is literally a rocket scientist. We'll be in Oakland in 2 weeks, and we'd love to connect with you. I have a— this is sort of an aside, but maybe I'll end with this. When we're fundraising, We find that we can meet people when we say we're visiting who we would never be able to meet if we weren't visiting. And so we've started visiting our own city. So if I say I'm coming to Chicago, you know, I'd love to meet, do you have time? I get almost, you know, 50 to 90% yes rate. But if I went to that same investor in San Francisco and said, hey, how about getting together? I might I might get a lower response. So now I say, "Hey, I'll be down in Palo Alto in 2 weeks. We're about to close our 3rd or 4th fund. I'd love to get together, start to build a relationship," and that works. So I urge you to say— it's sort of like creating scarcity. "I'm gonna be in town. It's a limited thing. I'd love to meet while I'm there." And if you have to visit your own town, then so be it.

Now, that's a really good strategy. And just to clarify for everyone here, you know, this happens after you get the introduction, right? So, you know, introductions happens, then you reply with something like that in order for you to maximize the chance of getting the meeting. So, great. This was awesome. Everyone here is saying like, this is really helpful. Thank you so much in the chat room. So good, Rick. Thank you so much for taking the time to do this. This is terrific. We're going to record this and send this out to everyone and also turn it into a podcast. I really appreciate you coming on board and giving us a little bit of advice on how to engage with venture capitalists and as well as learning about Better Ventures. It's really cool what you guys are doing and we're looking forward to hopefully working with you closer in the future.

Likewise, we're fans of Founder Institute. You're working with the stage of founders who we love to engage with. I'm told you have an Oakland chapter starting or started. We're excited about that. And, you know, there's a good fit here. So I'm hopeful that this will turn into a good, good, long-standing relationship. Thanks for having me. All right.

Have a good rest of your day and the rest of your week. Thank you so much.

Okay. Thanks, everybody.

Bye, everyone.

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