Investment Criteria, Focus, and Process For Haystack Fund 3
Investment Criteria For Haystack #3
For my third fund, Haystack III, which is still a small fund (but larger relative to my previous funds), I wanted to share a simple and straightforward guidepost for founders, seed syndicate partners, angels, and larger VC firms as to what I’m looking for, what my process is, and what to expect from me if I get the chance to work with a specific startup. (I will continue to update this list based on feedback, so please consider it a work-in-progress and feedback is welcomed.):
Sector Focus
For Fund #3, I will invest in pre-seed, seed-stage, and select Series A rounds. I am investing only in the Bay Area and in three (3) sectors, listed below (old post on why Bay Area only, see point #1). In each sector, I have some specific things I’m looking for, as written below. Please note these sectors are set for Fund #3, but I will likely change them a bit in Fund #4:
SaaS (Enterprise & SMB)
Elements that I’d like to in place see are:
– presentation of an offering which leverages proprietary data and/or brings machine intelligence to the market on top of specialized data; or creates a new category entirely
– demonstrating mastery of — or a genuine interest to learn and master — classic SaaS metrics, such as MRR or ARR, ASP, ACV, Churn, and more (link)
– should have at least have either prototype in beta or product in market
– should have a detailed customer pipeline plan (doesn’t need to be complete) that demonstrates capability of prospecting and prioritizing
Heavy Industry (Software & IoT)
Elements that I’d like to in place see are:
– for software and applications, should be focused on some element of surveillance (drones), design and support (3D printing software, industrial AR)
– for IoT, should be focused on (relatively) cheap, low-power distributed sensor networks paired with corresponding software services; these often run on HaaS (hardware-as-a-service) business models and therefore should be thought of as a variant of SaaS
– should have at least have either prototype in beta or product in market
– should have a detailed customer pipeline plan (doesn’t need to be complete) that demonstrates capability of prospecting and prioritizing
– demonstrating mastery of — or a genuine interest to learn and master — classic SaaS metrics, such as MRR or ARR, ASP, ACV, Churn, and more (link)
Direct-to-Consumer Technologies
Elements that I’d like to in place see are:
– prefer to be able to test and try out product
– specific interest in digital health and wellness
– specific interest in new mobile communications tools
– am curious about VR but will admit more attracted to infrastructure and content generation
– am curious about Apple TV as a platform; would love to learn more
– prefer to see either technology brought to market or potential marketplace/network advantage
– In general, with respect to Consumer, I’m more open-minded and have preferences over criteria; I expect the founders to see the future, not me.
Process
Seeds Is A Process: each process is different because each seed round is different; sometimes, it can take a few days, other times, I’ve gotten to know a founder over the course of months.
Introductions: I don’t mind cold emails (first.last@gmail) so long as people are economical with their communications and have taken a few minutes to determine if they meet the criteria listed above; email is the best and only way I prefer to be contacted. Formal introductions to me aren’t necessary; my job is to meet new people and get to know them.
Diligence: At times, I can tend to ask lots of questions; my hope, in those cases, is that the founders like the questions and enjoy answering them and the ensuing dialog it creates. On the B2B side, I’ll often bring a customer or two to the founder in the process if I’m interested to see how the interactions go and learn more about the product and problem. I prefer conversations stretched across days and mediums versus pitches and quick decisions; I also like to learn more about a person’s background, things they’ve overcome in their lives, and examples where folks have shown great drive and/or resiliency.
Email Ain’t Perfect: I get over 200 work-related emails a day and now have three kids at home; i sometimes will miss an email, so while I can’t guarantee a response, I am pretty good at replying, and i’m hoping the clarification of what I’m looking for will help both sides.
Investment Size: typically invest $100k to $250k as a range, and usually it’s $100k; currently, do not seek or ask for pro-rata rights; that said, I do have reserves in my model and my hope and intention is to provide enough value along the way such that the founder will want me to come along for the ride from Series A and beyond.
Post-Check Interaction
Getting To Series A: In the process above, I try and make sure the founder(s) and I are on the same page about the path to Series A. The main value I add is to help founders develop a framework for what will be needed for a larger, institutional raise, and this cuts across many product and company functions. I spend a lot of time with larger, institutional VCs and, when the time is right, take great care in finding appropriate matches between founders and VCs. I view this as a deeply personal endeavor and one that is hard to match using software and/or spreadsheets of target lists. [see here for more resources on getting to Series A]
Customer Development: On the B2B side, I work with founders closely on sales pipelines and often bring customers to them.
Executive Recruiting: Additionally, I help close senior or executive candidates who are considering joining the startup, but cannot really be effective at helping a founder recruit overall — my intention is to fund entrepreneurs who are themselves recruiting machines and have a pipeline plan to execute against.
On The Personal Side: Finally, I’m available all the time to chat: text, email, phone, or beer and whiskey when necessary. I’d also ask folks not to take a “no” personally. I’ve had to say “no” to friends and that is the worst. I have and will continue to make mistakes as an investor. Lucky for all, there are 3,000+ early-stage investors in the market, so a “no” from me should just be no more than a slight bump along the road.
Things I Won’t Do
– Introduce you to investors if I am not involved
– Consider an investment if main HQ is outside the Bay Area
– Consider uncapped notes or valuation caps that are way ahead of today’s realities
– Participate in unnecessarily huge round sizes relative to operational plans
** I will continue to update this list based on feedback, so please consider it a work-in-progress and feedback is welcomed — https://twitter.com/semil/status/683056120882171904