 Well, this is Preeti, and I'm doing my MBA at Sloan School of Management. In the next set of sessions, we will be deliberating the various aspects of how to evaluate startups. First up is the billion-dollar question on how do you evaluate seed-state startups. We have with us here Kevin Colrin, who's the managing director of Slow Ventures. He's an early-stage investor in Pinterest and Perpac and many more such impressive companies. He's also one of the first 10 employees at Facebook and is a regular contributor to the Wall Street Journal. Joining him, we have TJ Parker, who's the CEO and co-founder of Perpac, the startup that's helping people across the companies get their medications on time. He's also named one of the 30 under 30 under Forbes, as well as in the Inx Magazine 30 under 30 in 2016. All of you join me in welcoming both TJ and Kevin. Hi, everybody. Let's make it awkward. Always keep your founders this far away. Investors and founders. I could lie down. You could lie down. Yeah. I want to talk to you about my dog. He died. Anyway, who here does drugs? Well, he's got a coupon code. So I am Kevin Coller and as mentioned, I worked at Facebook from 2005 through 2011. He's one of the first 10 employees. Started out of my apartment in New York and ended up staying with the company until it was about 5,000 people. When I left, I moved here, thanks to my wife being from here and my family as well. And with a couple of friends started investing, seed investing or angel investing in tech companies. A group of friends all from Facebook, we pooled about $15 million of capital and wrote 175 checks between 2011 and 2015 into a whole lot of things. This being one of them. Sorry, you. Thank you. You're not at this anymore. And then recently, beginning 2015, decided to institutionalize the fund and we raised about $250 million so far to invest larger amounts but focused mostly on seed stage companies. And who are you? I'm TJ from Pill Pack. So Pill Pack is a pharmacy that makes it really easy for people that take ongoing chronic medications. So we sort and deliver their, sort and package of medications based on when they take them throughout the course of the day, we then deliver them to their door and we manage all the coordination with their insurance company, with their doctors, do all the heavy lifting so that's super easy for folks that take medications. We started the company in early 2013 and we launched the product in early 2014. To date, we've raised about $115 million in capital, including from Kevin. And we are now servicing customers all across the country. We are located in Boston, our office is in Somerville, so right down the street. And we have pharmacies across the U.S. and then another office in Salt Lake. Companies about 600 people at this point. Before that, I was in school and did a lot of work actually helping run things like this. So helped run the 100K at MIT, helped start hacking medicine at MIT, so I was really involved in this community. And before that, I was in college. Keep going all the way back. All the way back. The whole story. How many people here have raised capital from institutional investors? How many people here see that as being something they may do in the future? Cool. So I was at a dinner with a bunch of MIT people the other night and many of them were either had just or were about to start raising seed funding. And basically, the questions were consistent of brilliant people doing brilliant things and not having much insight as to how the fundraising process goes, what you should do, should not do, et cetera. And so we figured we would take maybe 15 minutes or so to talk ourselves and then open it up to you guys. Happy to answer any questions. TJ obviously wants to talk about or is happy to talk about his experience of raising capital. As I said, over $100 million takes some work. And as I mentioned, we've invested now in over 250 companies. And so I'm happy to talk about things that have and have not worked. Why don't you start, so going back to that point when you were doing things here to the point of actually having a company that has 600 employees and $100 million plus raised, there were probably a few steps along the way. So going from the, you have this idea, maybe even talk about, I mean, your backgrounds in terms of being a pharmacist and seeing the opportunity and then actually committing to an idea and deciding, you know what, I'm just going to go be a CEO and start this thing instead of the typical career path that you had planned on. Yeah, so as Kevin alluded to, I am trained as a pharmacist. I didn't actually go to MIT. I went to Mass College of Pharmacy across the river. And during school, my dad had started this new kind of pharmacy that actually sorted and packaged meds, very similar to POPAC, but delivered to nursing homes, assisted living facilities, sort of long-term care facilities. And I always knew I wanted to start something or be working at a startup or do something entrepreneurial. I spent probably three or four years running around here trying to understand how this whole thing worked. Like how do you raise money? How do you meet a co-founder? How do you start a company? How does all this stuff work? Was in a lot of the sort of 100K judging sessions where you'd have oftentimes venture capitalists and angel investors watching someone pitch their ideas, oftentimes a student pitch their idea. And I sort of observed that whole process. And by the time I was on the other side of the table, I had a little bit of insight into how investors think about evaluating an idea. And then we first pitched the idea of POPAC at a hackathon, that MIT Hacky Medicine Hackathon. And we got a good response from that. We won the hackathon, but we started the hackathon. So it was a little bit of a misnomer. Is there a conflict there? No conflict. I think it was a $1,000 prize, which was a big deal at the time. And then ultimately that sort of started the snowball and we would get together once a week as a team to work on what the company would be, if we'd actually build a pharmacy, if we'd build a platform, how much money we'd need to raise. And within three or four months, it applied to tech stars, got into tech stars, which was early 2013. And from there, the whole thing kind of snowballed. So it was a lot of sort of build up of understanding how investors think about writing checks, to just pitching it for the first time at a hackathon to four months later, I think we had 120K from tech stars. And then within about five months of that, raised the first thing, 400K and then three and a half millions, about $4 million. But really the biggest thing was really just pitching it the first time and getting feedback and then people around to you that really helped. How did you decide how much, I mean that's a large round for that soon, right? So the way, the trajectory we usually see is there, it used to be the seed round was the first round that's now kind of turned into the second round. So there's this angel round that happens first, which from my experience, probably the average is $500 to $750,000 being raised. Usually it's friends, family, and some strategic people, it's 50K and 100K checks, that usually gets you somewhere around a year worth of operating. Then there's the seed round, which now you have a year of under your belt. You've got some metrics to show, you may have a prototype, you may be already in market. I think the average usually we see is probably a million and a half dollars raised for a seed round, which then gets you another, should be 18 months. So now you're two and a half years in when it's a series A, which we typically see as being $5 million fund raise or so. So it seems like you did that pretty accelerated. Yeah, I mean I think compared to a lot of startups, we are asset heavy. So we had to build an actual distribution center. We had to buy automation to do the packaging. We had to get licensed nationwide. So there's a lot of baking costs at the beginning. We followed that trajectory somewhat, it was just really accelerated. So we raised the 500K about two months into Techstars. And then tactically what happened was that in Techstars you have to sort of build up to demo day or any of these accelerators just build up to demo day. And it's all sort of on some level operating off of FOMO. And by the time demo day happened everyone felt like they missed the first sort of pre-seed round and then that parlayed into it. I think we were going out for $3 million and we ended up closing $3.5. And the primary reason for raising that much again was that it was, there's just a lot more infrastructure we had to build to even go to market. We couldn't sort of test the idea with just a piece of software or half a dozen engineers. Did you find your investors as a result of the Techstars experience? Some of them. We found our first two angel investors as a result of the 100K and Hacking Medicine. There are actually two of the judges that I used to recruit to help judge. So the first, the first people which often- More conflicts of interest. More conflicts of interest all over the place. I think the first couple investors are always the hardest and it was nice for people that I sort of knew. I didn't know them super well. And then the first institutional investor, my co-founder had worked at Founder Collective so he knew them well. So conflicts of interest all over the place. So work at the 100K, work at Founder Collective and then you're good. Yeah, it's just start a business plan competition. Win that business plan competition. Stack the deck with judges who will then invest in your business. Find a co-founder that works at Adventure. Get a co-founder that works at a VC firm and it's easy. Off to the races. Really, all these people talking about it being so difficult. So we struggle with this because we've seen the trends. It used to be that there were very few accelerators, incubators. Then there all of a sudden were hundreds of companies a year, Y Combinator and Techstars in multiple cities and so many more. And I think there's been points of view on both sides as to whether it makes sense to go into one of those accelerated learning environments, rapidly 90 days typically go from idea to some sort of prototype, try to raise as much money as possible afterwards. What do you think about, I mean obviously your experience was a little while ago, but do you think that you being a first time founder at that time, being coming out of a pharmacy school, not being an entrepreneurial or business trained person was, do you think that experience helped? It definitely helped for me and for the company. I think every instance is different, so for some companies it's been a good experience, some it hasn't been. I think being really clear about why you're doing accelerators, so for us we did the accelerator primarily to accelerate the process of raising capital. And that's what we hope to get out of it and we got that out of it and I think in the process met a lot of folks in the community that we didn't know before. So for us it was worth it. I think for us the decision point of the time was do we do one of these healthcare specific accelerators, do we do a rock health or a health box or something like that, or do we do a tech specific and we found the capital raises typically go better at the Techstars type accelerators. But that was four years ago. I don't know if the market has changed. At the time it was a pretty no-brainer decision at this point. Why a combinator feels like a no-brainer decision and then I think all the other ones are very dependent on the company and whether it makes sense for them. So one of the questions I was getting the other night at that dinner was, which was surprising to me, is we my fund has a policy against doing uncapped notes. So typically a seed round, instead of having to go through the hassle paperwork and legality of creating a true equity round, there someone will use the Y Combinator safe agreement if you're familiar with that, or kind of a simple dead instrument. And the only thing that really needs to be determined is what is the cap of the valuation, which is not really a true valuation now, it just means when we raise again in the future, as we will be adjusted to that valuation with usually some sort of discount for having come in early. And it was interesting that the students, or not students, but the alumni that I talked to from here had said that the lawyers that they had worked with and the ecosystem that they'd worked with around here told them never put a cap on the note. And basically what that means for me as an investor is it's a little bit, it's been too hard for me to overcome that because if you're gonna come in early, usually a year before other investors are and take much more risk when the idea is still just an idea and there's really no infrastructure or business, the idea of just getting kind of a 20% discount to the next person that may come in a year or more later when there's so many more proof points, so much of the idea has been de-risked. It doesn't make sense to me unless there's some sort of cap on the upside and basically my concern, the reason why we've pushed forward is the misaligned incentives I feel between an investor and a founder if there's an uncapped note is significant because the founder wants the valuation to run as high as possible before that first investor that believed them first gets their equity and of course the investor wants the lowest possible valuation which means that should I be as helpful as I can, should I make as many introductions as I could, et cetera, cause reverse incentives. So you guys, how did you- You may not have the ability to put on the valuation in the future. So how did you guys handle figuring out how to, being first time, I mean I assume Techstars taught you certain things about that, but figuring out what your valuation should be and how to set up valuation along the way so that it didn't become a problem either between your relationship with your investors or a problem with your ability to raise money in the future if you didn't achieve certain goals because a down round is perceived to always be a bad thing. Yeah, I think we got very lucky not just with Techstars but getting a really good experienced early stage investor involved, that's not Kevin. Just kidding, you're great as well. There's good investors and there's not. We had, so the first institution of money in was David Frankel at Founder Collective and we navigated all these, do you do an on cap note? Do you do a party round? Do you do like a strong lead in your next round? And leaned very heavily on David for advice through that period as well as the folks at Techstars. Katie was super helpful working through all of that. But I think getting an early stage investor that both knows other folks in the community that will be a good fit for your next round helping sort of educate and walk you through what makes sense and doesn't make sense. I think we wrestled with this, it was four years ago we wrestled with doing an on cap note or sort of pricing the round or doing a cap note and Dave and other folks pushed pretty hard on the fact that you want to align it with all of your investors and especially we're seeing this even later stage now you're seeing on cap notes and we're dead instruments that seem great at the time but then have all sorts of potential for downside. And that was really just leaning on people that were super helpful whether that was early investors or folks at Techstars. At what point did you decide a board of directors was necessary and it sounds like Dave Frankel probably operated in that capacity whether he was officially one or not but how did you go through that decision? Yeah so we didn't do a board on the first half a million which I think is pretty normal. The capital in the timing of the business that oversight didn't feel necessary and we had one institutional investor which was David and I think he acted in that capacity but it didn't need to be formalized. We raised the priced round that was three and a half million and it made sense to put a board together. I think you're not always but oftentimes with that amount of money you're gonna get pushed by the investors and it's a pretty standard thing to do and it made sense for us. We I think made a five person board at the time that was myself and my co-founder and then the two that we basically split that three and a half million dollar round between Atlas and Founder Collective and they each got a board seat in that process. Oftentimes I think it's more normal to have two plus one lead. For us I think five was a nice size. I think five is a good size in perpetuity and it was nice to have more than one personality on the board so they get some balance and some different opinions. But I think you experience a breadth of this in a way that I don't but for us at that capital amount it was pretty logical. What have you seen from, is it dollars in? Is it timing? Yeah I mean we I would say the majority of company first of all at that angel round the 500, 750 there's no reason to have a board. Fast forward a year now you're a year in you're going out for the seed round. As I said usually a million and a half dollars or so. I have seen it go either way. We typically don't ask for a board seat when we write one of those checks and if we do do it it's usually with the incentive of getting off the board as soon as possible. Kind of taking the seat in order to be a mentor advisor to make connections to be helpful but in reality we want to just be there until the bigger funds are around the table. The people who, our models we write a lot more checks than a typical VC. We will do probably 30 or 40 investments a year among five of us and a typical venture capitalist will write one or two checks a year which allows them to be on boards. A typical VC is on 12 boards usually at any given time. That's kind of the max when you can do it but for us we were much more interested in making more bets without having to make the long term kind of decade long commitment of the board seat and we don't think our strength is being part of your series B or C and preparing for an IPO, et cetera. We think it's really to get you the initial capital you need to get the business started and to make the introductions to who will likely become your first board member being your series A lead investor. Conflict between founder and board or founder and investor. I think has a lot to do with who you choose as investors and vice versa. I think ideally you have the same people that are willing to write checks you actually like which is always helpful. I think a lot of board and investor management is really just keeping folks in the loop in a very sort of real time manner. There's lots of mechanisms to do that but I think no one likes significant surprises. And for me that's been less about formal monthly or bimonthly investor updates and more ongoing sort of short snippets and text or hop on the phone or just keep people in the loop about what's going on. It's not like everything has been rosy and everything's been great news but I think in the process as things are developing keeping people in the loop and not obfuscating stuff and being as transparent as possible has limited conflicts but I think if you choose the wrong investor you're sort of starting off in a really bad place. So it's really about people that you can get along with and be real with. I think different people have different personalities and then really sort of ongoing communication about what's going on in the business. And I think that there's two sides in terms of founders who just really want the dollars and want the dollars at the highest valuation versus founders who actually want the mentorship advice of a true partner. What are the ways in which, and then there's the pitch that me as a VC and that I see, the pitch that the VC's make to founders especially founders in competitive rounds as to why their firm is better than the others. You know, Jason Horowitz is now famous because of the mass, mass infrastructure that they have to do, they'll handle your legal and your CFO responsibilities, they'll do your recruiting for you, et cetera, versus other funds that completely focus on we are just a small group of partners and we are here for advice and mentorship but we don't have infrastructure tools. What do you think makes sense and how have you seen other than a source of funding and a source of quarterly meetings, investors playing an active role? I think one of the benefits of being a first time entrepreneur with an experience that'll lead investors that you truly want the advice, you want the perspective and I think choosing the right investor that can help with that is really paramount. But I think most of the time that for me has really just been about personality and obviously there's lots of things that go into who you pitch and whether they've done similar companies before and things like that but it was really came down to personality. There was two instances of funds that delivered really specific things. Kevin was one of those, was super helpful at one point in time getting us sort of approved on Facebook and helping us work through that process but it is a general rule that was more choosing a generalist and a personality that I thought I could actually learn from and truly wanted to learn from and if that wasn't the case it probably just wasn't the right fit but I wasn't looking at things like interest in infrastructure or first rounds like founder portal but those were all things that were pitched I think it really became who do I want to actually spend time with and deal with when things are good and when they're bad. So 10 minutes left, any questions? We can, real life scenario, yes. Did you raise money from university endowments? You're asking me I assume. I did not, no. Yeah, so slow, we are. Sort of, indirectly I think. Yes, you did. Not directly. Most VC dollars you get come from university endowments. So we tried, our kind of philosophy for slow is much different than a typical fund because it was started as the personal capital of about 10 friends that all worked at Facebook when we expanded to become larger we ended up raising money from about a hundred other individuals who were all CEOs of tech companies. Founders, CEOs, key executives at tech companies and our request to them was we wanted everyone to play an active role in the investment process and the reason for that is we think that you can take money from universities but the university is not going to play much of an active role in helping you find investments, diligence investments, et cetera and we felt that at the seed stage the most important thing is getting expertise and network and we thought okay if we have the CEOs of companies from social media companies to payment processing companies to virtual reality companies, et cetera when we see stuff that seems really interesting we then ask those LPs to meet the company on our behalf and so we can kind of be generalists and our kind of rule is I don't necessarily as the investor have to be a master of understanding the business that's being pitched to me as long as someone in our ecosystem which is usually one of those 100 LPs is an expert in that ecosystem and they can say listen, usually we see this all the time is most founders are so busy being founders that they likely don't really have time to be angel investors also but just through the day to day of running their business amazing people come into their office and they say wow like if I actually had the time or bandwidth or interest in doing the paperwork I would totally invest in this company because you're building something incredible but I'm so busy running my business and so our request is basically 100 of people that see those types of founders come into their office and we say when you get that inkling that like man this person that just came in for that meeting is incredible if I actually had a little bit more time I would have written to check myself into this company we ask them to forward it to us and call that out in the subject of the email and so basically we do now have only now in the most recent fund we brought in a couple university endowments but other than that it is this group of kind of these 100 individuals and then what we also did is we brought in VC firms which is not very typical we've got a couple dozen VC firms that have invested either their own partner capital or fund capital in too slow because we see stuff much earlier than they typically want to invest and so we'll do the seed round and then we'll make the introductions to those people to lead the series A or series B and what we find is when you can tell a founder at the very beginning the reason why you should take money from us is not just because it's money but because you're getting now the access to these 100 so he mentioned we helps him with Facebook we have a lot of ties to Facebook they had a problem there we were able to rectify that problem which most other firms may not have had the direct path to helping with that and we try to and we have that with basically a hundred different companies and what we say to most founders you don't know who you're going to need help from at some point when you're building your business there is going to be you're gonna need help getting onto Facebook or getting on to getting becoming a beta test of some sort of product of a big company that's being tested or whatever it may be finance help et cetera we say we have all those introductions and so think of us much more as a network rather than a pool of capital and so that's kind of how we do so yes in order to grow now in further the other individuals do have a natural kind of threshold as to how much they can invest into a VC fund continuously and so as we want to grow the fund we do start taking outside capital from VCs but we are sorry from endowments but we do keep that network of those hundred individuals and those VC firms and those are the ones who play an active role yeah what's your median size of investment and you said that you don't do uncapped so what's your maximum cap in the notes how do you do that I wonder to learn on the product what we see in the seed round again so typically we are the second time a founder is raising and they have been doing their business for a year and they've been doing that on this angel money that they've raised from friends and family or kind of angel investors so they are further along then and this is very different than what it used to be so it used to be the seed round was two kids in an idea and there was nothing more than that idea now I think because the opportunity to make progress without much capital whether it's through because of Amazon web hosting or just other things we really want to sit back and see how scrappy were you and how far did you get on either the money in your own pocketbook or the money from friends and family and so for us typically that is a one and a half million dollar, two million dollar seed round it's typically at some sub 10 million valuation so it's one and a half on a seven million cap note or an eight million dollar round and we will write a check of any size from the full amount down to usually $500,000 the difference that we have for most funds is most VC funds want to get 20% ownership of a deal for you know because that as I mentioned because that founder is only doing you're sorry because that VC is only doing one or two deals a year he or she needs to have enough equity to make sense that they're gonna spend so much time on it with us we're doing five, six, seven, eight deals a year and we are fine being the second largest check which is very different than most so a lot of times it's a zero sum someone is going to win the lead position to write the lead check of a company and the other people will have lost the other VC firms will leave and then you'll fill whatever's left with strategic we say listen you can choose us to lead or choose someone else to lead and we'll just take whatever's left because we'd much rather be part of this company going forward instead of saying we couldn't convince that founder back on day one and so we now have no ownership and so it's different and time will tell as a result we end up doing probably three times more investments per fund and we probably have one third the amount of average ownership per company but we think the quality of all of the companies is higher because we don't have to actually win zero sum we can kind of be in all of the things that we see that we think are great yeah so you'll find so our policy and this is basically we ask as many investors do for pro rata rights so if we're buying 7% of your company at the beginning we want to be able to maintain that going forward with a small seed fund you there's usually a limit to that you know if you get into a company that becomes a rocket ship just maintaining your ownership is going to be a $10 million check when our whole fund is not much bigger than that so and so we ask for the ability to do it and then it allows us to at some point say okay you know the valuation is too high we are happy with our ownership we're gonna get diluted down a little bit but we still own enough that we're happy so typically you know if we start at the seed we'll do one more round so we will do our pro rata at the A and then by the time it gets to a series B or C we usually are just you know kind of on the sidelines cheering for the company but not actually writing new checks in the back you know a lot of the experience that you guys have been talking about has been fairly positive have you ever invested in someone and for TJ have you ever taken capital from someone where after the fact you realize oh crap like I don't actually want to work with this person and sort of how does the situation play out because you already have capital invested in them? Yeah he tried to send ours back about three times I think it was until we had to hire a lawyer and it got pretty nasty. No. I don't even think you would participate in any of our rounds after the first one. Well that was our old model. We are fortunate that the amount of capital we are putting into a company as a percentage of the entire fund is pretty small it means usually less than one person almost always less than one percent and so if things don't go well we can kind of part ways and be okay with it you know it's we're never going to you know sue or try to fight legal you know it's like you kind of you try to diligence a founder as best you can and you try to make sure that it is a match and you trust that they are going to do the right thing and if you find out that they didn't or that for some reason it's not working you know we will politely say hey you know we're happy to just forego our pro rata rights and we wish you best of luck to continue raising you know capital from other investors but clearly this relationship you know we're not being helpful to you or you're not you know receptive to that help and so for us you know it's absolutely and we have 250 investments there are certainly founders that we said wow that person didn't do what we thought they were going to do or didn't behave in the way that we hoped they would have behaved or there's been some signs that make us think that we probably shouldn't put more money in this business but you know again when you're only when you've only invested $500,000 or a million dollars it's a lot easier than if you are a later stage investor and you just wrote a 50 or a hundred million dollar check and then find out that. How about you? I have not I mean I think a lot of it is diligence in your investors and spending enough time with them and being super transparent about the business so luckily so far have not had any sort of bad relationships or things at one self but my breath is not the same as Kevin. I know we're out of time but it also helps when you have a company that many investors are trying to get into. I think you know when you have choice you can do that process. I think it becomes much more difficult when one you know one investor is willing to actually take a shot on you and you don't seem to be you know feeling a great vibe but it's like well I'm either going to have a business that's funded or not and those are the tough scenarios and you know if you can have choice among investors at each stage of your company I think your likelihood of success goes up dramatically because it gives you the opportunity to do some diligence or make an A versus B choice and not have to kind of you know you're getting married right? Like especially if it's a person that's going to be on your board for 10 years you know potentially like that is it's really hard to be in that position with someone that you don't necessarily get along with. It's also I think why not just choosing to do a deal because it's an uncapped note of the valuations meaningfully higher than the others becomes more and more important. I think if you work with these folks for hopefully a long time. Yeah do not try, this is always the investor to say this. Do not try to optimize for the deal terms or the valuation. If some relationship feels a lot better and they're offering you something a little bit less attractive monetarily but it's a person that's going to be able to help your business or that you think you can scale with like it's crazy to me when you find out and that's actually a big indicator like red flag for a founder. It's like you know you're the right person they've already told you you're the right person and because someone else that may not for whatever reason came in with over the top offer and they choose that if they even though saying that's probably not the right VC for me but the offer was so good and it's like that's when you say, you know, few like I'm glad we didn't end up getting married because your incentives may not have been aligned. Cool, thank you very much everybody. Appreciate it.