Criteria

Based on our analysis of the seed-stage market, we know the portfolio we want to build. So we have a narrow set of well-defined investment criteria that we apply to every potential investment:

• Seed Stage. We want startups that are still trying to achieve product-market fit. If you have both a finished product and a smoothly-executing business model, you are too far along for us.
• Technology Sector. When we did the math behind our fund, we assumed the high exit multiples typical of technology startups. Our primary indicator is that the largest category of spending in the next 6 months be R&D within an identifiable technology area.
• Capital Efficient. When we did the math behind our fund, we also assumed our startups would at least have the option of exiting via a $10M-$50M acquisition. Therefore, we only want to invest in companies that could conceivably be successful with only $2.5M in lifetime capital raised. Though if a startup eventually decides to take more and grow bigger, that's fine.
• Subsector Diversity. While we want the exit multiples associated with technology startups, we want to be diversified across different subsectors within technology. We don't want just Consumer Internet and Cloud companies.
• Geographic Diversity. We also want to be diversified across the entire United States. In fact, because of the high operating costs and high investment valuations in Silicon Valley and New York City, we actually want a lower proportion of our startups from those areas.
• Dollar Alignment. Finally, we don't want to waste anyone's time if a startup is looking for a larger investment or higher valuation than we can afford. We are currently looking to invest $200K or less in rounds whose total size is $500K or less, at a pre-money valuation of $3M or less.

These firm, portfolio-based criteria will probably apply to all our funds in the foreseeable future. Due to our first fund's small size, we currently have some additional qualifications that simplify our logistics. First, we are only considering startups introduced to us by incubators with whom we have relationships or people in the startup ecology whom we trust. This policy helps limit the startups we see to a manageable number.

Second, we want every startup to have a readily identifiable source of strong operational expertise. Such sources could be the founders' having extensive previous startup or business experience, the founders' attending a high-quality incubator/accelerator program, or the company having an active Board of Directors or Advisory Board with highly relevant backgrounds. This policy allows us to focus our ongoing mentoring efforts on high-leverage advice and assistance.

Third, we want each startup to have either exceptional technical capability or industry experience. Having both is, of course, a bonus. Based on our analysis of seed-stage startups, we believe startups with either of these advantages can, on average, search for product-market fit more quickly. This policy better suits the time horizon of our first fund.