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About Kerry Rupp

Kerry Rupp is a General Partner at True Wealth Ventures, an early-stage venture capital fund investing in women-led businesses that improve human and/or environmental health. She is a board director for True Wealth Ventures’ portfolio companies Flourish, Partum Health, reHarvest Provisions, Rosy, and VidaFuel and a board observer for BrainCheck and Atlantic Sea Farms.

She has also taught as a nationally-certified instructor for the National Science Foundation’s Innovation Corps (I-Corps) program, helping university-based teams to commercialize their science and technology research. She is an active startup coach who is asked to judge at startup competitions nationwide and is a frequent speaker on entrepreneurship, innovation and early-stage investing. She has served as a mentor at Capital Factory, on the Advisory Panel of the Texas Health Catalyst program at Dell Medical School, on the Advisory Board at Jon Brumley Texas Venture Labs at UT Austin, and on the Founding Steering Committee for Beam, an organization focused on making Austin the best place to be a woman entrepreneur.

Kerry holds an MBA from Harvard Business School and a BA in Biology from Duke University. In addition to her startup ecosystem service, she is a past Board Chair for the Texas 4000 for Cancer, is a Member of the Austin Area Research Organization (AARO), and has been on the Host Committee for the Austin Community Foundation’s Women’s Fund Keyholder event for the last several years. She is an avid adventurer that has visited over 50 countries and all 50 US states.

For more details, see www.linkedin.com/in/kerryrupp or www.kerryrupp.com

Episode Highlights

How to identify the ideal startup for investment, considering factors beyond just financial metrics.
Why valuations have shifted since 2022 and how these changes impact fundraising for early-stage companies.
How to navigate crucial deal terms like liquidation preferences and participation to secure favorable investments.
Why seed-stage investing is unique and how to showcase your startup’s potential even with limited data.
How to transition successfully from Seed to Series A funding, understanding the key criteria investors seek.
Why impact investing is gaining traction and how to align your startup’s mission with financial success.
How to decode the complexities of healthcare reimbursement and secure funding in this sector.
How to build a strong foundation for your startup by assembling the right team and advisors.
Why women founders face unique challenges and how to overcome them in the fundraising process.
How to position your startup for future success by understanding emerging trends in impact investing and healthcare.

Links and resources

National Science Foundation’s I-Corps Program: A program helping researchers understand commercial potential through customer discovery and lean startup methods.
NVCA (National Venture Capital Association) Standard Documents: Standardized legal documents used in venture capital deals, ensuring consistency and fairness in agreements.
Angel Capital Association Convertible Note Standard: Convertible note documents standardizing early-stage fundraising for entrepreneurs and angel investors.
CrunchBase: A platform providing data on startups, including funding rounds and company profiles, essential for research.
PitchBook: A database offering financial information, including valuations and investment trends, for investors and entrepreneurs.
Y Combinator SAFE (Simple Agreement for Future Equity) Documents: Standardized, founder-friendly documents for raising early-stage capital without complex terms, widely used.

Interview Transcript

Shubha K. Chakravarthy: Hi Kerry, very happy to have you here today on Invisible Ink with us.

Kerry Rupp: Thanks for having me.

Shubha K. Chakravarthy: We have a lot of really exciting things to talk about but first I’d like to kick off with a little bit about you.

True Wealth Ventures Investment Thesis

Shubha K. Chakravarthy: You’ve been a GP at True Wealth Ventures for quite a while now. Can you talk a little bit about what your investment thesis is at True Wealth Ventures?

Kerry Rupp: TrueWealth Ventures is a venture capital fund. We invest at the early seed stage generally, specifically in women led companies that are improving either human health or environmental health.

And to clarify the way we define women led is at least one founder or C-level who’s in a full time day to day operating role is a woman. It can’t be an advisor or chief medical officer who’s also a practicing physician. It’s one of the people on the ground in an early stage company. It’s one of the three people kind of things.

When I mentioned the verticals in which we invest, we are actually an impact fund which I’m sure we’ll get into later in the conversation. We’re specifically looking at companies, not just in healthcare or in the environmental space but things that are actually showing improved outcomes.

We’re looking for that alignment both around the financial return as a venture capital fund but also the impact that it can have on outcomes from a thesis point of view. Thesis point of view, when we say early stage because we’re in Texas in the middle of the country.

Seed stage for us those rounds are like 1.5 million to 4.5 million in size and we’re writing checks of like 750 to a million. There are larger seed stage deals in the valley that just don’t look like the rest of the country and I would say we’re kind of like middle of the country type investors.

Shubha K. Chakravarthy: Makes sense. And thanks for walking us through that. Who’s the typical startup who fits your investment thesis? Like you did walk through the high level filters but can you give us some details?

Kerry Rupp: We have a broad range of who the actual person is. I think it’s a good question because as seed stage investors you’re mostly investing in the team. When you think about real estate and it’s all about location then maybe a bunch of other things. In early stage investing, it’s always a team and then a bunch of other things and the other things matter. But it’s like if the team isn’t right then the rest of it falls apart.

We have a really broad range of profiles like it can be a first time entrepreneur but it can also be multiple people on our team who had prior businesses. One who had two exits. We have PhDs in technical or science kind of areas. We have a broad range of personal backgrounds.

And for the company, it’s sort of less about whether it’s hardware, software or CPG and more about the impact the business can have in terms of health or environmental outcomes. The kind of clear things that I’m sure we’ll get into around, is it venture backable? is it big enough? is there a defensible value proposition and those kinds of things. The teams are usually 1-3 founders. The teams could be 3-10 people as they’re early.

Shubha K. Chakravarthy: You were very clear in terms of laying out what you mean by your investment thesis.You talked about full time and what it means to be women led. Is there any like gray area stuff which you wouldn’t consider a good fit within your investment thesis that might technically fall within that?

Kerry Rupp: Yeah and we do try to clarify this as well. Healthcare is a broad range of things and we will do some hardware, some software and some CPG. We don’t do things that are very heavily FDA regulated, i.e. it’s a brand new de novo kind of registration. Mostly because the time and the money that it takes to get there is just beyond sort of our scope.

We had a 20 million fund one, a 35 million fund two. We don’t have the funds to kind of navigate that kind of pathway. We also don’t frankly have the FDA experience for that kind of pathway. We’ll do things that are called 510k regulatory pathways. One more thing on the health side and this is just our fund specifically, right?

We’re talking about the anecdotes of my fund. We don’t do heavy clinical solutions that are sold into ICUs and ERs. Our background is some healthcare background and some chemical engineering and all these different kinds of things. We are not experts around sort of how things get sold or used in clinical settings that are severely or intensely clinical.

Then similarly on the environment side we don’t do things that are heavily industrial. If it’s like chemical plants or huge big wind turbines, things that are sold to utilities or governments or municipalities. Because they’re these utility scale, industrial kinds of solutions are just outside of our area of expertise. We may get to this but as an investor, most of us don’t want to just write the check. We want to actually think that we can be helpful in terms of navigating strategic questions or making introductions or helping you find customers. We would be completely useless in those areas. So, our money is less smart to speak in those areas.

Deal Terms and Valuations

Shubha K. Chakravarthy: I know we have a ton of really interesting topics to get into. Let’s just start off with kind of the standard deal terms and changes since 2022. A lot changed in the second half of 2022. Not sure it’s even coming back close to what it was.

Just at a high level, how have these changes impacted valuations for early stage and especially Seed and Series A? If you can talk about sort of how investors are adjusting their expectations and what that means for founders who are looking to raise. That’d be awesome.

Kerry Rupp: I think one of the key things to talk about first is just to remember that valuation is not the only deal term in a deal. It’s the most obvious one that people sort of see and it feels like it’s the price that impacts everything. For a long time, maybe it was the only thing you cared about. Because we had an era where at Seed and Series A, all the terms were generally pretty vanilla. They were pretty entrepreneur friendly, meaning they weren’t that onerous and a little weighted more towards the entrepreneur than they were to the investor.

Although not maybe back to the Facebook era where founders were getting these 10 times the number of shares with founder shares that had super voting shares. There was a swing of the pendulum that way. Terms were sort of generally standard and the NVCA which is the industry organization has standard terms that most people are using. You don’t care as much about them because they aren’t affecting you.

I would say with this shift in the economy, things that have gone on. Not only have valuations, especially at the later stages dropped but also some of the terms have actually gotten swung back if you think of it as a pendulum to being more investor friendly. That includes and maybe we’ll get into some of this stuff in more detail about liquidation preferences or other kinds of terms that you have to also trade off because the economics change depending on the type of exit that’s going to happen.

To really understand them you probably have to do what’s called a pro forma cap table and some modeling around different scenarios and what might happen in the case of a 20 million dollar exit versus a billion dollar exit. Those are different scenarios and different investors who come in at different stages are going to have different repercussions depending on that.

I would say generally the data will show you if you go to CrunchBase or PitchBook or anybody that the valuations have come way down. If you look across time, it’s probably more normalized.You can call the years preceding 2022 or whatever the timeline was an aberration and things got super high. If you look across time, maybe they’re normal valuations now. That’s hard to see when you’re in the midst of the high stuff and now it feels really low.

I think that’s what they generally say. I would say that generally Seed stage and Series A are less impacted and the major impact is later stage. The data companies are better at providing this context than I do. I follow the trends but not like all the data and they know all the data. I would say what we’re seeing is companies who are fundraising and haven’t yet completely reconciled or accepted that those valuations are coming down.

Sometimes we see companies that are just holding on to raising at the valuation and they’re still fundraising but they’re not finding investors at that valuation. Maybe they’ll find investors when things come down. I would say where I’m seeing some of those terms come in that are more investor friendly and maybe a little onerous to the investors tends to be companies that are raising a series A or series B who didn’t perform on target as they expected.

Some of that could have just been the vagaries of startup life. You thought one thing was going to happen and another thing happened. Other things were literally direct impacts of the economy but if companies didn’t hit their milestones then they needed to raise and for a while investors weren’t writing as many checks because they were kind of waiting out what was happening with the economy and were helping their companies that were really struggling.They’re waiting for these companies to raise.

And by the time they finally find some investors who might write a check, they don’t have a lot of leverage yet. Because they don’t have a lot of cash in the bank, they haven’t hit their metrics. There are more onerous terms. So there’s sort of a joke going around but it’s probably true that flat is the new up. Getting a flat round meaning that your valuation at the next round is the same or it’s an extension of the prior round or your SAFE note valuation is the same as the last safe is better than a down round.

The down rounds often come pretty harsh so you don’t just get your valuation shut down. You also get all these other terms like maybe pay to play and look more at liquidation preferences and other kinds of onerous terms. I covered a lot of different things there. I’ll pause and let talk about anything you want to dig in on.

Shubha K. Chakravarthy: Yeah, I do. I love how you emphasize is very well taken that founders tend to over focus on valuation. It’s like they want to make sure they get the highest valuation.

You talked about some of the other terms. Can you talk a little bit about liquidation preferences, participation, information rights and all of that good stuff.

What key trends are you seeing emerge outside of that valuation big bucket in terms of more common deal terms or even changes in how those have been crafted into some of the funding deals that you’ve seen. What are the new provisions and new structures? What are you seeing?

Kerry Rupp: I would say at Seed, most stuff is still pretty vanilla. I’ll tell you most investors are kind of inclined to keep it that way because if you start adding unique things like a different participation or liquidation preference and define those later if you want to.

If you add them at seed then the next investor that comes along, it’s like, Okay, I see you did that specific term. It’s like poker, like I’m gonna see that and raise you. They’ll ask for their own version of that on top. Usually they ask for it to be senior. So it means that you wanted one X or two X of your return back before the other investors got money. Great. I want two X of my return before you get any money. That’s before any of the common stock gets any money.

All of a sudden you started having these layers and not only does it take more and more away potentially from the common stock which is the founders and the early employees and advisors. Potentially they need a much higher threshold for an exit to ever see a return. So even if your own quote unquotes 50 percent of the company, that doesn’t mean if you sell the company you get 50 percent of the cash. All of these terms add to who gets to take theirs out first.

But also when you have these multiple tiers that have different rules, they actually create these weird areas where at certain valuation thresholds, people have really different motivations. A founder may want to sell at 20 million, Series A investor may want to wait till 100 million to sell but maybe the investor who came in latest the series B investor actually gets two times their money back at 75 million. Everyone’s got these. You’ve got to get X number of votes and people have different voting power.

Now everyone’s got different incentives and sometimes it just leads to perverse incentives where actually you want to sell for less which usually doesn’t make sense. Some people on the cap table do and so then you’ve got people fighting. I mentioned all that to say at Seed, a lot of times things are still pretty vanilla because you add complexity then you just make up for something really complicated. And what will probably happen is later on a Series B investor will come and be like, “Look, I’ll invest but I’m cleaning up all that mess on the cap table. And you don’t get all those extra rights that you asked for etc. You don’t want the company to stay afloat and get this funding round. Well, guess what? We’ve got more power than you now because we’re holding the next check. So we’re going to get rid of all those things.”

And so I would say at Seed, mostly they’re still pretty standard terms. For a company that’s doing well and kind of going up into the right, they’re meeting their milestones and they’re raising their Series A and their Series A probably looks pretty clean too. It’s when companies hit hurdles, don’t meet milestones, need to raise, don’t have the leverage to wait and find an investor who isn’t going to kind of negotiate against them. That’s when you see some of these other terms arise.

Shubha K. Chakravarthy: It sounds to me like the moral of the story for at least the early stage founder who’s looking to raise her first outside round. You’re better off sticking to the middle in terms of valuation because you don’t risk a down round later, especially if things go south like we’ve seen. Also keep it as clean and plain vanilla as you can.

Kerry Rupp: I’ve been sort of talking mostly about price equity rounds. When I say that, what I’ve been saying is that we’re talking about a price round with the standard deal terms similarly with SAFEs and convertible notes. A lot of times those are used at Seed and then they convert into maybe a Seed Two or a Series A. Those tend to be pretty standard too.

So almost everyone I know uses a SAFE, either uses the Y Combinator, pre or post money SAFE model. It’s pretty standard. Sometimes there’s a discount. Sometimes there’s not convertible notes or some variation but they’re pretty standard. I would say it is much easier at seed to just go with either the standard NVCA docs.

I haven’t looked at it yet but actually the Angel Capital Association apparently just came out with convertible notes, a standard that is meant to be industry standard. There isn’t a lot of incentive for either side right now to mess with that at the early stage.

Liquidation Preferences and Participation

Shubha K. Chakravarthy: Do you want to give a very quick primer for those of us who don’t know what liquidation preferences and participation refer to?

Kerry Rupp: One of the necessary evils of taking external money from investors is that those investors get to invest in a series of a kind of stock called preferred stock. That has more rights and preferences and benefits than common stock which is what the founders and stock options and those kinds of things are.

Some examples of those things are usually that the investors have the right at the time of an exit to either choose to get their money back or have their preferred shares converted into common and their percentage ownership of the company. They get their percentage ownership times the exit price.

If I just take an example, I hope I do a simple one here. If I own 25 percent of the company and the company is selling for 10 million. I put in a million to get there. If it’s a $10 million exit, I own 25%. If I convert my stock to common, I get 2.5 million. I only put in a million. I’m getting a 2.5 x return. I’ll take that.

But let’s say it cost me 5 million to buy my shares and now I own that same 25%. It was sold at a different valuation at the time. They’re selling for 10 million. So if I only get my 25 percent of 10 million, I’m only getting 2.5 million.

But if I take my liquidation preference, I get my money back. I get 5 million back before anyone else gets what they are going to get out of it. What happens in that scenario is there is less left to distribute among the common but the investor who put their money in has the right to get their money back first.

Now obviously if it was a 2 million exit, there’s not even enough to pay the investor their home money back. But they get the first right of that. They get the full 2 million back and there’s nothing left for the common at all.

Even though the common owned 75 percent of the company in that last scenario where there’s only 2 million, the investors got 2 million back. The common got zero. That’s liquidation and usually it’s one X in a seed stage company.

That means the investor gets one time their money back. Now there’s some complexity. When you buy a convertible note, you’re buying it at a discount. You actually don’t get the value of the stock. You actually get the money you put in. If you put in a million but you got an 80% or 20 % discount, you don’t get the full amount. You get like the actual cash you put in.

With liquidation preference, sometimes someone could say, “Hey, I want a 2x liquidation. And that means I get two times my money back if there’s an exit.” And a lot of convertible notes will have that. It’s short term money. If there’s an exit before you raise the next round, I get 2x my money back before you start distributing the rest of the proceeds.

And then participation, we won’t go into all the nuances of it but essentially it allows you to have your cake and eat it too. You actually both get your money out the first time through and then get your percentage share.

In one of those examples where I had 25 percent of common stock diluted and I put in 2 million at a 10 million exit, I’d get my 2 million and then I’d also get 25 percent of whatever was left after you take the 2 million out. It’s double dipping.

It is not common to see in a good environment. It’s one of those things that investors can start adding when times are tough and they’re like, “Sorry, you want the money. I get to have these extra benefits.”

Shubha K. Chakravarthy: And from a founder’s perspective, right? I know that founders have a tendency to focus too much on the valuation and not as much on liquidation preferences and participation.

Do you have any heuristics or rough rules of thumb in terms of how they should be thinking about these? Is it as simple as not changing the standard or is there something else?

Kerry Rupp: You’re not always going to be in the position to control that. Certainly in most cases when the company’s fundraising, they let the investor propose the terms that you know to them. If they’re having a healthy conversation when their company is doing well.

It’s an early stage company, a VC fund that’s trying to actually support the growth of the company and they want to be aligned. They’re going to propose terms that are standard. If you get terms that are non standard like there is a 2x liquidation or there’s participating preferred. You want to ask why that is and understand what is most important to the investor.

At that point, you really need to either leverage your lawyer and your legal team to create a cap table to look at these scenarios or get good at really understanding what these terms mean.

There’s a great book, called Venture Deals that goes into each of these terms in detail. I think that there’s even an online class you can take to get into this and there are models online that you can research.

It may not be your favorite thing to do as a founder depending on whether you’re a spreadsheet driven person but you really need to understand the implications of these terms and decide what the trade offs are.

I would say at Seed, hopefully you aren’t having to fight these battles or you want to just understand which of the terms are most important to the organization in any negotiation. Understand which of the terms are most important to other players, what’s the internal motivation and how you might come to terms that are commonly beneficial and you can give up on one thing in order to get another thing.

Shubha K. Chakravarthy: You talked a lot about generically speaking or overall like what these terms are and what the changes are. Do you have any comments in terms of specific nuances first for the health care sector?

Kerry Rupp: I don’t think there’s actually, at least not in my experience over the last couple of years, terms being different at the sector. I think maybe the threshold for what makes a company look fundable. When investors are interested depending on the stage at which they play, that may have changed. I think both generally and in healthcare but I don’t see terms being different.

Shubha K. Chakravarthy: Likewise for impact, at least a part of the impact sector that you’re involved in? Would you say the same?

Kerry Rupp: Yes correct. I don’t see different terms. I see different terms for companies who haven’t hit the thresholds that they meant to hit. That’s usually what I said in subsequent rounds.

Shubha K. Chakravarthy: That was a pretty comprehensive overview of deal terms. That was interesting. So thank you.

Financial Underpinnings of Fundable Startups

Shubha K. Chakravarthy: I want to now move on to kind of what the financial underpinnings are of a startup that wants to get funded particularly at Series Seed. Then maybe some commentary in terms of as they move from Seed into Series A, what changes and what founders should be watching out for? So first is a high level.

Can you talk about the differences between what makes a startup fundable at Series Seed versus what investors might look for in Series A?

Kerry Rupp: And again as always, every fund brings a different point of view to this. So I don’t want to say that I’m speaking empirically for every seed stage fund and every series A fund because they’re going to be nuances and differences.

For example, as an impact fund one of our criteria for seed is you actually have proof of some sort of the efficacy of the outcomes of your solution. A lot of times at Seed, you need money to go run the trials to have proof. For reasons we could talk about sort of a separate time.

We feel like at the time we’re going to write a Seed check, we need to know the thing actually has impact because we don’t want things in our portfolio that don’t have impact. We’re hoping that you can go find grant funding or pre seed funding et cetera to get enough outcome metric that’s specific to our fund. It may not even be specific to other impact funds in the sectors that we’re in. I’d like to set that aside but it’s an example of every firm kind of having their nuance.

Generally, the Seed stage is about having some element of product market fit. Maybe you don’t have it all worked out but pre-seed is, I’m going to go test some things.

Seed is okay, I’ve got a real problem here. The market is big and it’s venture backable. We’re talking about things where the market could be big and I have a solution that meets those companies needs and I’m learning how to go to market. How to make that replicable, how to scale it.

I’ll use an example of a company that’s geographic based. I’m in one market. I’ve proven out some things in one market. I want to now take it and actually go to the next two markets and see which of my playbooks is replicable, which of the actual fixed assets that I created that I can actually carry with me and which new things I have to build marginally for each new market.

But I probably don’t have a perfect CAC to LTV ratio yet. I’m testing out different go to market models and different blended CACs in different environments. I’m figuring out my margin and how to get my COGS down. Some of that may come with scale and some of that actually may come with changing the dynamics of my business. But there’s a likely pathway to an opportunity where this all makes sense.

Whereas I feel like at Series A and you’ve usually got some. So you’ve got a product in the market. You’ve got some revenue. I sort of joke in our fund. We’ll take tens of dollars of revenue, not tens of millions of dollars of revenue. It’s like every firm is going to have a different threshold for what’s enough revenue. Some of them will literally explicitly say, “I invest once you have X in ARR or you have X earned to date and others.”

It’s a little bit more like what the trends look like or Is there a growth trend in users? Is there a growth trend in engagement? Is there a growth trend in revenue dollars? When you get to series A, they’re looking for more of a repeatable model. It’s much more about like, imagine like a little widget machine where if I like. I know that if I put in more coins, I’m going to spit out more widgets and like a replicable kind of model.

I have a sense of how I go to market. I have a sense of what I have to spend to get more customers. I have a sense of what that sales cycle would be like, what the COGS will be like, what the margin will be like and I just know I could grow if I just had money to throw into the little machine as the coin. I’m probably not profitable yet but I can see a path to profitability in this environment.

Now I’ve got this thing. I just need money to put in and keep working the machine and grow. It’s a lot more about a working model. I would say in that case, they want much more. More examples of customers and revenue, right? They’re looking used to be, let’s say a million in ARR. If you were a B2B SaaS company. I’d say now it’s more like two or three to be series A fundable. Some of those are again going to vary by industry.

They’re going to be very by the firm but they’re looking for much more. I’ve got proof that something’s working. Now I want to grow it. Whereas seed is kind of like figuring out all the mechanics of you see the opportunity but it’s still got a lot to figure out.

Role of Market Sizing and Financial Projections

Shubha K. Chakravarthy: That brings up a very interesting question, at least in my mind. VCs are famous for being pattern recognizers and knowing which ones in theory are going to get big and which one in theory is the weed and not the acorn that’s going to grow into an oak tree.

Given that you don’t have specific metrics for CAC, LTV, I understand, but there needs to be certain markers that tell you that this could become something big. Without disclosing identities, can you maybe give a couple of real life examples where two startups look alike on the surface and they both have fuzzy CACs and LTVs but you know that one is potentially going to become an oak tree and the other one’s going to become just like a plant?

Kerry Rupp: I think at the Seed stage a lot of those things are maybe financial underpinnings but they’re qualitative in terms of how they’re assessed. There are things like the drive, passion, zeal and persistence of the entrepreneur to go deliver on the huge freaking thing. Not Hey, this is cool, I might build it, et cetera.

It’s like they see not a little opportunity but a huge big thing. It’s like they can’t stop until they create that thing. So that’s one, I think. A real clear pain where it’s not nice to have but something is really broken in the way things are done today. People are having to do manual workout rounds or things are super expensive or take too long.

Where there’s like a real opportunity to use the word exponential and maybe that’s like too extreme. But like for really dramatic improvements, that have value to the customer whether it’s a B2B customer. It’s like actually delivering a financial ROI. In consumer, sometimes that’s financial or sometimes it’s an enhanced experience et cetera.

There’s like a broader range of things but it can’t be cool or that’s nice. It’s gotta be like, wow it’s killing my day right now and I’m going to get 20 percent back of my day by getting this solution. There’s enough of those people. It’s a big enough market that you could deliver that all those times over, is venture scalable and can be really big.

Those are the kinds of things I think we’re assessing at Seed versus a spreadsheet. We want to see the spreadsheet because we want to see the thought process of the entrepreneur around how big it could be, how much it’s going to cost to get each customer and how we can get there. But I think the way we assess it is also that these boxes are being checked as opposed to this spreadsheet, right?

Shubha K. Chakravarthy: You know the market to a certain extent within your own thesis but to what extent are you relying on the entrepreneur’s characterization and sizing of a market opportunity?

Sounds like a lot of it is around the market opportunity and how much headroom there is for something new to come in and dramatically make a difference to the customers like you just talked about.

Can you just talk a little bit about how much of that are you relying on yourself and your domain expertise versus how much the entrepreneur is able to paint that picture and really convince you?

Kerry Rupp: I’ll add in a third element here because I think it’s going to be external like experts in space too. I would say in the early conversations, depending on if it’s a space that we know well. Usually we know the broad space well but then they’re doing something very specific.

You may know there’s a behavioral health problem in the world right now, especially in the US but if this person is handling specifically pediatric care and it’s ADHD and anxiety and depression versus autism, etc. I’m not an expert when we get down to that level. I may have a sense of the big market and then realize that the entrepreneur has a better sense.

For the first couple of meetings, you are relying on them having done a good job of explaining not only the TAM and the SAM and that kind of stuff but actually literally doing storytelling to help you feel the pain of how bad it is playing out today and how you know the relief of the solution that they’re bringing to market.

That gets you to the point of interest and like engagement but when you go do due diligence to decide if you’re really going to write the check, you’re usually then vetting that by going out to look at the competitors. You look at their chart and you go look and see what you can find. And did they do a good job of explaining how they differentiate, are there other things that you think are drivers, what are the drivers of success in those sectors, are they putting the competitive landscape on the right matrix, are these the right axes to actually compare us?

It’s like, what does the customer care about? And not Oh, my feature has blue light and your feature has red light. What’s actually the thing that delivers value to the customer and how do they buy and et cetera.

But then we also will often go talk to industry experts. If it was a pediatric mental health company, we’d literally be calling up pediatricians and asking them what happens in your practice? We might be talking about therapists in that sector. We might be talking to payers and providers about how they think about that sector, what success looks like for them in terms of both financial metrics and outcomes et cetera. It is often third parties come into the mix too.

Shubha K. Chakravarthy: That’s very helpful. You mentioned briefly that you do care about the financial modeling, not so much for the values that it produces, i.e. the outputs but really to understand the thought process of the founder.

Can you expand a little bit? Like, what are you looking for? What’s an appropriate level?

Kerry Rupp: If we have a good first call with the company, it’s almost inevitable that the follow up for the second call is, “Hey, can you send us the financial model because we want to take the narrative that happened in the first pitch which was a storytelling kind of experience and then see that narrative played out actually in Excel.”

We want to see both the financial forecast and the cost expenditures over time and what the levers are. It’s not like okay, 5 million in revenue in year one, seven in year two and 10 in year three or whatever.

It’s the assumptions. These are the lines where they realize, if this is true then this will happen kind of thinking in the model. What are the major factors? Is it how much marketing spend they have, is it the product mix, is it distribution channels, what are the things that kind of make or break success for the company and where can more resources be applied or fewer.

You need to have seen that those things are actually the right kinds of assumptions. The right levers of these are the factors that impact the viability of the business. There are lots of things you could put in as assumptions but they’re not major drivers. It sort of helps you see what the major factors are.

And also, do they know how to look at different scenarios? One of the things we question when a company comes to us to say they’re raising two million. The one of the questions we get serious about the company is two million the right number.

Should they raise one and a half or should they raise three? It’s not just what is the cool number to raise for Seed right now but like literally both what gets you to the next market milestones, what gets you long enough in time and what buffer do you have.

The way you know what that is you start playing with. If they had more marketing money to play with, how much would that change, the output and the length of where they get. And how many more customers would they get or if we couldn’t afford to do all the product changes that they want to do in V1 and we just did this one, how would that change sales and uptake of that and where would that get them?

So you need a model that’s actually live where changing marketing spend actually changes is like row as or which is returned on advertising spend or it’s changes CAC or whatever. That changes the number of products sold. That then therefore changes the COGS and that flows out to cash flow and revenue levels.

You can get a sense of not being able to order that much inventory that our minimum order quantity for a physical product is X. If they don’t have that much money, they can’t order any at all. It’s very binary. They’ve got to have that much more.

But if they spend that much, what happens to the rest of the cash flow? They run out of money this much faster or they can last this much longer. We’re looking for a model that replicates the narrative story in the spreadsheet and that they know what the major levers are to show success of their business and gives them the right things to test against.

If they’re a Seed stage company, they’re gonna go test a bunch of these things. They know which things are tested because they want to fill in the right number in those assumptions of the first one. It’s a bright yellow cell. It’s a guess.

Over time with testing it may become a light yellow cell and it’s more like this is where we are today but we think we can improve upon it.

Thirdly, try to understand what’s the right amount, where should they spend the money and that’s why it needs to be kind of a live model that they can then take with them.

It’s a tool. It’s not just like an annoying ask from an investor. It should be a tool that’s actually like driving actually what you do to test and like driving your business.

Shubha K. Chakravarthy: And I love how you laid it out. You don’t care as much that the CAC is 24.67 dollars but rather you want to understand that the founder gets the fact that the funnel looks like this and the yield at every level of the funnel is XYZ or whatnot. Is that a fair characterization?

Kerry Rupp: And again, this that’s where I want to clarify that’s what True Wealth Ventures is doing when we’re doing it. My take is at Seed. I mean at Series A. They do actually.

They’re a lot more concerned about what is CAC 24 or is it 12, is the lifetime value 7 or is it 14, what is that ratio there for, what’s the churn rate? I want all those metrics in seed but I want to see that they’re trending in the right direction.

The entrepreneur knows which tests to go run to get them better. But I think, to my point about the little machine where you can put the money in and it spits out things by the time you get to series A. You want to have a lot more of that actually at a certain kind of ratio et cetera. So that when you put more money in, you’re spitting out growth in a viable way with a good margin that makes sense and gets you a pathway towards, “Hey, this is long term viable, not just interesting right now as an experiment.”

Shubha K. Chakravarthy: So, how long do you typically spend on these models? You’ve had the first meeting. You ask them to send in the model, they send in the model. Is it like a week? Are they sitting side by side with you?

Kerry Rupp: Depends on how well the model is designed. Sometimes we open it up and we’re like, “Oh yeah, okay. So they’re not ready yet.” Not to throw a company under the bus but once we had the timeline down the side instead of across.

And if you’ve been in any sort of financial context for whatever reason, historically dates go across and then the different categories of expenses go down. This one slipped and I thought that his company’s really early. We got to like do some basic financial education, right?

Sometimes we get just a static like there is in Excel but it’s just hard coded content and it’s not a working model. It’s usually premature like the company. It’s not just that the model wasn’t good. It’s like the company isn’t at a level of sophistication yet that they’re really Seed fundable. We’ll usually give feedback and be like, hey, come back to us when and then if the model is well designed and self explanatory.

A lot of times we can go in there and play with it and do things like double expectations or shrink sales in half or do whatever and just get a sense of the risk, the sensitivity analysis and the risk profile and all of that. Then come back to them with questions like, why is the CEO salary 200,000 or, why did you make this assumption that sales growth goes from 5 percent a month this year to 20 percent next year?

It helps us understand what you are thinking.Why does this change at this point? All three of us usually take a different approach. We dig into the model. We come up with a bunch of questions. We send those to the entrepreneur. We have a conversation.

I will say sometimes a model just needs someone to actually walk us through it. We spend a half hour on the call where they say this tab shows me inventory. This tab shows me X. This tab shows me Y. Then we go back and look at it for rationality. Usually if it’s that sophisticated of a model, we’re already at a better place where they’ve been actually thinking about this as a tool to describe their business that actually gives them feedback and information on the strategies that they’re planning to implement. It depends.

The other factor is that when we talk to a company that isn’t the only thing we’re doing for the next week or two, right? We’re also supporting our existing portfolio companies. Sometimes the venture fund is also fundraising and for themselves at the same time. So if you were just doing that one company, maybe you could get there. A lot of times it’s just the back and forth takes long because we’re juggling multiple hats that we’re wearing.

Shubha K. Chakravarthy: You talked about a couple of the red flags that would immediately signal to you that the timing isn’t right. So once you’ve started digging into it, are there other red flags that from a financial robustness or projection detail that would tell you to wait a second?

Kerry Rupp: When a company only has like one customer or a couple customers so it’s more anecdotal than like a trend. It is probably frustrating to say, “You know what when you see it”. But you’re looking for a growth trajectory and a sort of a repeating process. When you’re looking at whether it’s engagement users, revenue, et cetera, you know you want to see this trend changing over.

Sometimes companies hit blips and it’s totally okay if you can say here’s the thing that happened and here’s what I learned from it. I can give an example from one of our companies, who was acquiring customers on Facebook or meta and they had a certain cost across the customer acquisition. They knew how many customers that delivered etc.

Then, Meta decided their ads were inappropriate because it was a women’s health company and they’re talking about women’s sexual health. All of a sudden they’re like, “Oh, we can’t talk about that topic at all of a sudden the entire flow of customers into the company.” Goes to nothing right? So all of a sudden you’re like revenue-strapped. You have to both figure out if you can solve that problem or can you find another pathway or whatever.

But in the early stages of a company, that may be explainable if they’re like this is what we learned. Now we’re on Tik Tok and it’s delivering it at 2x the rate. Your charts don’t have to be perfect but your lessons learned need to be.

If it’s a B2B like healthcare company and they are going to be doing these long sales cycles with payers and providers and they’re going to have pilots and they’re going to convert, et cetera. We’ll ask for a pipeline and sometimes we’ll get a list of companies like Advocate Aurora or Mayo Clinic. These huge big entities on a list and maybe the list will say 4 million potential.

That is not detailed enough to really understand. You’re going to start at a particular location. You’re going to have a pilot and it’s maybe going to be 50k or 100k. How long is that going to take, how long is that going to go, what do you really need to do before you even get to the point where you start earning any of that revenue.

When might you get to the next, how might it grow over time, etc. So putting that together, the pipeline, both awaited likelihood and like breaking it down to the level of each kind of engagement and seeing how that’s going to roll out over time is way more impactful than just a list of big companies and might talking to them.

We get that more often than you might think which is why I’m not trying to be flippant. It’s often we get a pipeline and it’s like just a list of like 15 hospital systems. That’s not what we’re looking for.

Shubha K. Chakravarthy: If I had to kind of distill what I heard and this is a really good set of guidelines I’m hearing, make sure that it’s a driver level. So bottom up to what drives drivers to outcomes, number one.

I heard number two, explainability. Even if the numbers aren’t right, you’re able to articulate a lesson that has actionable implications for what you’re going to do next so that you’re not throwing money down the drain.

Number three I heard is around granularity, right? It’s like specifically which human being are you going to talk to in which location and for what kinds of dollars in the next three to six months or whatever might be. Is that fair?

Kerry Rupp: Literally need tiers of that, right?

Like that level of detail for meeting one’s way too much which is why you have a slide of like revenue projections, year total revenue, right? And COGS or something like that there.

But when someone wants to get into it, they want to know that how behind that. You touched on something. That’s one of my pet peeves, which is “Hey, if we get 1 percent of the market and the market’s a billion, we’ll have a hundred million or whatever.”

That is a frame of reference that is helpful but I want to know, “hey, I’ve got to go from the bottom. If I were to acquire a doctor and the doctor were to get 10 percent of his patients to use this. And for each patient, I was able to get 1,200 lifetime value. I could afford to spend X on marketing to get the doctor who could get the patient who could get the dollars. Then I could get a market of X. Then I can sort of build up.”

Instead of If you went to the next doctor’s office and you had more money to do that. Maybe you’re scaling marketing now. Now you can be this size of a company but just top down. I could be a billion dollar company. I could be a hundred million. It just doesn’t mean anything because it doesn’t tell you how you get there. So the bottom up thing is pretty important.

Criteria for a Strong Series A Candidate

Shubha K. Chakravarthy: I know that you focus on seed but then you have companies that are graduating onto Series A and beyond hopefully. What are your thoughts on what the criteria would be to make a startup a strong Series A candidate?

Kerry Rupp: As noted previously, they need to have sort of much more replicable kind of processes at least at this stage. Multiple customers, a known go to market process and you sort of both marketing and sales like strategies and tactics like to go execute on them.

They know how to deliver on the product side. They’ve got an operating approach whether the product is software or medical device or whatever it is. It is sort of repeatable in that point of view.

First of all it’s like, it’s working and is what I’m trying to get at first but then also that it can get big and that there is scale involved, right? So it’s not just. Every dollar I can put in, I get another dollar out.

As I put more in, I actually can produce more with less cost, right? And it’s either by being large. I’m negotiating better discounts on my supply or there are network effects.

And so for every new customer I get, they bring in 10 or whatever those sort of factors are that show it’s going to get big. Because one of the key things to remember is that we’re talking on this call specifically about venture backable businesses and that’s just different.

They need to see the capacity for it to get big and scale. And frankly also to eventually be of interest to a potential acquirer or have the capacity to be compelling enough to IPO.

So that doesn’t mean there’s something wrong with the business that is a services business and every time I get a project I hire more consultants. I make X percent margin and then I do it again and I do it again.

That just doesn’t usually have the scale that makes it fundable where it’s going to have explosive growth and have an exponential level of growth acquisition value at the end. It’s a nice predictable business that might shoot off a lot of money to the founder and to the consultants. Maybe at the end of the day you could sell the consulting practice to another person who wants to kind of take it on for their career path. It’s just a different business model.

And so this is all about sort of that leverage of, “hey, this can hockey stick. And also ultimately it can really have a great exit potential at the end.” So you’re also starting to tell more of the story of who might want to buy me, why might they want to buy me, what might they value, and how is that compelling.

It’s still a ways off for you to get there but you’re starting to not just say, “Hey, I’ve got something interesting that people like, it’s working. It’s okay. And this is why it’s going to create big value over time and have an exit.”

Importance of Exit Strategy for Founders

Shubha K. Chakravarthy: I love that point you talked about how exit is so important. I think this is one thing that founders, especially early on, might struggle with before they’re raising their first Seed. How much should I be thinking about exit at Seed? What is going to serve me well as a founder? And then how do I cultivate and improve on that portfolio of options?

Kerry Rupp: Well, it’s funny because I think you’ll get this is one of those polarizing kinds of questions. And I think, for some investors, they’re like, don’t come out at all, try to be huge and build great value and build this big enterprise for the future. And there are some kinds of companies for whom that’s appropriate but it’s not the norm.

Mostly for better or for worse if you are building a company. You’re going to ask venture funds to come in, especially traditional venture funds. They have a timeline. A traditional seed fund, for example, has a 10 to 12 year fund life meaning I need to get all that money back to my investors within that time.

And by the way if I invested in your company in year five. Like let’s say I have a five year investment period. So the last investment I made out of my fund, I have a much shorter window. I actually need you to invest to turn around faster because I don’t have another 10 to 12 years from that date.

I have 10 to 12 years total from the time my fund started. So even angel investors, they might have a longer timeline in some cases depending on how old they are when they invest or whether the money is going back to them for their retirement or if it’s going to their grandkids. But usually the whole idea here is I’m going to need my money back.

I may love what you’re doing but like the point is it’s a return on investment. And so the premise of an exit is important for most investors and the timeline that they are going to care about depends. Family office might be investing for their family’s wealth for their grandchildren, et cetera.

Sometimes they can take a lot longer profile. They can invest in things that are much longer to get to exit. All that to say, you first want to make sure that your exit, the plan you plan to have an exit is aligned with bringing in investors. Because if someone’s like, Oh, I want to run this for the kids.

Do it. Maybe your friends and family will invest because they want to support your family. But that isn’t going to work for an outside investor who wants to return, right?

So that seems basic but you really need to make sure you’re aligned. Some investors are going to be really psyched if in the first call, you’re like, and here’s how it exits. And here’s why these people are going to value it a lot. And here’s what multiple logs say and here’s some great examples and professional investors. Probably are more inclined to like that because they can see that this person is thinking about creating value and what these parties who are buying might value if it’s not an IPO.

And that could be really compelling to them. Or some of the moonshot, big Silicon Valley firms who would change the world, be the next Google or Apple. They might find it short sighted if you’re talking about all that detail at the beginning. So I’m going to err on the side that most professional investors are and most companies. By the way, most companies exit after a Seed or Series A. Most of the time that’s not what happens there.

Obviously, if you think you’re going to be one of those exceptions, put yourself in a different category. But otherwise it helps you understand what stuff to build that’s valuable. If you’re a med device and really the point is to do enough clinical trials to show that it’s viable and then you want striker or one of the other med device companies to buy you.

Well, we don’t build out a huge big HR department with all kinds of activities and things to support a company for the next 20 years. If what you’re doing is just getting it to the point where you’ve got a lab, you’ve got some clinicals, you’ve got enough investors, you’ve proven the science and you’re selling it, right?

And so really think about what will the acquirers value and how do I build it there? So I think it depends a little bit on the pathway, how long it’s going to take, how much funding it’s going to take.

But you do want to keep an eye towards it because at some point in your company’s evolution. Then you start needing to have the conversations with the acquirers so that you’re not just, on day zero or day hundred, like oh okay, I want to sell now.

Who do I talk to? You want to be knowing the acquirers, knowing what they care about, having a bit of a relationship, being able to play them off one another. You never want to consider one incoming potential acquirer. You want to actually have a sort of gamified process where you’re playing people against each other.

And so that will require you at some point in your company’s evolution to start knowing the potential players and actually understanding what they want. That’s for sure not in the early stage that we’re talking about with seed stage founders. But if you don’t even know who might find you interesting, you won’t know how to start having those conversations and how to relate to industry players when you’re out in the field.

Shubha K. Chakravarthy: It sounds like it never hurts as a founder to think about where value is because what it boils down to is building enterprise value, right? Who could value this and for what reason and then you’re able to allocate whatever resources you have towards building that option value where it might pay off the best for you.

Kerry Rupp: I would think you want those answers. You want a slide that addresses them, whether they’re in your presentation or whether it’s something you pull up when you get asked the question, is a little bit of a style thing for you, who you’re talking to, what you think drivers are and that kind of thing.

Shubha K. Chakravarthy: One last question on this Seed versus Series A. Are there things that you’ve seen companies do really well at the seed stage but somehow they were blindsided at the Series A stage? In other words, unexpected failures of successes at seed.

Kerry Rupp: Do you mean in the fundraising process or in the company’s sort of development?

Shubha K. Chakravarthy: It could be both.

Kerry Rupp: Because certainly in the company’s development, there’s just so many things that unfortunately seed stage companies are just super high risk. All kinds of things can happen. I would say I’ve taught for five years for the National Science Foundation’s I Corps program.

And so they had some good data around why startups fail. And in their research, the number one reason above all else is that the customers didn’t want the product.

And to some extent that is a little bit of the nature of the companies coming out of the National Science Foundation program. They’re scientific or technical discoveries in universities that are then looking for a market as opposed to, oh, I’ve got a market pain, let me go build something.

There are discoveries that happen in their life who might want this. And so when you do that cart before the horse approaches, you might be less likely to have a customer who has a big pain.

But honestly there’s just so often even with traditional startups. People think that they understand what the customer wants or they come up with an idea of like, Oh, wouldn’t this be cool.

But it isn’t enough of what I mentioned earlier. This must have pain. It’s more of a nice to have or they just sort of like the cost and price sort of don’t fit the willingness to pay or all these elements. So while it seems obvious that you’ve got to have a product market fit you. That’s the number one factor.

Those companies fail and sometimes you think you have it and you actually don’t have it or you just had it for that very small market. It doesn’t jump the curve to the mass adopters right so that can absolutely happen.

Sometimes the economics just don’t work in terms of like people want it but not if you can’t afford to buy it or produce it for the cost that they’re willing to pay.

But founder misfits are often a problem, right? Whether it’s like the team themselves don’t get along and they have breakups and it falls apart or the founders just are not the right person to execute on it. Sometimes stuff’s too early.

It’s a really good idea but like the market’s not ready or the tech isn’t ready yet. So there’s a whole litany of things. And I think as investors we think we’re good at preempting those because we know what the list is. But some of this is art, not science. And so we can continue to try to use our prior pattern matching skills or our analytical skills.

But sometimes you’re taking a fire because you believe in the potential and the world plays out a different way.

Industry Specifics: Navigating Healthcare Reimbursement

Shubha K. Chakravarthy: I know you do a lot of work in healthcare. So I want to talk about one topic in healthcare which is around reimbursement. There’s a lot of understanding and misunderstanding about reimbursement. How critical is it in your decision making when funding a healthcare startup? And why is that so critical?

Kerry Rupp: I think the first thing is figuring out who the right payer should be and by this I mean more broadly not payers as insurance companies. But literally, there are some companies in healthcare that go direct to consumers. I would say the conventional wisdom that I agree with is in the U. S.

At least in most cases, consumers don’t think they should have to pay for their health care and are only willing to pay so much. So certainly, concierge medicine is the example, or small price points for little, wellness kind of things, people will pay out of pocket. But it frankly only focuses on the affluent community and it isn’t having the impact of reaching the people who maybe have more of a pain or literal health issue.

I would say, it doesn’t mean there aren’t businesses that are consumer healthcare companies. There can be. But let’s set them aside for a second to say, you’ve got to have a real compelling value proposition. And you have to realize you’re only targeting a certain part of the market if you’re out of pocket.

Then you look at who the payer should be? And reimbursement can happen in lots of different ways. I’m using the term very broadly because I think it’s usually used to mean, I’ve got a CPT code in a fee for service model and of course we know that the ACA was passed. All this stuff was supposed to go to different kinds of health care models and there unfortunately are a myriad of health care models that are frankly almost impossible to define. Because sometimes the payer and the provider are one system and sometimes there’s Medicaid or Medicare and it’s different from a commercial payer.

Sometimes employers are self insured, etc.The key thing is to understand if you have a business that’s in the healthcare sector, who benefits and why and how do they benefit? Because sometimes you benefit literally by just costing less for the healthcare to be delivered in that model, right?

So that’s just a lower cost solution. But sometimes it’s, “Oh, I’m going to get higher star ratings or I’m going to have fewer hospital readmissions which is going to have me have fewer fines.” And there are all these different kinds of elements. And it’s like, well it turns out in my healthcare system in this town, my model is I pay the physicians a salary.

And so they’re motivated X wise but in this town, my physicians are actually all paid a fee per each transaction. They’re really trying to do more and more transactions.

And in this model, they get paid for the health of the patient over the course of time. If they do pay for upfront health visits and they have fewer costly things later, they actually have a financial incentive for that.

They’re literally different in every scenario with every player, et cetera. It isn’t as simple as oh, my product has a CPT code that could be billed. It’s really stepping back and understanding if my product or my solution or my software or whatever it is comes into this equation, who am I benefiting, how am I benefiting them, which healthcare models am I benefiting.

And does the math make it compelling for the financial player, does the outcome stuff make it compelling for the healthcare provider, what about all these ancillary fines and bonuses and reimbursements and how does that all work? It helps you sub segment. I actually want pediatrician offices where the pediatrician is actually the owner of the practice or I want ones where the pediatrician is part of a private equity owned practice that does XYZ because their business model works like this. And my product provides this benefit.

I think it’s a lot. You got to step back and really understand literally the value propositions to each of the players and which players you’re going after. But if we get to the point where we’re talking about, this is a fee for the service model. And this transaction when I use this product or service is there a billable code whether it’s a HCPCS code or a CPT code matters if that’s the business model that the products being sold in.

Just because there is a code doesn’t mean you’re going to be reimbursed on that code. I’ll take an example. We have a company that does cognitive testing for brain health. There is an assessment tool that can check your health and the tool can be used across lots of different mental conditions but it’s mostly focused right now on memory and dementia.

And so there is a code for someone doing the assessment. And if someone has the assessment and it indicates that there might be some sort of impairment. There also can be a cognitive care plan that the physician can put together that helps them understand what kinds of things they can do to intervene right now.

There aren’t great Alzheimer’s drugs but there might be a whole bunch of lifestyle innovations or get off this drug or you need a hearing aid so that you can engage more so that your brain function gets more engaged. There’s a whole set of things that can happen. That cognitive care plan also has a CPT code. But if you had a 20 year old come into your office and gave them an assessment for Alzheimer’s and they got a perfect score because they’re 20 and their brain’s fine.

Then you did a cognitive care plan and you tried to submit that for, okay, I want the 280 or whatever it is for this cognitive care plan. You’re going to get denied. That person didn’t need the cognitive care plan and so just because there is a CPT code and we’re doing a code doesn’t mean you can use it.

The company had to put screeners in place to say that this person even needed the assessment. Then the assessment needs to have a bunch of letters that answer that say, can I do a care plan for them and then you have to actually have a whole bunch of documentation to prove why that person actually needs the care plan and why it should be billable.

The same kind of thing can happen, if you’ve ever heard of chronic care management codes or remote patient monitoring codes like just because you’ve got a heart rate monitor at home. That doesn’t mean that it’s helping anybody to have the person have their heart rate reported back to the doctor every week.

Does the person have a condition where getting that information means that the doctor is actually like intervening when something happens and preempting health care costs? And so you need to make sure that you actually get paid on the submissions.

Let’s just say in the case of the company I was explaining. If a bunch of doctors did the cognitive assessment on all of their patients and submitted them and they expected to make 100 for each patient and 90 percent of those claims got denied because they were giving them to people who shouldn’t have them. Your CPT code isn’t helping there, right?

All of a sudden you have to say, Oh, wrong practice. This is a general physician’s practice. They’re trying to use it on everybody. Let’s maybe go to a gerontology practice where 90 percent of their patients actually are of an age where they need an annual exam where they’re going to get the revenue.

And I’m blending some that’s not really how the business works exactly but just to give you a use case. I think way more often than not, people think they have a CPT code and everything will get billed. But it’s not always that the payers sort of have a disincentive to pay.

So just like when your car gets in an accident. They sort of want to make sure it’s your fault before they pay on it and they want to make sure you’re not trying to fix up some other stuff that was already broken in the car before the car accident, et cetera. There’s going to be conflict between the payer and the provider. And if your solution’s in the middle, like you could end up being a victim of that.

Shubha K. Chakravarthy: This actually raised two very interesting implications for me. The first is I’m not a healthcare founder, but if I were a healthcare founder. It sounds like I need to have a pretty good conversation, maybe even more than a conversational familiarity with what are the business models that are out there from a healthcare delivery perspective. And therefore how much of a fit is? I mean, leaving the innovation aside. There needs to be a commercial fit between a preponderance of those kinds of models, right?

Kerry Rupp: It’s not A conversation. It is thousands of conversations. This is one of those things where customer discovery is so important to really understand. That’s why I sort of was frustrated by the example of the pipeline where they’re like, I’ve got this hospital on my list and okay, wait, what department of that hospital, who’s using which kind of, care delivery model with which kind of payers under which kind of business model and why is this a value proposition to them specifically for this kind of condition or treatment, et cetera.

And then getting really specific. Instead of just being like, we’re going after healthcare providers. It’s like, Oh no, large academic medical centers are a fit because of X and small rural hospitals are not because of Y. This is how they pay. And this is how it turns into a strong value proposition for them. So it requires a really deep level of understanding of the market and a lot of conversations.

Shubha K. Chakravarthy: From a founder perspective, given that at least in this sector, most of them probably specialists in the technical side of it whether it’s diagnosing ADD and pediatric patients or what have you seen work that founders have done to kind of cut the time and also improve the likelihood that they’re going to land on a winning business model?

Kerry Rupp: So making sure that their team is not just a tech team coming in to say, we’re here to save the day but actually has people from clinical settings, from scientific setting whatever the right group is from the payer community whether it’s on their team or in their advisory board or on their board.

But this reminds me of a meeting that happened in Austin four or five years ago where it was a health tech meet up at a co-working space. And there were like 75 people there. Health tech was kind of a new, exciting industry in Austin at the time.

And we asked how many people there were technical founders, how many people were sort of the business founders and how many clinicians were in the room and let’s say there were 100 people. There was 1 doctor in the room. And so all these healthcare tech companies were like, I’m going to come and my grandmother had this problem. Therefore, I’m going to build this product and I’m going to push it into the healthcare system.

And unfortunately, you really can’t do that without understanding. However, it gets paid what motivates them what a successful like how they get promoted, all of those kinds of things that happen in any enterprise sale. They’re just multiplied more complex in healthcare because of not only the payer provider patient issue but also then within each thing. There’s just all these different sorts of payment models, care delivery models, and approaches.

It’s like a matrix of a matrix. I don’t know how many dimensions it is and you just have to find your sweet spot. You might eventually apply to multiple of those but you might need a different business model and you have to find which one is your beachhead. And that’s where you find where’s the highest and where’s the value proposition the highest.

Shubha K. Chakravarthy: Then from a founder and even an investor perspective for the seed stage startup in this healthcare business, what are you looking at? Are you looking for pilots? Are you looking for that granular customer list that says it’s not the Mayo Clinic but it’s this division of the Mayo Clinic in this city in Minnesota or whatever the case might be.Whatis going to nail it?

Kerry Rupp: First, I am looking for evidence that they’ve had these kinds of conversations. I think maybe I’m a little biased because I’ve taught this customer discovery class.But also I was the general partner and CEO of a company cccelerator for five years where you’re in the really super early pre-seed stage.

And if it’s all about talking to customers. By the way, don’t talk to customers about your solution. Talk to customers about the way they work, what their pains are, what they do instead, what they pay for, how they’re driven. All these kinds of customer discovery questions.

I’m very focused first on has this person actually gone and talked to all these people, do they actually understand how these business models work? You get that with the founders like do they actually have that context and do they know how to differentiate the market segments?

But then yes, I think from a traction point of view again, this is one of those, when you see it because different companies depend on the type of solution and how much it takes to get a pilot or to get a paid engagement or to implement. It’s going to be a different level of what kind of engagement is.

A lot of things aren’t really fully successful in a healthcare system until they’re integrated into the electronic health record. And sometimes that requires a custom integration and et cetera, et cetera. And so you want to see these proxies like here’s an example of how it worked in a kind of offline setting and here’s why they’re willing to spend on the EMR to make it a big integration.

We wouldn’t invest in a B2B healthcare company that didn’t yet have some paying pilot customers that are either payers or providers showing that it was valuable enough for them to implement a project and put a team on it and pay something to get it moving.

Shubha K. Chakravarthy: So real life data that proves out the fundamentals of their hypothesis is kind of like the bottom line I’m taking away.

Kerry Rupp: Yes, but I don’t mean just data. I literally mean you’ve got to have some customers.

Shubha K. Chakravarthy: Data, meaning data from the pilot that said, I have like four clients and we got 10,000 from a pilot and what have you. And this is kind of the data on how it worked and therefore you can kind of extrapolate it and say, it’s going to work in a larger scheme of things.

Kerry Rupp: There’s going to be some investors who are pilot shmilot. What about the first customer who converted and you kind of have this slippery slope of, you’ve got the pilot. I’ll wait and see when you get the conversion of the pilot. The pilots or the conversion happened.

Are they resubscribing or what are the engagement numbers look like or you’ll have investors who are constantly waiting for the next milestone and different investors are going to ask for different things.

So I don’t want to say any one of these is like that’s the obvious benchmark. If you hit that point then everyone will come flooding in. Life isn’t that simple but those are the kinds of things that investors are looking for proof of customer interest.

Shubha K. Chakravarthy: Got it. Are you seeing, trends or anything that you think is noteworthy for founders to keep in mind in the healthcare sector in particular over the next two or three years?

Kerry Rupp: Unfortunately, just that the later stage investors want to see more traction. I don’t think that’s just healthcare but I was just at an event for women founders in health tech. The investor panels basically all just echoed like, it used to be you only needed this much traction for Series A, now you need this much more traction for Series A.

I have seen the same thing in CPG, for example, a lot of the investors who used to be, what we thought of as Series A investors are like, wait till risk is out. We’ll move up to Series B and the seed investors are like we’ll move up to Series A. And so it’s like these moving goalposts. And I think that’s happening in a lot of sectors and it’s just a challenging time for startups who have to learn to be scrappy. I don’t envy that stage of a startup’s life, but it is just the reality.

Shubha K. Chakravarthy: Women more so than anyone else. I imagine.

Kerry Rupp: Resilient though, women are more resilient too. So I have faith in their ability but it is a hard road.

Impact Investing: Aligning Returns with Values

Shubha K. Chakravarthy: The last thing I want to talk about in our conversation today is you operate in one part of the impact sector. I know the impact is a very big sector so I want to talk about what it’s like to get funding for an impact focused startup.

First of all there’s this tension. You talked about this earlier, right? Impact startups are here to make, to do good but at the same time you’re in venture. You need to do well. How do you characterize that? how do you resolve that inherent tension between impact and returns?

Kerry Rupp: It’s funny because everyone thinks it means a tension. Our thesis is that there is no tension here. Those things are actually very aligned and I’ll tell you why they are one of the elements of our impact.

Although, this for us is a fundamental investment thesis point is that we’re investing in women led companies. That is a more diverse strategy which certainly can be considered impactful. The data shows that when there are more women in senior leadership and companies and startups, they actually outperform, right? By the way, the same kind of things can apply to diverse teams generally. This is like a scientific study. Just diverse teams doing things whether it’s in building companies or doing other things, come to better decisions and tend to outperform.

So to me, those things are aligned. Like it’s overlooked because of subconscious bias and all those kinds of things that are out there in the marketplace. But if we invest in women, they should outperform because the data has shown that in the past.

I think the same thing we believe is true of our focus on health and the environment. If anything over the last 7-8 years since we founded the firm, health and the environment have become all the more important if a global pandemic didn’t tell you that healthcare is a really critical thing that people need to invest in. I don’t know what will happen.

We live in Austin, Texas. The number of climate issues in the last couple years, especially just in our own environment have shown that this is critical to our species survival on this planet. We believe that ultimately these kinds of solutions that are improving health and the environment actually are going to provide a value proposition to the potential acquirers and the community in the market.

That may seem flip it to say, I don’t think there’s tension but literally we do think there’s alignment like these companies are all the more needed in the world. Therefore, as long as they’re building under viable, sustainable business processes that are like actually developing financial return to that seems aligned to us.

We do make sure at the time of investment that improving health or environmental outcomes is literally fundamental to the business proposition and actually to the customer’s value proposition. If I use an example, it’s not like, “Oh, we’re making this product and also we recycle at the office or not throw Toms shoes under the bus.” But Toms shoes model is that we’re going to sell shoes and then we care about philanthropy. We’re going to take a dollar and they go give shoes to somebody else.

This is actually like our shoes are going to be more and maybe I don’t know the details of current Toms shoe production capacity. But it’s like we’re going to create a platform for more sustainable materials to be used in shoes and the distribution channel. We’re not going to use plastics in the packaging or in the production of the shoes. The whole model of shoe production actually becomes sustainable. That would be more of a fit for us and then the purchaser would be buying it because they actually choose to buy. More sustainable products because a lot of younger generations actually like to put that into their buying process.

We then ask the companies to hold to a metric that they’re going to track their company on. That’s fundamental to the value proposition of their company that we track from an impact point of view. Now we have a longer impact report that they have them fill out around like what’s the diversity of their team or what end sustainable development goals are they actually like working toward.

There are more things than just this one quantifiable metric. The reason we just have one is that seed. Lots of things can change their business model and they might have thought they were going to market B2C. Then they end up going B2B because it’s actually a better business model for them or whatever.

If we have them tracking too many things, a lot of those things may become not relevant anymore as their company pivots and navigates, et cetera. This one shining light of the vision kind of level, metric that we’re and it’s quantifiable. It’s like gallons of water saved or the number of lives prevented from having to do this thing. We just want them to not be overburdened by either reporting that goes out of date or just too much reporting because you get to a certain level. At public companies, the ESG role is like an entire department of people tracking all these metrics and a startup doesn’t have time for that.

I think I’ve veered a little bit into more of what it means for us to track impact. All that to say, we believe that our impact is aligned and there’s plenty of data out there now to show that you don’t have to give up financial return to invest aligned with your values.

Lots of impact investing is happening now at scale. One of the most effective ways to do that is in private companies where you can have a lot of leverage around the way the business is designed such that impact is actually at its core and part of how decisions are made.

Shubha K. Chakravarthy: What I’m taking away is that essentially what you do at least from an impact investing perspective is that all of the economic discipline that you would hold to from a venture backability perspective holds.

You just narrow it and shine the light on a specific sector, insisting that impact be at the core of the business model and then imposing a lightweight yet robust metric. That kind of keeps their feet to the fire but doesn’t overly burden them from changing directions that they need to.

Kerry Rupp: Yes, I think the only thing I didn’t mention in that is that so for us. I alluded to it in the beginning when you talked about our investment thesis. That means that they also need to show proof of their ability to drive that metric at the time of investment. There’s going to be like a little bit of a casual example that isn’t a fit.

But if we had a company come to us and say it was going to connect you to personal trainers. Suggest that it was an improving health outcomes kind of business. Our hurdle rate is higher than that because just connecting you with a personal trainer does not actually mean you are healthier. A, it doesn’t mean you’re going to show up. It doesn’t mean you’re going to actually just do the exercise alone that you do with that hour a week. With that trainer may not move the metrics on your health issues. Maybe your issues are diet related or require other kinds of medical intervention.

Now, if the company were to be in a healthcare setting and this was a prescribed particular type of exercise for a particular kind of condition. They were tracking actual metrics of health, whether it’s inflammation markers or weight or prediabetes score and actually getting diabetes and those kinds of things. They actually had clinical data around and we’ve been implementing it with this many customers. We’ve preempted their progression from prediabetes to diabetes versus the general population. Then we’d look at it.

But if it’s like, I’m going to connect you with a personal trainer in your city, that’s not enough for us. So we would need to have that Oh, we did a pilot and we had an end of X. This is the benchmark against that we’ve measured.

A lot of times we’re literally looking for peer reviewed academic journal kind of studies and random control trials. Sometimes it doesn’t need that level depending on the type of business but we need to know that it’s actually changing biomarkers that are used in that industry. So it can’t be like, Oh, 80 percent of customers liked it. They felt better afterwards.

For us, that doesn’t hit the bar. It’s like, did they have it? They were potentially depressed and they did a PHQ 9 score which is a validated metric and that changed over time. We know that this was the intervention that caused it et cetera. Then we’ll look at it. It’s pretty specific making sure that the business is actually delivering on the goal that is their impact goal.

Shubha K. Chakravarthy: And I don’t know one of the things I’ve heard in the impact section. I just wanted to comment on whether this is even relevant in where you operate. Is this issue of scalability of outcomes, right?

There are a lot of impact driven innovations and inventions that work at the pilot scale but then especially in healthcare, at least read a few books or papers where everything works out fine at a single hospital or single location. Then they try to translate it into a more global or a macro situation. Is that a consideration? Are you seeing that? And if so, how do you control it?

Kerry Rupp: I think it depends on if it’s like a change in the like approach to medicine. Is it like a different health care delivery model or is it a technical tool or how scalable is the particular innovation kind of takes me back to the conversation we were having around. What’s the setting, how does the workflow happen in that setting, how do people get paid, what are they driven by, what are they motivated by.

That’s where you’re looking for those venture scalable kind of opportunities. If it’s just like, “Oh, we had a really passionate team of people who really cared about this problem, that’s not probably translatable but it’s like, Oh, we’ve got this process that you can implement.” It’s faster, cheaper and also delivers higher outcomes. Once you get through the change management process that feels like it’s more replicable. I wouldn’t say that we face that but it might be just because it’s inherent in the business things that we’re evaluating. We’re looking for a business that scales. We would expect if the business scales that impact scale.

Shubha K. Chakravarthy: And any similar comments on the environmental side from a translatability perspective.

Kerry Rupp: I’m just using the health care example because we were in that world but I think it’s the same concept. We are looking for businesses that are big enough to be venture backable that can have that kind of approach.

Shubha K. Chakravarthy: Let’s say I want to start an impact driven startup but I also want it to be a venture scale. What counsel would you give somebody who’s in the earliest stages to make sure that they’re focused on the right North star but not hampering themselves and still making sure that they’re actually going to build something that’s going to be interesting to investors. Do you have any counsel guidance?

Kerry Rupp: I only see that conflict happening when someone’s come out of a non business background. If someone’s come from non profit or philanthropy then their frame of reference where they’ve come from tends to be to get a donation for this kind of thing. I think they need to make sure they have a business person on the team.

A lot of times we will have a problem where we have a scientific team where they’re just really into the product and don’t understand the market side. And we were like, “You need a business person.” I think the same thing can happen when you have a really visionary, climate entrepreneur who wants to change the climate but you’ve got to make sure the economics are compelling.

It goes back to the same thing we were talking about with healthcare like who is impacted by this, what are they driven by, what does success look like to them, how do they make money, how do they get rewarded and how do you have a solution that feeds all those needs of the constituents and also delivers the value you have.

You need to be looking at it from the customer pain point.What is the value proposition? How does the math and how do I satisfy all those parties? There’s not a squeaky wheel kind of like fighting against the progress. Sometimes that needs a business person to bring that point of view. Sometimes the models don’t work like in a business model. Sometimes you’re like, “Oh, I would love to save the world by doing this thing with carbon but it would cost everybody 10X.”

What ‘s worth a good example is in fabric recycling. We have a company in the space that’s actually trying to address one of the bottlenecks but there’s a lot of companies that have come about. There’s regulation in Europe already around. You can’t have all this fabric waste because we have all these barges driving around with extra fabric or it’s getting burned or put in landfill.

There are chemical recycling companies that can actually break the fabrics down to a liquid and reconstitute it as a new fiber. But the cost of sorting all the material to understand what material is this made of and should it go into the poly cotton recycling process or the cotton only prices which use different chemicals and will explode if you put the poly cotton into the cotton et cetera.

It’s so expensive that the cost benefit of analysis of the brand or the fines or whatever is going to happen. It’s like the math doesn’t work to make it happen at scale. All these companies got funded. They’re out there ready to go but it just doesn’t work.

Our company as a side note is helping with the process of using AI machine learning and spectroscopy to actually be able to automate the sorting of what the fabrics are by bouncing light off the fabric and knowing what fabric it is and sorting it into the right place so it doesn’t need manual separation. Sorting scales the issue but people want that to happen. But until the math works, it’s not a business.

Shubha K. Chakravarthy: The math and the technology should both work together, right?

Advice for Early-Stage Founders

Shubha K. Chakravarthy: To conclude, what actionable recommendations would you offer to a founder who’s looking to get her first outside round? Maybe she’s technically not been in this business before, especially in today’s environment that you think founders are not hearing as much as they need to.

Kerry Rupp: I don’t know if I can do the founders aren’t hearing as much as they used to but some of these aren’t even maybe exactly directed to how do you get your financial model to the right place.

I will say one of the things that I think people aren’t hearing enough is remember when you’re telling the story that you’re engaging and you’re in a conversation. You’re getting people excited. I have so many founders reading scripts to me of their deck online like, we’re in a zoom call and they’re reading the script. And I will tell you that it is not effective. That’s what you do to children when you want to put them to sleep. So don’t do that.

That’s just one that I think people maybe don’t hear as much because it happens more often than you would think. And it’s like we just zoned out. Then when I was talking earlier about that founder who’s so passionate, you can tell once to go change things. When someone’s reading to me the script, like I’m not getting that connection. I get that it’s intimidating to have to tell the story or whatever but you got to know it, walk that talk, like be excited to share that story and not read to me what should be on slide four.

A big part of this is making sure that you have the right team around you and advisors who can help you with all these places. One person can’t come into knowing all the things they’re supposed to know about both technical and sales to the customer, sales to the investor, the Excel spreadsheet, how these terms work on the cap table and what participating liquidation preference. It’s a lot to come at all at once.

And when you’re a first time founder, you can’t know it all. So how do you surround yourself with the right kind of experts? You can start to learn it over time or they can fill in the gaps where you don’t. Some of that is your co-founders and employees. Then it’s advisors both formal and informal, programs that you undergo to get educated, when to use a law firm that knows how early stage startup stuff gets done and has workshops to help you through the stuff.

You’re not paying billable hours for every single education thing that you need to get up to speed on. I would say read Venture Deals, the Brad Felt book on all the details behind these term sheets. It is a team sport and there’s too much for you to know on your own to start. Take advantage of the resources around you and really use them.

Shubha K. Chakravarthy: And any wrinkle you would add to that for women founders?

Kerry Rupp: It is unfortunately still harder out there to fundraise. I think if you haven’t already seen the videos, sort of the content around the promotion oriented and prevention oriented questions, I would go educate yourself about that. Reminds me a little bit about how there are PR and publicist people who teach people how to respond in an interview.

You are going to get looked at differently and people are going to be thinking about the risks, the challenges and what problems your business might cause instead of thinking about how big it could be and what a wonderful opportunity it could be. So you need to reframe their perspective.

Yes, it is unfair that you would like take that different approach but there are good tactics on how to navigate that. Now that it’s been identified as an issue because the unconscious bias is just out there still. It’s not just men against women. Women do it to women too. It’s a cultural thing that we’ve learned over time that we need to unlearn. In the interim, you need to figure out the skills to counteract that. So fortunately, we’re starting to get some research around how to actually tactically do that.

Shubha K. Chakravarthy: Fantastic. This was amazing, Kerry. I learned quite a bit myself and I just loved how articulate you were and how to the point. It was an absolute pleasure. I know that our listeners are going to really benefit a lot from this. Thank you so much and I wish you all success. I’d really appreciate the time.

Kerry Rupp: Thank you. Fun to be here.