Automatic "No" Situations
We can't deviate from the basic parameters of our investment model. Any of the following conditions will trigger an automatic "No" from us.
- Coin/token offering or SAFT.
- Round size greater than $1M. (This is a hard limit. Our soft limit is $500K.)
- Valuation/cap greater than $6M. (This is a hard limit. Our soft limit is $3M.)
- Previous outside investment greater than $500K total.
- Primary offering is at the idea, mockup, prototype, or pre-revenue MVP stage.
- No full time founders -- Even if they plan to become full time after funding.
(This is a hard limit. Even a single FT founder is usually a "No".)
- Company is not doing any real engineering of its own.
- Product/service is pure e-commerce sales, an e-sports league, or an e-sports team.
- Produce/service is related to legal "gray areas" like marijuana and real money gambling.
- Company is based in Central Europe, Eastern Europe, Russia, Middle East (except Israel), Africa, India, China, Southeast Asia, or South America -- Even if the corporate entity is domiciled in the US. Even if the company intends to move its operations to a jurisdiction where we do invest.
Pro Tips for Getting to "Yes"
We know pretty precisely what we're looking for and try to be completely transparent. To save you time, we'll simply tell you how we make decisions.
80%+ of our decision process is based on just five variables:
- Business model.
- Unit economics and growth path.
- Capital efficiency.
The first thing we do is classify your business model based on target market and revenue model. We use the following target market categories:
- Large Enterprise.
- B2B, high price point.
- B2B, low price point.
- B2C, including B2B2C.
The higher a target market is on the list, the less we need to be convinced about scalable acquisition and delivery economics.
We use the following revenue model categories:
- Subscription, taking into consideration acquisition costs and churn rate.
- Two-sided marketplaces, taking into account acquisition and transaction metrics.
- High recurring transactional, taking into account repeat purchasing metrics.
- Low recurring transactional.
- Affiliate and advertising.
The higher a model is on this list, the lower the traction we need to see for a given valuation. As a rough guide, low recurring transactional revenue is worth about half as much as subscription (at a low churn). Affiliate and advertising is worth about a quarter as much,
After business model, we look at traction. Traction almost always means revenues and firm contracts starting within 60 days. (We don't count LOIs or verbal commitments.) Actually, we focus on gross profit to account for businesses with different margins. There are some exceptions. A large enterprise model with many unpaid pilots at potential lighthouse customers may warrant an exception. Similarly, a B2C model that is pre-monetization but has enormous DAU with high engagement is an opportunity we will often investigate further.
We next consider this traction in the context of unit economics and growth path. Our database of 1000 portfolio companies and thousands more applications mean we know the typical unit economics and growth trajectories of companies at this stage across our business model categories. If your metrics on these dimensions are higher, we need to see less gross profit. If they're lower, we need to see more.
The final consideration before valuation is capital efficiency. Our model places a high premium on companies that consume less capital. These companies can do more with less and therefore have a better chance of surviving and achieving a sustainably growing business. We judge capital efficiency in terms of how much money you've previously taken from investors, your historical cash burn, and your projected cash burn. Beyond a modest level of capital intensity, we're usually not willing to invest at all. Below that threshold, the lower your capital requirements, the less traction we need to see.
At the end of our analysis, we combine all these factors into a valuation.
We make 90% of our investments at a a $1.5M to $3M valuation in companies with MRRs of $5K to $30K.
Valuation scales with MRR according to the factors described above.
- Make sure you meet our criteria and valuation guidelines.
- Fill out and submit the form at the bottom of the page.
- We usually respond within 1 business day. Never more than 2 business days (unless something has gone wrong--send email to email@example.com if you haven't heard from us within that time).
- We may ask some clarifying questions over email.
- If we're interested we'll schedule a call.
- Often we ask for some initial documents before the call, such as cap table, monthly P&L, recent balance sheet, and customer information.
- We usually follow up within a few days of the call. Sometimes that will be a firm decision; sometimes it will be with additional questions.
- Our decision is either "No" or an offer. Our default instrument is the current version of the YC SAFE with a cap and a discount. If other investors are investing at the same time and strongly prefer a convertible note or Series Seed, we can usually accommodate those as long as the non-monetary terms are "vanilla".
- We'll ask you for a full set of due diligence documents.
- We usually make an investment decision and conclude diligence within 5 to 15 business days of first contact.
If, after carefully reviewing our criteria and 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.