RSCM Investment Process
Over the last 5 years, we've refined our systematic investment process with two goals in mind: (1) produce a portfolio with precisely the characteristics we target and (2) be maximally respectful of founders.
Transparency is the key. We know what we're looking for and try to make this profile as clear as possible so that you can choose whether exploring an investment from us is worth your time. Then, if at any point we suspect that we're not a good fit for your startup, we'll simply tell you. If we're going to say, "No," we try to do so as quickly as possible so you can focus your efforts on better prospects.
Of course, if we're going to say, "Yes," we do that as quickly as possible too. We want you to get back to building a successful business that has a great exit for both of us! Usually, we manage to close deals within 2 to 6 weeks of first contact with a founder, and can move even more quickly when necessary.
The sections below explain each phase of the process.
In the interest of efficiency, we believe it's best to tell you up front what we're looking for and then let you decide if there is a likely match. That way, if our investment focus doesn't mesh with your business model or capital strategy, we don't waste your time and you don't waste ours. With that in mind, here is an overview of our target investment profile:
- Sector: We are focused on Technology startups. Technology R&D of some type must play a key role in any company we fund. We do not have an inherent preference within Technology, though our other criteria naturally reduce our exposure to startups in some sub-sectors.
- Location: We invest primarily in US and Canadian companies, primarily outside the SF Bay Area & NYC. We consider startups US-based if they are US corporations and have an office in the US where at least one founder lives. We occasionally invest in companies based in Western Europe, Israel, Australia, and New Zealand, but those deals must meet an even higher bar than normal.
- Valuation: We make almost all of our investments at valuations between $1M - $3M. Traction, growth curve, and unit economics are the most important factors we use to determine specific valuations. Exceptions above $3M require correspondingly exceptional traction, growth, and unit economics. In 2016, the exceptions we've made have typically had $50K+ MRR with an impressive growth curve and fairly proven unit economics.
- Check Size: Our typical check size is $75K - $100K. We'll go as low as $50K. We rarely go above $100K.
- Round size: Almost all of our investments go into rounds totaling $100K - $500K. Deals on the higher end of that range require a correspondingly higher level of traction (usually $10k+/mo in revenue). We occasionally invest in companies raising up to $750K rounds, but only with truly exceptional progress.
- Cash Burn: We have a very strong bias towards companies with low cash burns. We also prefer the funding round where we participate to yield at least 10 months of runway.
- Founding Team: We usually require at least two full-time founders, with one being technical. We make exceptions in cases where the company has a relatively stable business with a strong management team.
- Progress and Traction: We do not invest in ideas on paper or prototypes. Moreover, the startup capital efficiency trend means that almost all our portfolio companies already have at least modest revenues. Below are the rough minimum traction levels for different types of startups:
- B2C: We have the highest bar for B2C companies. To be successful, you need to acquire paid or heavily engaged users cheaply at scale. Consumers can be unpredictable and there is much competition for their attention. Therefore, we require strong user engagement metrics and evidence of compelling CAC, LTV, and retention.
- B2B w/low price point: If your company has a B2B product with a low price point, our traction bar is also usually higher. We want initial evidence that you can acquire customers economically at scale. Usually, this requirement translates into least 40-100 customers, most of which you acquired through a cost-effective, repeatable sales model.
- B2B w/high price point: If your company has a B2B product with a price point high enough to support a sales force, our traction bar is lower. We like to see a proven price point, evidence of a strong customer value proposition, and at least a few customers that have gone through sales cycles with decent acquisition economics.
- Large Enterprise: If you have an enterprise SaaS product with a price point in the thousands to tens of thousands of dollars per month, we'll be interested in exploring an investment when you have live pilot customers with promising usage data. Paid pilots make an even more compelling case.
After you decide to contact us, we'll conduct a quick screening to assess (a) whether you meet our basic criteria from the previous section, (b) how you compare to the other companies in our pipeline, and (c) how you'd fit into our portfolio.
We see many more great startups that meet our basic criteria than we have available dollars to invest. To choose among them, we have a system that balances a variety of factors like absolute traction, growth rate, and price, while taking into account the need to construct a portfolio diversified across sub-sectors and geographies. During screening, we "look ahead" and estimate the outcome of this comparison and let you know immediately if it looks likely that we'll eventually say, "No."
In the past, we've done most of our screening through email or over the phone. But with a steady increase in volume, we want to (a) make sure that nobody falls through the cracks and (b) capture as much interaction detail as possible to optimize the process. To this end, we now conduct all initial screening using the submission form at the bottom of this page.
We generally respond within 3 business days to new screening submissions.
This is the most customized phase of our process. Evaluation is where we take a more personal approach to learning about your team, technology, and business.
We'll start with a phone, video, or F2F conversation. That may lead to requests for more detailed information and further conversations. We may want you to speak with a different partner who has relevant expertise. Sometimes, we like to speak with your investors and customers. The course of events depends on the specifics of your situation.
Common additional information we ask for includes:
- Capitalization Table.
- P&L and Balance Sheet.
- Financial Projections.
- Product release schedule.
- KPIs and their historical values.
- Copies of key customer contracts.
Behind the scenes, we build a more detailed analysis of factors like engineering risk, unit economics, and sales scalability. As mentioned in Screening, we face a budgetary constraint and can only select a subset of those startups in our pipeline at any one time. So we try to determine which startups will add the most value to our portfolio at the lowest cost. A big factor in this calculation is valuation. Therefore, we try to identify any mismatch in expectations as quickly as possible.
We do try to be respectful of your time. If at any point we forecast that your startup isn't the optimal fit for us, we'll let you know immediately.
If our discussions during the Evaluation phase produce a strong match, we'll make you an investment offer. We generally invest using convertible notes as that's become the de facto standard for pre-seed and everyone understands the mechanics.
We'll also participate in SAFEs or Series Seed if that's what other investors in the round have committed to. We will very occasionally lead a Series Seed if that's what other investors strongly prefer and you have sufficient commitments to close immediately.
These days, we generally only issue a term sheet in the rare cases we lead a Series Seed round. For convertible notes, we usually just specify the amount of our investment and cap, as well as the legal template for the note document.
Our goal is reduce transaction costs as much as possible. Unlike many investors, we don't require you to pay our legal fees. However, we also don't burn resources negotiating over legal language or reviewing non-standard structures.
Once we've agreed on terms, we'll ask you for a package of due diligence documents. Often, in the interest of efficiency, due diligence occurs in parallel to final negotiations and document drafting. While the exact documents required depend on the business, they will usually include:
- An updated and double checked Capitalization Table.
- Updated and double-checked P&L and Balance Sheet
- Copies of corporate documents like Certificate of Incorporation, Bylaws, and annual filings (if applicable).
- Copies of intellectual property agreements with founders, as well as all current and past employees and contractors.
- Bank statements and tax returns (if applicable).
If, after carefully reviewing our target profile and typical process, you'd like to explore an investment, please fill out the form below.
- Do not enter zero for "Desired Round Size" or "Desired Valuation/Cap".
- If you list "Current Sources" or "Previous Investment Sources", do not leave "Current Committed $" or "Previous Investment" blank.
- Do not enter zero for either "Gross Expenses" fields.
- If you have revenues, do not leave "Most Recent Month's Revenues" blank.
We try to respond to all genuine submissions within 3 business days.