How to Invest in Pre-Seed Startups: with Coyote Ventures, Startup Haven Ventures & Untapped Capital

Hello everyone and welcome to this Founder Institute event on how to invest in pre-seed startups. We have an incredible panel for you today, uh, pre-seed and seed investors, and I'm excited to kick things off as your host. My name is Ryan Micheletti and I'm head of global operations for the Founder Institute. For those of you who don't know, Founder Institute is the world's largest pre-seed startup accelerator. Since 2012, or since 2009, we've created over 5,000 startups across 200 cities with a mentor network of 21,000 mentors, and we're just getting started. I'm also a general partner at the Veteran Fund, which is a pre-seed venture fund that invests in military veterans, spouse, and dual-use startups. And so for those of you in the audience who have not heard about our VC Lab program, Founder Institute created a program to help launch venture capital firms because there is a capital crunch at the pre-seed and seed stage, especially in emerging markets. So we developed a program similar to Founder Institute, but to help emerging managers launch their venture capital firm. And so some of the, the people who are on here today have actually participated in that program, and they can tell you about their experience. But Founder Institute is actively looking for startup leaders who are interested in launching a pre-seed accelerator in their region. As a part-time managing director. So if you're interested in launching startups in your industry or in your specific cities, please go to fi.co/lead for more information, or you can just reply back to any of our emails and we'll be able to send you more details. So let's jump into the agenda for today. So in a moment, I will introduce the speakers, then we'll kick off the panel discussion. So note for everyone here, this is a live event. If you could go ahead and jump into the chat and just introduce yourself, tell us where you're from, say hello. And if at any point you have questions, we wanna answer your questions. So please put those in the chat and then Simona, who is here in the background as our producer, will put that in the queue and we'll be sure to ask that with the panel. And then finally, because it's harder to network in the virtual world, we're gonna host an optional networking session for you afterwards. So when we conclude this in about an hour or so, we're gonna switch over to Airmeet, which is a networking platform that allows you to do speed meetings, like 3 to 5 minutes, or you can join a table discussion with other people from around the world. Okay, without further ado, it is my pleasure to introduce the panel today. So for the people on the panel, in addition to introducing yourself, please share some details about what you're working on and even the genesis story of how you launched your fund. So Brittany, you're the first one to jump on with me, so maybe let's start with you and Coyote Ventures.

Yeah, definitely. And I also have my business partner, Jess, here who's also with Coyote Ventures. So I won't give all of the, All of it away, but, um, I'm Dr. Brittany Barreto. I'm a geneticist by training. I'm a serial entrepreneur and venture capitalist. My first company was the first nationwide DNA-based dating app called Faramour. You can look up that story online. It's a pretty fun one. Um, and, uh, was very involved with Founder Institute in Houston, Texas. I now live in Raleigh, North Carolina and have been leading the FemTech community. So FemTech is innovation in women's health and wellness. It's gender agnostic in terms of the founders, although most of our founders are women solving problems that they're experiencing in the healthcare system. And so we are very passionate about being one of only 6 femtech funds in the world, which is insane that women's health is actually an emerging market. But historically, women have been excluded from medicine and healthcare innovation. And so now there's this big movement to say, hey, you know, You know, women are not just little men. We actually have our own organs and our own metabolism and anatomy. And so we need products made for us. And so we've really established this community through FemTech Focus, the nonprofit. Based on the nonprofit, which we have a podcast and a virtual community, and we do market research, we're partnered with Crunchbase. We're now really well equipped to launch a successful venture fund, Coyote Ventures. And I'll actually, if that's okay, pass the baton over to Jess, and then she can tell you about the fund.

Yeah, and major shout out to Founder Institute VC Labs. When Brittany and I talked back in March, we said, okay, we know we need, we really need to invest in a lot of these companies. We have insane deal flow. Do we do SPVs? Or if we do a fund, what's the size? And so I was like, I heard about this thing, and we applied and got in the next day, and it's been a game changer for us. So major shout out, Mike and Adeo are doing really great work. My background is that I studied biochem. I'm a PhD dropout. I completed a master's at UC San Diego. Before that, I was originally from West Texas, so I had no idea what startups were or disruptive technology or seed stage for most of my life before this. And then I got recruited after that to a company that was less than a year old, and it became Impossible Foods. It went through about 3 name changes before that. I was working in research and development, so I had experience building a new product, filing the intellectual property, and then launching it 4 years later. And it was a great experience. I realized I love early stage. So really that like idea, like how are we going to build this? How are we, you know, what's the company culture and everything? So I started consulting with early stage startups for a while. Helped with a lot of product strategy. And then I was also doing an MBA, so I helped with the finance side as well. And then after some time I said, wow, I really have the skillset to make investment decisions. So I moved my way into venture, working on an impact fund and started seeing women's health deals. The term femtech wasn't coined until 2016, so I hadn't been tracking it really for a while. But became obsessed. They said, wow, the most best place I could have an impact is on gender equality. And so once I started seeing the deals at the venture fund I was at before, I said, this is the only thing I wanna work on. So I got to know Brittany over the last year before we started it. And yeah, so Koyote, after graduating from Founder Institute, we completed our first close. And made our first few investments. So super excited to talk more about that later.

That's awesome. And I really appreciate your guys' focus. And so now that I know this is what you're doing, I will be sure to fill your deal warehouse with companies coming through Founder Institute. In fact, a couple actually come to mind here. Let's go over to Yohei. Yohei, do you want to do a quick introduction?

Sure. Hey, Yohei here. I'm with Untapped Capital. Been around startups for about 15 years, started really on the community side. I jumped over to Techstars where I helped lead the Disney accelerator, then was the director of pipeline. Joined a seed and Series A firm in the Bay Area called Scrum before starting Untapped. Untapped Capital is myself and my partner Jessica Jackley. She's most well known for being the founder of Kiva, the large micro-lending site. We are a pre-seed firm that invests in what we call unexpected founders. What we saw in the market was that it seemed like too many VCs were looking at the same startups, largely due to a referral culture where most VCs source their referrals. And two, the psychology of not being able to ignore hot deals, especially in this market, there's just so many of them. And there's so many founders who just don't have a strong network to begin with. We wanted to set up a fund that looked for those. There's a couple approaches to do this. We've taken a unique approach of sourcing primarily through outbound, which is my specialty. Because I used to run outbound across Techstars. So about 90% of the companies I talk to are ones that I cold email to meet with. If you look at our portfolio, 70% of the companies are ones that I cold email to initiate the engagement. So we're a little bit of a unique fund that it's hard to get a hold of us, but we're reaching out to founders all the time.

Yeah, that's awesome. I appreciate that perspective as well. So I can see a theme here, especially with like the Founder Institute and VC Lab Network. So Let's go over to Bob. Bob, how are you? You wanna do a quick intro? Oh, I think you're on mute.

Okay, sorry about that. Thank you very much, Ryan. Yeah, so I'm with Startup Haven Ventures. So Startup Haven, the background on that, I've been a founder in Seattle starting back in 2000 and did a few companies here in Seattle. And along the way, I noticed that if you could bring founders and investors together in a certain environment, amazing things happened. And so in 2006, I started inviting founders and investors I knew to come to dinner and then to play cards, poker precisely. And what I saw amazed me. I'd never seen anything like it. I'd been in the startup world for a while before then and had been to plenty of networking events, but never had really been to a relationship event like this where what was happening was all these folks who would normally not cross paths, were coming together and really getting to know each other and helping each other. And so that was so much fun that I kept it going. And it's just been this sort of passion project, 10 or 15% of my time for 15 years. And it grew and grew quite accidentally, really, with no real effort into this thing that's mostly on the West Coast. We have 7 chapter cities. It's sort of a membership organization now for venture-scale founders and investors. We have about 2,300 founders and investors in the ranks. And we try to help them build relationships. We try to help them with some other operational stuff. And in 2019, before COVID we launched an accelerator, the Startup Haven accelerator. And that was built to be virtual even before COVID had come because we have members all across North America. And we wanted to make sure that anybody who was part of Startup Haven would have the opportunity to participate in that program. So in, as I said, in 2019, we did our first cohort, and then we raised a fund through partly with the help of VC Lab and Adeo and Mike. Thank you guys so much. I had actually started raising that fund in 2019, sort of figuring out the thesis. And then in 2020, my last in-person coffee meeting, was with the lawyers to finalize the paperwork and to start the fundraise. And that was March of 2020. And we're sitting in this coffee house there, it's a big one downtown Seattle, probably 20 tables, 3 of them had anybody at them. And we're looking at each other thinking, gosh, this COVID thing, maybe this is gonna take a while. So, you know, maybe hold off for a few weeks. And needless to say, we pumped the brakes. And then I had known Adeo for quite some time. Adeo's a Startup Haven member himself. And I had seen that he was doing this accelerator. I thought, well, let me I've always appreciated Adeo's no-nonsense approach to virtually everything. And so I entered that program and to say that it polished me up is an understatement. It was tremendous, really, really great program. I highly recommend it for anyone who's thinking about starting a fund. I thought I was ready and would've plowed ahead, but was so much more ready after going through the VC Lab program. And so we're a pre-seed fund. We're getting involved very, very early. We're focusing on leveraging that network that we've built of all those founders, investors, really all over the country, obviously a concentration on the West Coast, but finding startups very, very early, first check, first round. We, you know, we want to find founders who we think our capital can help them get to a next milestone. That's a really important element for us. The notion of Knowing what your next strategic milestone should be 4 to 6 months out and being able to tell a cogent story about how you could grow to get there. And so we look for founders that have somewhat of that disciplined approach to building their startup. And then we try to bring in other investors that we think can also help them on that journey. And so, yeah, we have funded about half of our companies so far through the accelerator and half of them just directly. But I'm a huge fan of accelerators, and as it turns out, 6 out of 7 of the companies that we have invested in so far either went through our accelerator or another accelerator.

Yeah, that's awesome. And at that pre-seed level, you have to kind of have that either extra level of validation or value add that you can provide on the back end. And so I guess just to kick this off, and again, you know, audience members, please feel free to put your questions in the chat here. Let me just start this off with a question around like pre-seed and seed, because we have a seed fund and we have two pre-seed funds here, and I'll just kind of go around the table here. How do you define pre-seed versus seed? And then what do you look for at that pre-seed stage versus the seed stage? So maybe let's go to Yohei first, then we'll go over to Coyote Ventures.

Oh, this one feels like— I think different people have different opinions. I don't attach myself too much to whether it's considered a pre-seed or seed. Sometimes the founder makes a decision on what to call it, and I might not agree, but I'll go with it. Generally, pre-seed earlier, could be pre-product or maybe just launch, getting early data. Seed, usually a little more traction, like proved a little bit, trying to double down on some things that might be working. Kind of a rough ballpark, but again, it really depends on the company, the market.

And so when you're looking at the deal flow, right, you know, because yeah, it is sort of like flexible pre-seed, per seed, and usually there's like an amount that they're raising. What are you looking for in the companies, like specifically? Like, is there like sort of a key indicator of success, or is it— it seems like you're also looking at like pre-product, so like traction may or may not be the only mechanism that you're looking at?

Yeah, I mean, I think it's, you know, we're generalists. I think depending on the type of company or the market, what we look for is different, right? If you're starting the next SpaceX, I don't expect you to be post-product before pre-seed. But if you're doing the next Twitter, yeah, probably get a product on the market, get some users before your pre-seed, 'cause that's lightweight to build. So it's hard to come up with a what do I look for on a general basis. If it's general, it comes down to like, Market, team is kind of like the two things I look at. Again, if we dig in and say, what do you look for in SaaS? What do you look for in social? The answers start changing.

So Brittany, in your opinion, like, you know, you're looking at seed. And so what type of companies, like outside of the industry focus, are you looking for in terms of like stage? And then is there anything specifically you're looking for in either like a founding team or an amount of traction?

Definitely, yeah. So the first, I would love— we have nearly 100 people here. I would love it if attendees could drop if if you're a founder or an investor, and then if you're a founder, what stage do you think you're at? Because I want to define things if they need defining, but I also don't want to define things if everyone here knows what we're talking about. So if you all could drop that in chat, I think it would help all of the panelists. So for me, you know, I just also want to say I've been a serial entrepreneur, and the first time I fundraised, I thought that these names were— these pre-seed, seed, Series A— were very strict. Names and that once you rose a seed, you had to raise a Series A next. What I'll tell you, if you're a founder in the audience, is that I rose a seed round at one point, a $500,000 seed round. I realized I needed more money and I went back to market and said, "Oh, that was actually my pre-seed. I'm now raising my seed." And you know what? Nobody questioned it. They were like, "Okay, sure. So now you need a million? All right, whatever you want to call it." We use these words more so as investors so we can kind of, in our minds, set you in a bucket kind of to say, Alright, if you come to me, you say you're Series A, I'm expecting you to have a product and some traction. You know, you know what you're doing, you have a team, you're definitely full-time. If you come to me and you say I'm a pre-seed company, I'm thinking you might still have a full-time job somewhere else, right? You're still in ideation stage potentially. You just, you know, you've been funded so far based on your own credit card savings and your Aunt Alma, you know. And so these names, don't get too caught up on them. It just helps us kind of set the stage for what— where you are in the process of your company. For me, I would define pre-seed as you've already self-funded a little bit, you've already gotten some money from friends, family, early believers. I'm somebody who does not come from money. And so if you think, oh no, I need a raise from my not rich family first, don't worry, that's not necessarily the case. But just some early— some early dollars, even if it's pitch competitions or whatever. And pre-seed is kind of usually for angels, I would say, in my perspective. And that's why Coyote does seed stage because it's a little bit bigger rounds. I see pre-seeds as being usually $250,000 to $750,000. Obviously, there's a lot of caveats to that. Are you a med device? Are you CPG? Are you digital health? Are you just an app? Or also, are you in the Bay Area or are you in Houston, Texas? That also changes how much you need to raise. But that's my two cents on that. Jess, why don't you tell them about our Coyote, what we look for? I guess you can answer that part of it.

Yeah, I would say definitely idea stage is a little too early, and if you do have an idea, I would love to see materials. I know it will evolve over time, but I know I saw a question in the chat about like what fundraising materials you should have. Even if it's an idea, put pen to paper, that's really going to help us understand it. If somebody has a coffee with me and just talks, like, I'm just gonna forget about it. Like, maybe that's just how I process things personally, but I want to see that a product is being developed unless, like Brittany said, unless it's heavily scientific or like a SpaceX. Like, that's going to take R&D. Impossible took 5 years to launch, but there was always a product being built or intellectual property being developed. So, and, you know, we do take into account geography as well as teams. So, you know, accelerators are great, but We have one team who's super experienced serial entrepreneurs, and I said like, please don't do an accelerator. I've seen some really ugly, not from Founder Institute, other ones where they just take so much equity. And I look at the cap table or like the future ownership, and I'm like, founders are not going to be motivated. So I do love when somebody comes to me, even if it's an idea stage and they sort of know what's up, I'm like, don't ask me what your valuation should be when I just met you and things like that as well. So that's a few things that, I mean, we look at team, we look at what the market is and the potential and a lot of those things are really important.

So Bob, I'll jump in here. Yeah, go ahead. Well, I just want, you know, Yohei and Brittany and Jessica and I, we all, I can tell you right now, just, we all have different ideas about what pre-seed and seed, and I'm just here to tell every founder, it doesn't matter. You're raising a certain amount of money at a certain valuation to reach a certain milestone. And just be sure that as you're doing your research to run your process, and you should run your fundraising like a process, you should know what investors are interested in the kind of company you are at the stage that you're at, raising the amount that you're raising at the valuation that you think is right. And don't get hung up in whether or not it's seed or pre-seed. We call ourselves pre-seed because the easiest thing to map to to say we want to get involved at the earliest stage, but we want some— you have to have built something, you have to be full-time, you have, you know, even if it's the earliest signs of commercial, you have, oh, look, we did this prototype and we got a customer to pay us a dollar. Okay, well, you solved a problem, somebody paid for that value, you might have something there. You're very, very early though, but let's see, can you tell us what your next strategic milestone would need to be so that if you had some capital to get there, that would unlock something next? That's what we look for. And that requires a certain way of thinking about a startup. And it's not for everybody. But if you're the kind of founder who has an eye to actually building a company and not a project, not a start— the romantic startup, "Oh, I'm a startup founder and I'm going to build a thing." And that's great. I love that. You have to have that. But you also have to understand you're trying to build a business. And, uh, there's a difference between solving a problem and building a business. Lots and lots of problems that you could solve are not also good businesses. So it's up to you as the founder. It's your job one. Is this really good idea? And I'm telling— I agree with you, it's a great idea. I agree with you that that problem should be solved. Separate question, is that also a good business? And how do you think about that? That's what I want to know. And I want to know if you had my capital, can you actually make progress toward that vision of the business? Because lots and lots and lots, as it turns out, you all know the stats on how hard this stuff is, lots and lots and lots of failure. And for us, we think that if you have in mind your next, and this is sort of a technical term, your next strategic milestone and what that would unlock for the company, then I would love to hear that story. And if you can take my capital and maybe a few other investors, if you're raising a million or more, you're kind of out of that range. If you're $500 grand and less, $250 to $500, that's to me, that's what I call pre-seed. Brittany or Jessica, I forget you, $250 to $750, That to me, as a dollar range, that feels like pre-seed. Now, if you go to the Bay Area, you could raise a $2 million pre-seed. And thank you, Bay Area, for bastardizing any categories we've ever tried to standardize on for the last 20 years. So founders, don't worry about that. Figure out— and when you're trying to figure out how much money you want to raise, it should be— you're going to be so much better off, not just in your fundraising, but in building your company. If you can say, here's why we're building, why we're raising $500K, because we think $500K will allow us to do this and that's where we need to be next. It's not like, oh, how much are we raising? $1 million. Oh, why? Well, 70% of it on this, 30% on this. That's not a good way to fundraise. You put yourself in the wait-and-see category for investors like, huh, I wonder if they'll ever tell a cogent story. I hear the big story, I hear the vision, I hear the ambition, I see the grit, but is there actually a business here? And are they going to actually try to build the business in this, what I refer to as a cogent manner? Like, oh, here's where we need to be next. How would we get there? What would have to be true in order for us to get to that milestone? Gosh, if we had $750K, I think that would be the right number. Let's go find investors. And so when we tell the investors our story, We're not just saying 60% on this and 30% on this and 10% on this. It's like, no, let me show you where we need to be next and what that will unlock. And if the investor believes you're roughly right about where you need to be next and that you're roughly right about what that could unlock and you're roughly right about the things you'd have to do in order to get there and you're roughly right that that would take about $750K, you're going to have a different fundraising experience.

I would love to co-sign that really fast. I bet about 75% of the founders here have a pie chart in their deck that says, I'm gonna spend 50% on marketing and 20% on management or whatever. Do us all a favor, delete it, okay? 'Cause I hate that graph. What I wanna see is, I'm raising $1 million to accomplish these milestones and have 5, give or take 5, major accomplishments, whether it be launch to a new geography, build out version 2 of the product, mean get 1 million users, whatever it is, 5 milestones that you're gonna accomplish with that money. If you could accomplish those 5 milestones by just paying yourself, that would be great. I don't care necessarily where you spend it. I care about what milestones you accomplish that increase the valuation of your company, therefore increases the valuation of our investment. I did drop a link to a webinar I've given many a time. So I've recorded it, put it on YouTube. So I dropped the link, says how much to fundraise How much to raise and from who? And it's essentially walking you through that. How do you figure out your milestones and backtrack to how much to fundraise? I just had to co-sign that, Bob. Yes, 100%.

Awesome. Well, so there's actually some questions here around geography, but before I jump into that, I do have a question for everyone here. So we've kind of established that pre-seed and seed are relatively fluid. You know, it does depend on like a dollar amount. You're not necessarily going to raise like a $2 million pre-seed, but a $2 million seed, could be feasible. As investors, what are you looking for, not necessarily in the team or the startup, but like check size compared to valuation? How much of a round, how much of the company are you really looking to target? Because someone could be coming to you with like a $5 million, like, you know, post-money safe, and you may say, okay, we're not going to do that. We'll do a price round. And like, you're expecting to get like 5% or write a check that's equivalent of like 5% of that company's round. So how do you think about that? Not just seeing like, does this founder make sense from an investment perspective, but does the deal as a whole, valuation, check size, how does that play into your decision-making as well? Anyone want to start?

Yeah, well, I'll say, so that amount that you want to raise, if you say, for example, I want to raise $500,000. And I'm a little bit of a broken record, I'll have to admit, only because I've been doing this for 20 years and I've seen this pattern so many, many, many, many times. The money that you're raising— if somebody put a comment in, I was watching the comments. Somebody said, oh, it sounds like that thing Bob's talking about is what investors are doing when they do diligence. And so these specific questions about how much, from whom, At the end of the day, all of those things that your investors are going to take you through as you draw that line, tell that story, that diligence process is effectively just this. Reverse engineer what you're telling them to see if it's cogent. And there's some latitude on whether you're a hot deal, whether you really love the founder, whether or not the space is like, you just really want to be there. There's lots of things that can influence how cogent the story wants to be, but diligence is effectively reverse engineering your story. So you as founders, whatever the question is, whether it's who you're raising from, how much you're raising, what milestones you want to achieve, what channels and tactics and conversions and all these things that you're going to explain as you talk to investors, all of that, each one of these little pieces is about you building a cogent story. And you have the chance as a founder to build that cogent story before you go raise, right? It's fun, some of the investors in Seattle sometimes will be having conversations and something like this will come up. And they'll say, "Oh yeah, that cogent thing. That's what that is, huh?" I guess at the end of the day, what I want to know is for you to tell me a cogent story. And if you do that to start, then we can get going. If you don't, then I'm in wait-and-see mode. And then I'm going to like, next month I'll have another meeting to keep me on your update list. And if you ever happen to break out, So that's great. And you have to remember, on that question of the— for a fund or an investor, an experienced investor, they're looking at their ownership. They have their own cogent story to tell. It's portfolio strategy. And most funds, and I'm going to guess Brittany and Jessica and Yohei have a spreadsheet that says, if I made this many investments with a fund of this size at check sizes in this range and valuations in this range, My ownership would be in this range. And if I sort of quantify my expectations for how many are going to go to zero, how many are going to return the original investment, how are we going to do 2x, how many are going to do 5x, how many are going to do 10x. And then in the end, they're building their own cogent story with their own assumptions about how much they should own. I think I'll just say for my range, the way I think about that, my cogent story is I'm going to get involved really, really early. I have to make lots and lots and lots and lots of bets. Even the best investors in the world suck at knowing who's going to be successful. And even the ones that initially start to look like they're going to fail can turn into unicorns. If you guys are familiar with the Techstars 2012 cohort that had 3 unicorns in it, 2 of those massive pivots, not even remotely what they look like when they came in. And that was about spotting a good founder and giving them giving them good support. So for me, when I think about, to get back to your original question, Ryan, that cogent story for me, for my fund, is I have to be investing at or below $5 million pre or post. I'm not going to worry too much about that. And I have to be writing checks $100K to $300K. And in some cases, I'm going to be syndicating with a couple of owners, but investors to get up to $500,000, maybe $750,000. It gets to $1 million, it starts to break the model because my check now owns a smaller piece of $1 million. A $200K check in a $1 million round is less effective in a portfolio model than a $200K check in a $500K round. So that when the portfolio model says a certain percentage of those are going to do something special, and when that special thing happens, happens. I have to own a certain amount of that in order for the fund to return reasonable results. So that's how I think about it. I'm not looking for, oh, I have to own 7% or 6% or 4% or 9%. I'm just looking at there are boundaries around a model and the model is imperfect. And it says that if I'm investing roughly in these ranges, mostly I'll be right.

Yeah, I think it was helpful for founders to understand somewhat how VC works. We do need, uh, we do expect some of them to fail, unfortunately, uh, and we— but like, you do need to have a certain level of growth for us to believe that like it could pay off potentially. And so sometimes I see, um, projections where it's like, we're just gonna double for 10 years, and it's like, well, that's not VC-backable really. Like, we need to definitely— like, it's higher risk, high reward in venture capital. And so that's To Bob's point, we definitely look at the numbers. For me, it's a little bit less about percent ownership and it's more about like how— what the potential returns are. We do sort of have a range of valuations we're okay with or caps as well that we're okay with. But in terms of what to think about when you are setting out for an early raise, I would also take into consideration like it's about sort of thinking about the future, like what will you be worth when you do go out and raise again and making sure you protect your ownership as well. Because when I see somebody with super low valuation, I'm like, kind of there's a signal they don't quite know what they're doing. So, and if you are new to this, then I suggest you get some mentors and advisors who have done this before and ask them before you start talking to investors.

You bring up a good point about, like, follow-on investing and protecting your investment. So, Bob, you gave us a really good overview of, like, portfolio strategy at the pre-seed stage. I'm wondering if Brittany or Jessica, if you have anything you'd like to add about that portfolio strategy at the seed stage, and then how do you think of follow-on investing? Because it's typical that a fund will have reserved half or more, sometimes less, of their fund to do follow-on. So as a VC, how do you think about that when you're looking at making those follow-on investments?

We reserve half for follow-ons, but if we model that out, that comes out to about 5 Series As, and it also very— Series As can really widely vary. The one that we participated in was a $30 million post-money. We've seen some that are $100 million, so we might not be able to do some of those more expensive, you know, biotech type. We have the option to do SPVs as well, so that's something to think about. So portfolio construction, we're thinking both about like impact as well as, and definitely like since women's health spans many industries, we have to take into account also in addition to the geography, which we haven't invested in California yet, we take into account the industry. So CPG is going to have different numbers than the med devices. So yeah.

Perfect.

And then actually, can I share? I actually love this question, and it's something that VCs and investors debate about and whether or not it should matter what your ownership is and whether or not you reserve capital or betting, double down on your winners, as they say. And I'll just say my observation when I thought about the Startup Payment Fund was we were getting involved so early that their next fundraising cycle won't necessarily, sometimes it is, but won't necessarily be a strong win signal. Like, oh, double down, you're a winner. You just had somebody else raise money. Like, you should definitely double down. You definitely do your follow-on, do your pro rata. At the very earliest stages, just from a portfolio construction model perspective, those signals are weaker than they are at the seed stage. If you're a seed stage and you get a Series A, that's a different level of diligence. The investors that are getting involved at that level are a different class of the way they think about companies. And if you're Series A and you get a Series B, double down on your winner. It's a clear signal. You go from A to a B, you're onto something. Goodness gracious, I want all of that company that I can get forever. But at the pre-seed, if you're reading your very first 250, your next round of $1.2 million, Might not be, "Oh my God, double down anywhere, that's a win signal." No, it's like, it's your next strategic fundraise and you're making progress. But that signal as a win isn't necessarily as high as it would be at a C or Series A. So what we've done is we've said, "Well, we're not going to do any follow-on at all. We're not going to reserve any capital for follow-on because we can then support more companies in that portfolio because we can make more of those bets." But what we've done is we've constructed it such that we We'll take pro rata, we get pro rata, and then we pass that onto our LPs. We want to make sure that our founders get supported. And as a portfolio model, for us, it doesn't make sense to be the one who reserves that capital. But our LP base is one that likes to make those investments. And so we have a structure in place that allows us to exercise that pro rata in a way through SPVs and sometimes through direct cap table investments. So that's an example of how when you talk to investors, you should know how they think about that. So if you're looking at investors and you have investors who say, "Oh yeah, we don't reserve pro rata any follow-on capital," and some don't, and they have no intention of ever getting involved again. They plant a seed and then they walk away, which is great for their model. You should just know what their model is. Our model is more about supporting that company through its life, through our support programs and the Startup Haven network and everything that we do is meant to support those founders over the life of their company. It's just that we don't reserve capital for the follow-on, but we help them find that follow-on.

Yeah, that's a really good point. Yohei, is there anything you want to add to that or anything else that we've discussed? Oh, I think you're on mute. There we go.

Um, no, I, I think, I think a lot of it's covered. Um, I could add more, but I know there's a lot of questions, so, so we can—

yeah, um, let's jump in here. So let's talk about geography, right? I mean, COVID kind of threw this out the window, but COVID's starting to sunset a little bit. So how do you think about investing? Um, we have some founders here that are from West Africa, from all over the world. Are you only looking— as a US venture firm, are you only looking at US companies? And then what are you seeing in terms of trends in the market?

I can start. It's a quick answer.

We—

for Fund 1, we're primarily focusing on the US market, largely because it's the market we know best and the market we can support the best. In the future, we'd love to go expand further. I mean, we've done one investment in London, one in Tel Aviv, but they're both targeting the US market and we felt like we could really support support them. I mean, for every geography, there are funds focused on that geography. So if you're a founder in a specific geography raising an early round, absolutely, like find out who all the companies are that are raising in your region and who the investors are and make that list because there are investors investing in every region. Much, much easier to do that than to convince people who don't invest in your region to invest in your region.

Yeah.

We're North America focus or fund one also. So Canada as well. But yeah, North America.

Yeah, there's a lot of great companies coming out of Canada these days. Brittany, I don't know, do you have anything you'd like to add? Are you US-focused as well?

Yeah, same for us. Coyote is US-focused. And, you know, I actually learned a lot about that in the VC Lab, which was, you know, is that just a matter of preference? You know, it used to be a matter of VCs wanting to be able to see their founders, so they would invest in their city or in their state so that they could actually meet and be hands-on. COVID has just thrown that out the window in terms of investors realizing like, "Huh, I can make relationships on Zoom. I can do due diligence." We've been forced to. Investors couldn't just not invest for 2 years or whatever, right? So we've been forced to become long-distance investors, but there is a certain amount of, especially if you're thinking about women's health, which is what we invest in, the laws around, you know, women's healthcare, whether that be abortion or healthcare, like who pays, who reimburses for things, even cultural norms around, you know, taxes on tampons and pads in different countries. It gets really complex really fast when you think outside of one system. I mean, it's bad enough telehealth is based on a state-by-state and not even a whole country. So There's a lot of other things to think about for us as investors that are, that will affect the success of the company. And we do want to make sure that we're, we are trying our best to, to make the company most successful. And then last but not least, from my end of things, is just that once you start a venture fund and realize how many fees there are, and you have a tax advisor and you have a financial advisor, and you got to file this and you got to file that, and each one of those has its own fee. And you're like, do I ever get paid in this? Like, founders, I know you are all here, you know, really, really needing money for your startup, but that's what venture capitals do too. We are actually fundraising just as actively as you are. In fact, we have to use your deals in order to fundraise. And so we have to also be considering, you know, what is our budget for legal? What is our financial budget? And is converting and filing different legal documents in different countries around the world really makes sense.

Yeah, that's a good point. The conventional knowledge, and this was kind of pre-COVID, is that the earlier stage you are, the closer your investors will want to be to you. And I think that's starting to break down a little bit. And there's a founder here that mentioned, uh, I think it was that they're, uh, working on a startup in the UK, the founders in Singapore, but the product helps small businesses globally. So like you're starting to see this dynamic a lot more where you may even have remote co-founders. One person's here in California, another one's Texas, or even internationally.

Yeah, Jess and I— Jess is in San Francisco and I'm in Raleigh, North Carolina.

So yeah, so that's been a beautiful—

that's really been one of the beautiful silver linings of COVID is just that, you know, founders from anywhere and investors from anywhere theoretically can get to know each other and invest in each other. But, you know, as Brittany said, you know, the costs to write a $200K check, it could cost me $100K in legal to like, oh, I'm going to invest in Guam or wherever it is. Like, oh my gosh, I got to pay lawyers to figure out that. And remember too that each— and this is really important for founders. I always want to bring this back to founders. When you're looking and you're building your list of investors who you think are a good fit for you, it's an obvious question to know whether or not they invest in your region or not. And that's findoutable for virtually any investor. If nothing else, just by looking at the gravity of the things around them, have they ever invested in a company outside of North America? If they haven't, then they're probably not a good fit. But there's also just the notion that if it's a fund of any kind, it has LPs, it has investors who gave them money to invest on a thesis. And so they have to stick pretty close to what they said to all those investors that they raised from, say, hey, we're gonna invest in startups like this. So when they see you, like, oh my God, this is a great founder and a great product and a great market. And oh, I love everything about this. But I can't. So save yourself the time and effort and grief and make sure that as you work your fundraising process, you're qualifying all the investors you think are interesting for whether or not they even can, let alone will, invest in you.

Yeah, fundraising is very much a measure twice, cut once kind of process. So we talked a little bit about kind of pre-seed and seed, what like a potential range is for fundraising, but also potentially valuations that at you might be looking at. You know, there's a question here in the chat around how do you come up with like a mutually agreeable valuation for the companies? And, you know, if you're at the SAFE note stage, like maybe it's like the cap or the discount, like how do you have that conversation when companies might not have enough traction to really like validate what the true valuation is?

I would say that you're probably raising a pre-seed on a convertible note or a SAFE. And so we really are talking about valuation cap.

Caps.

If you're, you know, like, oh, what's our value of our company? You're thinking about it wrong because there's no way for you to come up with a valuation at a pre-seed, seed stage, some usually pre-seed. So we're definitely talking about valuation caps. And then, you know, it's on geography, it's on your industry, it's on product type. So for example, you know, we are in women's health and there hasn't been a lot of women's health companies historically with the With more women in STEM, we are now seeing more innovations and solutions for women's health, but there's a lack of history in terms of what's standard. In fact, Jess and I are working on creating a standard valuation for femtech companies and where they're at, because we literally don't have that data. It doesn't exist. We're creating that. And so sometimes founders, you're going to be kind of not— kind of screwed, you know, depending on what you're doing. If you're the first startup in your country, you know, or you're you're trying to create the— an Uber type of deal where like it didn't exist, um, sometimes it can be hard. And I think that things like Founders Institute, coming to this, calling mentors and saying, this is where I'm at, and getting other people— it's essentially market research. You just got to ask enough people what they think and then taking an average of that valuation.

I think that's good advice, and I think it highlights how important it is for founders who are not in one of the top 10 tech hubs in the world, to find good mentors and advisors who understand how this works. And they might not be in your region. If they are, that's great. Start there. But finding folks who can give you guidance on that is really important. And I'll just say for myself, like, when I see a founder and they already know— well, two things. If they know what their valuation is that they want, if they have any Certainly if they have a lead investor, if they've got strong commitments from people at a certain valuation, and I just, for my own way of thinking about things, it's not the right valuation, I'm not going to try to talk them out of it. I'm going to say, "Okay, good. That's awesome. You should go get that." And then often the conversation, if I'm going to have a conversation with them at all, is about just to be careful because if I think their valuation is A little high, that's okay, we can talk. But if they're coming in, they've got virtually no— they've got MVP, no product in production, no revenue, and one sort of non-binding LOI with their past project or program manager that they worked with at their last company, not very much traction. And they're like, oh, $10 million, because that's— we want $10 million pre-money valuation. Okay. So Just understand that when you need to start raising money in 9 months, you're going to have to live with that valuation and your investors are going to want to see that you can get a minimum 2x, maybe 3x+ markup on that. So if you're raising at 10 right now, are you going to raise at 20? 15 to 30 in 9 to 12 months. What traction do you have to achieve to make it worthwhile for your next investors to invest in you. So be careful about setting a valuation too high. It's great, like you should take credit for everything that you've achieved and for the opportunity that you're creating, but it's not a win for a founder to get a massive valuation in their first round. Very, very often, I know my favorite story, which I can't share many details, but a founder in Seattle got an amazing, like Oh my God, you got that valuation? That's incredible. And they shut the company down 18 months later because they could no longer raise at the valuation they had to raise at. And it was a great company and a great founder. There was nothing wrong with this picture except that they could no longer raise money. So just be careful about that. Find the right valuation. Don't try to win on valuation. And investors shouldn't try to win on valuation either, right? You just need to find a good balanced number that makes sense to everybody, and it won't always make sense. And so that's why sometimes investors walk away and say, well, good luck to you. I'm not saying you're not worth that. I'm just saying it doesn't fit my thesis. So good luck.

That's great advice. Yeah, don't optimize for valuation, optimize for growth. Joey.

Yeah, the only thing I'd add is, as I talk to different founders and VCs, I mean, both on founders and VCs, some founders and VCs are very valuation sensitive, Some really don't care. And I think either is fine, right? Figure out what your style is. And I think, you know, for me, I look at enough deals that if I'm talking to a company, I have a gut sense of like what's the valuation I might pay for the company. You know, I think that, you know, that's probably similar for a lot of funds like me, but I know some people that would pay a lot more for companies. And yeah, to Brittany's point, yeah, talk to a couple of people, get a couple of data points, and right, being a founder is really about collecting data and making your own decisions.

So in the last 10 minutes here before we kick off the networking piece, I'd love to ask like one final question to each of the panelists, and that is, what is one piece of advice or best practice that maybe you picked up that you would like to share with other investors who are considering investing in pre-seed startups? Great.

Invest in something you know. About, you know, I know what my thing, my skill sets are and what I don't know about. So anything that has to do with like marketing or ads or building a marketplace and I'm just like that, not— I don't really know anything about that. I'm a geneticist by training, so I really love diagnostics, medical device. I did have a DNA-based dating app and I really relate that to digital health apps. And so just being able to know, like, these are things I'm passionate about, these are things I know about, because, you know, hearing a pitch, you want to be able to say, hey, I know the words that they're using and I have some comprehension of is this actually novel or is it being done already? So invest in things you're passionate about and things you know about.

I'd say, I'd say, yeah, find out why you want to invest, right? Are you investing because you just for the returns? Are you investing because you want unicorns in your portfolio, in which case maybe just go to an angel syndicate? Are you investing because you want to support your local community, because you want to help founders? Find out why you want to invest in these companies. Are you investing because you want to raise a fund? Because then there's a whole other strategy on how you might want to invest. So depending on, you know, understand why you want to invest and then go look for investors who are investing for those reasons and talk to them, because I think you'll learn a lot. But I think if you're investing for one reason and you talk to an investor who's investing for another reason, their advice might not apply to you. So I'd say that's what I'd say.

I would say, understand what your portfolio approach is. Even if you're just an angel investor, like, no, I don't have a fund, I don't have a thesis, I invest in what I like, or I have a thesis and this is what I do. Just understand that it's easy to say, oh, this company is so awesome, I want to write a big check in this company. But what I've seen over 20 years is it's virtually impossible with any certitude at all to pick a winner really, really early. If you're a super early investor, if you're getting involved before that first million is raised, think about making lots of investments. The data says that you're not even close to minimizing some of your risk until you get 20 in your portfolio. And it's not until you get 40 to 50 before you've— you can never cancel out all the sort of idiosyncratic risk in making all these investments, but build an investment approach that allows you to make the right number of investments, whatever your reason for investing. Make sure that you're taking that risk part seriously, because in the very early stages, there's a lot of risk. And so I see investors making big check investments for them when they could never sustain that. They could never build a portfolio of $20K, $50K investments or $20K, $100K investments, but they could build a portfolio of a bunch of $20K investments or $25K or $30K or $10K. Whatever your number is, find the right avenue to invest so that you can take advantage of an asset class that has lots of outliers. And it's just the case that in funds, the most typical pattern is there's 1 or 2 companies out of the portfolio that end up returning the greatest results for the fund. And there's variations of that on each end of the spectrum. But as an investor, if you're an angel investor getting involved in the pre-seed stage, just try to find a way to make the right number of bets so that you can you use your bankroll to invest in as many companies as it takes for you to increase your chance of a successful return.

Brittany read my mind. That's what I was going to say. If you become an LP in a fund, if you're wanting to learn, there's a lot of funds that actually can educate their LPs as well on how to generate more deal flow, how to evaluate companies. And back to answering the question, I think I'll state the obvious that a lot of VCs say is like you're betting on the team at the stage. So even if it is just getting to know people virtually over Zoom, you kind of have a balance of like getting to know them, getting you guys to like each other, but you got to press them a little bit, challenge them, because every part of their startup is gonna— they're gonna face challenges, they're gonna have to pivot, and you have to sort of like get talented on how to press them in a way that you're not, you know, being very critical. You're still friends, but you're like kind of also watching like, okay, how are they gonna respond to some of these like tough questions.

Yeah, great advice from everyone. And so as we kind of conclude the event, we're going to put a link to our Airmeet, which is for the networking session here. And before we wrap up, just, you know, thank you panelists for joining, Brittany, Jessica, Bob, Yohei. This was a really great event. We're going to send out the recording to everyone once this is over. And then for everyone here in the audience, just as a reminder, Founder Institute is not only enrolling founders in 200 cities around the world for our accelerator, but we're also actively looking for startup leaders who want to be managing directors of our program in their city or region. And so if you're interested, you can go to fi.co/lead, or you can simply reply back to any of our emails and we'll send you some more information. So thank you once again. This was great. Go ahead. We're going to leave this open for a little bit just so people have a chance to click over to Airmeet, but join us there so you can meet with other founders, investors, and mentors.

Thanks for having us.

Take care, good luck, see you.

Bye.