Highlights from “Raising a Seed Round from VCs”
Coyote Fireside Chats is a new ongoing series of casual, informational sessions intended to provide founders and aspiring founders practical lessons for navigating the digital health and venture capital landscapes. We hosted the first of this series on October 18th, discussing “Raising a Seed Round from VCs.” It was led by Jessica Karr, General Partner at Coyote Ventures, and Jess Guenzl, Investment Committee member at Coyote Ventures and Investor at 137 Ventures. Charu Sharma, also on Coyote’s Investment Committee and a two-time VC-backed founder, moderated the virtual event.
We were so excited to see such a large and diverse representation of founders in attendance, joining the call from San Francisco to Finland, and innovating in important digital health areas like personalized medication, IBS, mental health, and labor care. We at Coyote Ventures certainly understand how difficult the fundraising process can be, especially psychologically, and we loved seeing the community come together during our Fireside Chat to support one another.
Below are some other commonly asked questions and highlights from the event that we think digital health founders can benefit from:
How can founders be best prepared before fundraising?
Jess K, Jess G, and Charu all opened up the conversation by stressing how important it is to see founders be organized and know how to run a tight, effective process. In fact, they believed this was the most important skill for a founder to have during fundraising, and much of that starts by knowing what to do AND what not to do before even talking to investors.
Prepare yourself mentally. Raising a seed can be both a psychological and a numbers game.
Be intentional and clear about what you’re raising, the terms, priced vs. SAFE, if you’re looking for a lead investor or open to co-leads, etc.
Incorporate your expected raise into an in-depth, preferably dynamic, financial model. Exact numbers are less important than using the model to demonstrate how you expect to build your business lines, allocate marketing spend, headcount, etc. Your model should help investors understand how you think about your business.
Start building warm relationships (which can include using Linkedin and working your network). Other ways to connect could be to ask founder communities who they feel are good investors and request warm introductions from them where comfortable and possible. Obtaining advisors with relevant experience to assist in the process is also a good option.
Research VC funds and their portfolio, but keep in mind that what they’ve invested in in the past may not necessarily be their current focus anymore.
Keep an organized list of investors. Use friends in the industry as “practice rounds” to gain valuable, tactical early feedback.
Don’t prematurely talk to investors and let them run the process. You hold the steering wheel. Don’t try to sell to investors. Look for investors who are eager to buy.
Don’t drag (or let the investors drag) out the process for too long because the longer you fundraise, the more investors may doubt your ability to raise: 1-2 months is common, 6 months is on the long end, but not unheard of - when Charu was a first-time founder, she did take about 6 months. She does caution though that, similar to a browning banana in a grocery store, raising could potentially become more challenging the more time it takes. Also, your time is best spent operating the company.
When does it make most sense to start fundraising?
Timing depends on many factors, and all of which can be subjective and context-driven. Coyote Ventures likes to see an MVP developed and tested at the seed stage, with an initial understanding of who the customer is. Very well-defined value propositions are critical and collecting customer feedback and/or having some early customer traction is even better. Some examples of “traction” include having tested the product with one big enterprise, and/or a few hundred target customers.
As a founder, it’s helpful to understand VC math, as they have target returns for the companies they are investing in. For early stage, investors typically must see a potential for the investment to generate over 10x ROI. For later stages, it can be 3-5x. Founders should present themselves in a way that helps investors understand how they can hit those returns and mitigate risks.
If you do receive feedback from an investor that you’re “too early”, they may genuinely believe you’re too early and should not be taken as a lack of interest. Ask for direct feedback (although take it with a grain of salt) and add the VC to your email updates list so you can keep in touch.
What terms are you seeing?
We are generally speaking with companies raising $1.5-3M in a seed round, with valuations ranging from $10-15M.
Make sure your terms are fair -you do not want to set yourself up for failure.
Investors have to make the math work. VCs won’t even look at a company if the valuation is so high because they will become too diluted.
Jess K provided a helpful math shortcut VCs like to use, which is to take your seed raise divided by ~0.2 dilution (e.g. $3M/0.2 = $15) for a ballpark valuation.
When asked about SAFEs, all panelists agreed it is very important to have a cap. Both a cap and a discount are preferable, but a cap is a must-have.
Coyote is open to being the first venture fund to commit to a round, but feel it’s important to secure a healthy amount of capital from strategic angels first. It’s very rare that a venture fund would invest as the very first check (before angels).
For Series A and later, investors will look for credible VCs in prior rounds.
What are some must-haves to include in the seed investor deck, “ask” slide, and dataroom?
For an initial slide deck (especially with cold outreach), Jess G recommends no more than 10 slides. Investors will generally form an opinion in less than 5 minutes, so it is important for the slides to get right to the point, highlighting a clear value proposition, product metrics, traction and milestones, the founder background, and why you are raising. The goal of the deck should be to get the investors interested in asking more questions, so it is completely acceptable not to include everything and rather aim to get the investor on a live call and share more in a data room later on.
Once you do get to an initial founder call, make sure to use the time wisely. Don’t assume every investor wants you to share slides and walk them through the deck. Jess K prefers to have a conversation with the founder about what is their “why,” and how their career background and network places them in an unfair advantage over other competitors. This includes delving more into their background, team of advisors and executives to support them, and relationships with key partners, payers, and customers.
As a follow-up, founders should have a data room prepared, and once again at the seed stage, investors are looking for organization and simplicity. The organization of the data room reflects a founder’s ability to organize the company. The following should be readily accessible:
A longer investor deck (up to ~20 slides, don’t be afraid to use the appendix)
5-year projection model that incorporates the seed raise funds and includes at least one cash line item. Also, ideally, the model is dynamic so investors can test scenarios.
A folder with executed convertible notes and/or SAFEs
Biography of the founding team
For products with a strong scientific component or IP, investors will want to understand how credible the research is, so any market materials that are relevant should also be included (equity research, pre/clinical trial data)
Nice to haves may include a product demo video, white papers or articles to understand the space and/or thought leadership of the team, brand guidelines, customer testimonials
In Conclusion, We truly hope that our fireside chat and follow up post have been helpful in the launch of your fundraising rounds and wishing you the best on your journey to launch and scale impactful products in digital health!
Should you wish to submit your pitch to the Coyote Ventures team, please submit via the form on our website.