1. What types of companies are you looking to invest in?
We will pick great founding teams who have the vision and skills to develop great products that solve real problems in markets with high growth potential in a scalable and capital efficient manner. Companies can come from any industry sector, but the capital efficiency screen will make it hard for ventures in capital intensive sectors to be funded by us. That said, we have seen disruptive business models in unlikely places that would fit our discipline despite traditionally high hard costs. In all cases, connecting with the paying customer soon and often is important to us.
2. What will be the form of investment?
We plan to invest $25,000 in companies when they start with us in the form of a convertible note. We will have reserve capital for follow on financing in those companies who make good progress, but in most cases not more than about $100,000 from us over the life of the company. Most companies who need additional capital will need to raise money from other angels or VCs. The convertible note structure allows the most flexibility to early companies in terms of raising follow on capital from new investors.
3. What is your process after investment?
We will invest in a group of companies together, and then put all of them through an intense 3 month “mentor cycle”. We will use a combination of experienced entrepreneurs and investors to provide the guidance to maximize progress in this short period. We will work with each company to develop a set of measurable milestones to achieve during the mentor cycle. In most cases, these milestones will be tied to customer and market progress – get your prototype done and in customer hands, modify your prototype based on customer feedback, figure out who has the problem your technology can solve and get them to start buying, etc. It will all culminate in Investor Demo Day, which will be in essence a private investment conference. In addition, there will be a huge benefit of being part of the group – you will learn a ton from your fellow CEOs, maybe more than you learn from the mentors. After Investor Demo Day, we will continue to work with those companies who made great progress during the mentor cycle to help them reach their next milestones.
4. What will happen during the mentor cycle?
We will typically have one mentor lunch and one mentor dinner each week, and a weekly private session where the CEOs meet with just the fund managers. Plus, there will also be separate meetings –both private and group – with various mentors during the course of the mentor cycle. You should expect about 6-8 hours per week during the mentor cycle in meetings with the other portfolio companies, the fund managers, and mentors.
5. What will be the typical milestones for companies?
We will meet with each company before the mentor cycle begins to agree on the right milestones for each company. There won’t be a one-size-fits-all approach, but in general the milestones will be tied to testing the business model with real customers – get your prototype out and start getting feedback, utilize the feedback you had from your prototype to modify your revenue product, test changes to key elements of your business model, etc.
6. How is a PSF investment different from traditional VC investments?
Beyond mere capital, we believe there is extraordinary value in the three month mentor cycle and the opportunity to interact with other entrepreneurs and mentors. During that time, entrepreneurs need to flesh out all aspects of their business – including finance, legal, sales, etc. to really prove out their business model. Mentors are a key part of this program, especially those who have built and sold companies. In addition, peer learning is a natural outcome since we make our investments in classes. Lastly, we cannot, nor would we want, to do this alone. Portfolio companies will be connected with specific community resources based on their needs/trajectory. These might include OEN, Portland Ten, PIE, Portland Center for Design and Innovation, Nedspace, StarveUps, Portland State Business Accelerator and many more. Our portfolio companies receive privileged access to follow-on investors and acquirers during and after Investor Demo Day – the culmination of the 90-day mentor cycle. But prospective entrepreneurs should realize that this is a tough program and it’s not for everyone. It’s not a fit for those entrepreneurs who lack the appetite to drive rapid growth in their companies or those who do not want involvement by outside investors/advisers.
7. How do you compare to Y Combinator, TechStars, and other early stage funding sources?
We are big admirers of both Y Combinator and TechStars, and if we can have anywhere near the success they have had we will be thrilled. At a high level, our model is similar – small amounts of capital combined with intensive short term mentoring. More than anything else, they have proven that this kind of model can produce both great growth companies and great economic results. But until Portland Seed Fund, there was no investment model like this in Portland. We have tried to borrow the best elements of these other seed investment models and apply them to Portland.
8. $25k seems like a ridiculously low amount to invest. What can anyone do with $25k?
Incubators in other regions such as Y Combinator and TechStars have demonstrated what you can do with very small amounts of capital. It really doesn’t take much money to start a software company today and to find out if your business model will work or not – cost of infrastructure, tools, distribution, etc are orders of magnitude lower than they were 10-12 years ago. This investment model is intended to provide adequate capital and guidance to make demonstrable progress to allow you to raise your next round of capital or perhaps to even get to break even. Plus, have you seen The Social Network? The whole dispute between Zuckerberg and Eduardo was over $18,000 – and they had to buy their own servers! Plus, the funding is leveraged by the mentoring that you will get during this 3 month window.
9. Will you take Board Seats?
Very rarely. We don’t plan to take Board seats in any companies initially, but we might take a board seat as a company progresses and it makes sense for the company.
10. Does PSF provide office space?
No. There are a number of great incubator offices in the Portland Metro region including TIE, Nedspace, OTBC, PSBA, and others which would be good places for a company that doesn’t have space yet. Of course, a shared office, or even a garage, can also work. We will bring all the companies together several times a week, and expect that several of them will be working in common facilities, but we are not providing office space ourselves. If you do need office space, we can certainly help you with that.
11. Will you only invest in Portland companies?
No. We can invest in any company in Oregon or SW Washington, or any company out of the region who is willing to come here. We will require companies to locate in the Portland Metro area during the 3 month mentor period, but companies are free to locate wherever they want after Investor Demo Day.
12. Is Investor Demo Day open to the public?
No. Investor Demo Day is by invitation only. Mentors, angel investors, VCs, potential partner companies and potential acquiring companies, and past PSF companies will be invited. We had a fantastic response to our first Investor Demo Day in late 2011, and expect to repeat this with subsequent classes.
13. Will you be doing anything else to meet with entrepreneurs and prospective companies who want to learn more about PSF?
Yes. We will have regular “Office Hours” events where an entrepreneur gets about 5 minutes to talk to us. We will do signups at our web site and Facebook page. Angela and Jim are both very involved in the local startup scene through Angel Oregon, Keiretsu, PAN, PDX11, TiE and other forums.
14. How many companies will you invest in during each cycle?
Each class will have at least 5 but no more than 10 companies.
15. What if I have already raised money?
That may be great or it may be a problem. Depends on how it was structured. We ask about prior funding in the application process and will deal with it on an applicant by applicant basis. In general, if you have already closed a priced Series A preferred round, you are probably too late for us. If you haven’t done that – or don’t know what that is – you could be a fit.
16. Will you fund a one person company?
Very unlikely. We want to fund teams of at least 2-3 people. A startup is just too much work for one person. We have done single founder teams in the past and may again, but be aware that the bar is much higher for single founder teams.
17. I have a business plan. Can I just submit that rather than applying?
No. All companies need to apply to be considered for funding. We will not commit to look at any business plans submitted.
18. What if I haven’t incorporated yet as a C Corp?
That’s OK, as long as you plan to become a C Corp in the not too distant future. You’ll need to become a C Corp eventually, but if you’re still an LLC or haven’t even incorporated yet at all, that shouldn’t stop you from applying. We can help you with the incorporation details if you are selected for funding.
19. What are the top reasons you DON’T fund someone?
Go back to what we DO fund – scalable, capital efficient businesses run by passionate and smart founders. What do we mean by scalable? These are businesses which can grow revenue without a proportional increase in headcount; this will naturally skew more of our investments towards technology based businesses, but we have funded apparel companies. And what about capital efficient? If we believe a business would require substantial capital to prove out the technology, we will probably decline. As far as the founders, one of the top reasons we reject applicants is because the founders are not “all in” – e.g. they still want to work their day job while they “hobby” with a startup that they want us to fund. We are going all in with you … you too need to go all in to the new venture if you want to be part of the Portland Seed Fund.