November 15, 2023

The Seedfunders Investment Thesis

The Seedfunders Podcast
The Seedfunders Podcast
The Seedfunders Investment Thesis

Show Notes

Dave, when we started this thing, I wanted to pre-emptively get the fan site up. I wanted to get the Dave Chitester action figures made. I was ready to go. And now that we’ve made it all the way to episode 10, we’re in double digits. Do you regret telling me not to do that?

No, thanks Joe.

Well done. We’ve made it. So, 10th episode. We’ve talked about a lot: startup ecosystem, angel groups, crowdfunding, term sheets and a bunch of other topics. I think it’s time to focus on SeedFunders itself a little bit. Tell us about SeedFunders.

Our investment thesis at SeedFunders my one-liner is, we’re basically looking to invest in pre-revenue, scalable technology with a clean cap table in Florida.

So, it has to be in Florida.

Yes and no. We prefer that the company is started here and based here, but we will consider those with a strong presence or office in Florida. Also, out-of-state companies that want to relocate here will be considered or relocate or even open an office with significant presence. They can be out of state when we invest, but we do expect that at some point they will have a significant presence in the state. We did find one company actually in Connecticut. That when they launched, they were going to make their headquarters in St. Pete. Again, that’s our goal. That’s part of our investment thesis, Florida based.

That’s a real benefit for local economic development. You mentioned clean cap table. What does that mean, clean cap table?

We prefer to be the first professional investors on board. I talked previously about different rounds. First round is typically friends and family, and that’s fine. When we come in if there’s – typically be a friends and family round. But if an entrepreneur has already taken on angel investment groups and venture capital, those types of rounds are usually probably too late for us. We’d like to be really early in the process. We want to be early to help the company, help the founders succeed, have a board position. Basically, really be part of the member of the founding team.

We do more than invest. We want to use our expertise to help the company succeed. We think the best way to do that is early in the launch of a new enterprise, not after it’s already been funded with a certain amount of funding by other investment groups. The best way to describe a company like that would be they have a clean cap table, because they have a limited number of investors.

Got it, and you also mentioned scalable technology as part of the SeedFunders investment thesis. Does that mean specific industries that you focus on?

We’re actually industry-agnostic. As long as it’s a technology concept, we have partners who have expertise in various areas. That partner expertise plays a real big part in the types of investments we make. We’ve turned down some middles before, because no partner had any kind of exclusive industry experience that we couldn’t provide any expertise to the company that was looking for the funding. We’ve turned down deals in areas that we have no expertise, but we do have a wide range of partners and the expertise. We really don’t look at certain things when we don’t have expertise like cannabis, blockchain, aerospace, things like that.

But where we do have significant expertise, and a lot of our deal flow comes from is FinTech – financial tech or Fintech, EdTech – educational tech, medical technology – MedTech. We have four doctors that are partners, Computer Tech, things like we have a partner who has a PhD in physics and another with a masters’ in physics. Those kinds of high-level technology are things that we do look at.

When you talk about a clean cap table and first money in, does that mean pre-revenue?  You’re funding only pre-revenue startups.

We prefer pre-revenue but early revenue is okay. If you’re looking at they’re already have a revenue of $300,000 or $500,000 that’s again, pretty much past our sweet spot. They’ve probably already got other investment to get up that kind of revenue. We really prefer pre-revenue, but a little revenue is fine. Also, we do require an MVP or minimum viable product. It’s usually that initial funding that comes from the family and friends that provide that MVP or the chance for the entrepreneur [4:15] the MVP. That’s where we would come in. Not just an idea that we would invest in, but something that’s been funded by friends and family, and funded the MVP gives us a chance to come in during the MVP as it’s launched basically, before revenue is generated.

How many investments has SeedFunders made?

As you know, we started in St. Pete. We made our first investment three years ago. A year and a half ago, we launched SeedFunders, Orlando. Now, we’re launching SeedFunders Miami. Altogether, in those three years we’ve made 31 investments, and includes a number of follow on investments – as I said – to existing portfolio companies. We also now have 38 partners in St. Petersburg. We have 10 partners in Orlando. As I said, we’re just launching in Miami. In the three years that we have been investing, we’ve made 31 investments. Primarily, most of those all came out of St. Petersburg, the original location. Now with SeedFunders Orlando, they’ve actually led a couple investments of their own and made about five investments out of Orlando.

How many deals do you have to look at to end up with 31 investments?

Literally, hundreds. Basically, eight out of 10 don’t meet our criteria. Eight out of 10 are either too early or too late, or they just don’t meet the criteria or the industry or we don’t have the expertise. The other 20% basically, we go through a process. We have a significant process of how we analyze the other 20%. First, we do a review. I do a review. We might ask them to pitch, to come in. We’re doing everything on Zoom now, but we’ll be resuming live meetings at some point soon. But we have them come in to make a pitch. We put together a three-member due diligence team. If the partners that listen to the pitch are interested in following up with due diligence, we then might prepare a term sheet during the due diligence process, as I talked about term sheets in the previous podcasts. Then make the investment.

Really, out of all those you have to go through a lot of investments, literally hundreds potential investments. Hundreds and hundreds to come up with the 31 that we did. For every one that we don’t invest in, I send a personal email to every single one and explain why we would not follow up with an investment. Sometimes, some of the entrepreneurs are very appreciative. And say, “Thanks for considering us. Thank you for your detailed response.” And other times, they are not so appreciative that we’re not going to invest.

I think that’s super valuable and gets value into the community from SeedFunders whether there’s an investment or not. How does a startup get a review by SeedFunders?

Our website, has a link on it that says, “Apply for funding” or, “Submit your information,” something like that. Basically, you click on that, and you upload your information. There are 10 questions. You can upload additional information, a pitch deck, financial projections. It’s pretty flexible. All the information it will accept if the entrepreneur uploads that information. I personal review – as I said – all submittals for St. Pete in Miami and classify them as to whether we want to pursue any investment or it’s an easy rejection because they don’t meet criteria. Dennis Pape, our CEO in Orlando – at SeedFunders Orlando – reviews all the Orlando submittals. Together we basically – as I said – send a personal email to every single submittal.

That’s great, moving me on the companies. What about the founders? What are the most important traits that you look for in founders?

John Wooden, the famous UCLA basketball coach had what he called a pyramid of a success. Had a base and there were certain steps. And how do you get to the ultimate win? How do you get to the top of the pyramid as the top of it being the success? Basically, I have my own pyramid of success. I developed this a number of years ago. The base of my pyramid is four qualities that I call core values.

These four core values are really the base. It’s very much geared toward entrepreneurism. Those are the most important traits that I consider for a startup founder to have first of all, is passion. The founder has to have the enthusiasm, be into it, be dedicated to. You’ve got to have a passion, not just a past time that says, “Oh, I think I might do something with this.” We have to see that passion in the entrepreneur.

Second thing, initiative. As Nike says, “Just do it.” They’ve got to have the initiative. They can have a passion. They could tell us how much they’re really into it, but if they haven’t really done much with it, and they haven’t really progressed, because it’s kind of like a passion, but unfulfilled, because they don’t have the initiative to get an MVP, or to get the MVP out and do some testing and things. So, we consider initiative very important.

The third thing is perseverance. You’ve got to survive. That requires maybe changing, pivoting. Don’t give up. If you have the passion, and you’ve done the initiative, but then you give up really quick again, that’s not a quality we like to see. We’d like to see that perseverance. You’ve got to persevere. You’ve got to survive.

The fourth is like an all-encompassing trait. And that’s integrity, because nothing else matters. You could have again; passion, initiative and perseverance but if you don’t have the integrity and have the ability for people to believe in you and believe you’re honest and totally forthcoming, you lack the integrity, everything else will fail.

The four most important things that we consider: passion, initiative, perseverance and integrity, but again all four are required for success. Particularly in a startup, you can’t do with one, two or three. You’ve got to have all four. That’s really what I look for in an entrepreneur.

Four important traits, I didn’t hear industry experience in there. They don’t need industry experience.

We do prefer someone who is in an industry, recognized a problem in that industry and then set out to solve it. That’s preferable but again, that’s not to say someone can’t see a problem in an industry that they’re actually not involved with, do the research, consult experts. And then verify there is a problem and develop a solution. It’s not really necessary to have the industry experience. And we have funded companies where entrepreneurs don’t have necessarily industry experience, but they did identify a problem, because they were exposed to it some other way.

Often, we see developers that might want to write code to solve a problem, but they do no research. They don’t have any industry knowledge. That’s really not the way to go. Too often enough I think, we see a lot of developers that think because they can write code, they can solve problems. But don’t really research the fact that, “Really, is that a problem?” what do they know about the industry? What research have they done? We stay away from those types of situations, but we do like to see industry experience. As I said, as long as the research is done and they’ve consulted experts. And maybe have experts on their advisory team or things like that, we will consider those types of investments.

Such a wide array of skill requirements. Are you always looking for a team of founders?

A team is always better than one, but again, a large team can be a problem. There could be a lot of bickering, a lot of how do you share the work? How do you share the revenue, the equity? It really depends on a lot of factors, but basically, I think, two to three is a good number. Two to three founders of different expertise. Let’s say if it’s three founders, we’d like to see one that’s an industry expert. It’s not required, but if you have an industry expert on your team. Then you have a developer or a technical person. So, you have the industry experience, you have the technical experience to solve the problem. Then really important, somebody in sales and marketing.

A lot of these entrepreneurs don’t succeed, because they might develop something. They might potentially solve a problem, but if they don’t sell their service, if they don’t sell their product, they don’t get it into the market, it’s a complete failure. I would say personally; most startups fail due to lack of sales. I haven’t done any research on that. That’s probably a topic for a whole other podcast of why entrepreneurs fail. But I personally would think that it’s probably due to lack of sales. They can solve a problem. They could have the industry experience, but if they don’t get the revenue, they’re not going to succeed in the long term.

It makes a lot of sense. What else you got?

Something we think is really big in a founder is coachability. We want to help. It’s very frustrating if we want to help, and the founder is not listening to what we’re saying. There needs to a be a back and forth. We can listen to the founder after investment. And they could listen to us. And we could determine what the best way is to proceed, but it’s pretty obvious in interviewing and going through due diligence with a lot of founders that, they really aren’t interested in being coached.

Sometimes they think they know it all, and we’ve passed on a number of opportunities where we liked the idea. We liked the [12:59]. We saw the market. We saw the funding, but when you see a founder that really wants to just take the money and run and say, “Thanks, but no thanks for your advice.” That’s really not something we’re interested in investing in.

Very insightful, closing thoughts.

As I said, we’re in at SeedFunders for more than financial returns. We’re doing social good. We’re starting companies. We’re mentoring. We’re hiring staff. We’re providing guidance to them. All along those lines, in addition to the financial investment that we’re trying to receiving or the returns we’re trying to receive, we’re doing social good. We did have… One founder recently said that they would not have survived the first year without SeedFunders. Now, that company has gotten national contracts. They’ve gotten significant follow on funding. They’re hiring people.

That’s the way we like things to be. This founder was very coachable. Listened to things that we said. And basically, we are doing social good on top of looking for a return on investment. As I said before, we are Capitalists. We’re in this to make a return, but we’re doing social good by doing what we’re doing. We’re having fun doing it. We’re having fun doing social good to make money. What more can you want?

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