Interview with Sarah Kunst, Managing Director at Cleo Capital, and Maria Salamanca, Principal at Unshackled Ventures
We recently sat down with prolific pre-seed investors Sarah Kunst of Cleo Capital, an early stage venture capital fund for immigrant-founded startups, and Maria Salamanca of Unshackled Ventures, the 3rd-largest venture capital fund with a black female founder, to find out what founders can do to successfully close a pre-seed round in today’s turbulent macro environment.
Q. How do you define pre-seed?
Sarah: For me, the earlier the better. I look for valuations of $3–7M. Companies often don’t have revenue or product, but they do have customer feedback, initial plans, wireframes. By the way, you can pitch me at Cleo Capital.
Maria: Pre-seed is usually pre-product and pre-revenue. We’re not looking at the metrics of revenue and sales. Most of the conversation is about customer discovery, segmentation, insights. I look for $3–7M valuations. Seeds tend to be $6–15M, but this varies regionally.
Q. How do you assess pre-seed?
Maria: We go very in depth on how much founders understand their customer journey and pain points. I have talked to a couple hundred customers. For B2B startups, founders should have narrowed down what types of companies they’re selling to, who they’re selling to and what the sales cycle will look like.
Sarah: For me, I’m less checklist-oriented and more holistically orientated. I’m looking for a broad understanding of the world you’re building in. But, you should have done your research before meeting with me. Once, I looked at a deal and saw a number that was wrong in the deck. When I pointed it out, the founders were dismissive and condescending. The company went on to be successful, but it was a massive red flag to see this big thing that this company didn’t understand about their business or competitors.
Q. How do you think about founder market fit?
Sarah: I really care about why the founder is starting the company. For example, one time I met with a 22-year-old male founder starting a baby seat company. Starting a company is very, very hard. If you’re going to do it, choose a huge space so you can get rich.
Maria: If you are in deep tech, someone on your team needs that tech background. On the consumer side, does the company have some empathy or understanding of the consumer? I’ve passed on many male founders building businesses not related to them.
Q. How are you thinking about pre-seed right now in the current environment?
Sarah: I am used to doing things remotely, but I really miss hotel bath tubs! Other than that, my life hasn’t changed that much. I was taking remote pitches before. If anything, I now get funny emails from accountants confirming that I don’t have any expenses. It has actually given me more time to work.
Maria: We saw a slow down in March and April. Investors were holding off to see what was happening and wanted to make sure they weren’t overpaying. We have seen some prices coming down, especially in the Bay Area and NYC. Now it feels like investors are back to operating normally and are more active. There was a time when investors were very focused on their portfolios. Investors at pre-seed and seed are much more comfortable making bets without meeting founders. This gets harder at Series A and beyond, but early stage founders are in a good position now. I wouldn’t want to be a Series B or C entrepreneur right now.
Q. How do you build momentum for a pre-seed round? How do you get the lead?
Maria: Focus on pre-seed funds that are known to lead first. Going to them first will save you time. If you go to angels and follow on funds first, you’re going to get a lot of wait and see.
Sarah: Most pre-seed rounds don’t have a lead; founders are often setting terms. You don’t want to sell more than 10–20% of your round at each stage. Set your own terms, use a SAFE or note. Terms are clean and money is green. There’s a lot of over-engineering — if you need money, go get money. Make a list of the rich people you know. Go ask them.
Then go apply to every accelerator. There are 300 accelerator programs in the US — find one to give you $100k for 6% of your company. There are more and more angels and micro funds in emerging ecosystems like Atlanta, Ohio, and DC. Find the richest alumni from your school. People pitch me all the time. You have to be creative.
Q. What should pre-seed founders keep in mind when setting terms?
Maria: Make sure the terms are reasonable. Assume that your pre-seed round shouldn’t take more than 12%. Seed is 15–25%. By the time you get to Series A, you don’t want to be too diluted. Many women and underrepresented founders end up not owning enough of their company. Keep things simple and stick to a YC SAFE.
Sarah: Try not to change anything from a YC SAFE. I get really annoyed with pre-seed deals when I have to review terms from random lawyers.
One thing that the Stanford white dudes do better than anyone else is they make it so easy to invest in their companies. Docsend, Cooley Go, YC SAFEs. It takes me $100 in legal fees to review — it’s just so much easier.
Q. What should be in the pitch deck? How have you seen startups effectively pitch you remotely?
Maria: I don’t pay attention to financials, but I will look at assumptions and unit economics.
Sarah: Think of fundraising like dating. You don’t need to tell everyone everything right away, but you need to have thought of it. You need to know what business models exist.
Maria: Docsend has great deck analytics. Investors spend an average of 3 mins reviewing decks. Show your deck to a friend and see how much they can absorb in 3 mins. Investors spend most of that time on the team and why now. Keep it as simple as possible.
Sarah: Use templates. Canva and NFX have templates. Look at Guy Kawasaki’s 10 slide pitch deck. Google successful startup pitch decks for examples. If your pitch deck is terrible, I start to lose faith in your team.
Jen: I have seen startups using Loom video pitches. This can cut out cycles.
Sarah: I hate watching videos. Make sure you’re providing the investors the basics — don’t be precious. Send your blurb and keep it simple. Don’t make people jump through hoops to figure out what your company is.
Q. What is your investment decision process and how long does it take?
Maria: We have at max 3 meetings before we request diligence. Diligence is mostly confirmatory, and we rarely back out. I wish the process were more uniform between investors.
Sarah: I think the obsession with getting feedback from an investor is off-base. Think of it like dating — the feedback you’re going to get is not very helpful. As an investor, I could spend all of my time giving feedback. There are a lot of office hours, and platforms like Twitter and Elpha for getting feedback. But if you’re getting no’s, the reasons are probably pretty random. For example, I hate travel startups.
I love to read vs. talking to founders. I like to get on the phone with someone once I’m very interested in investing. I think there’s a difference between taking time in a process vs. wasting a founder’s time. Some people want 8 meetings for a $25k check — this will often not be a great use of time. My favorite thing for founders are coffee checks: $25–50k checks over coffee in one meeting. This tends to happen in the Bay Area. For most people, you have to assume you will need 2–3 meetings and 2–3 weeks before making a decision.
Q. How are you thinking about valuation caps right now? What should founders take into account?
Maria: We don’t really ever go below $3M. Most startups start in the $4–5M range.
Sarah: If you are in Silicon Valley and you’ve done something very relevant, you might get a $10–15M pre-seed valuation. If you’re outside Silicon Valley, and you are credible but a first time founder, you’ll probably raise a $3–7M cap. You don’t want to sell more than 20% in each round. Founders end up owning too little. Think of it like a math problem.
During Covid, the discount has been at most 20–30%.
Jen: You want to be careful with valuation to not set yourself up for a down round or flat round. That can hurt your momentum for your next round.
Q. What traps should underrepresented founders avoid?
Sarah: The most perplexing thing is when people approach me like I have to give them money. No one owes you money. Figure out who is a good fit. Lying to investors is the funniest, dumbest thing to do. We all talk to each other so much. I’ve had founders tell me an investor is interested in investing, so I’ll text that investor and ask. You’re unlikely to be able to successfully lie to investors. Trying to push momentum when there isn’t any is another mistake. I usually just say, “No, thank you.” You can be proud of what you’re doing, but I don’t owe you any money.
Maria: When an investor does pass, don’t burn that bridge by taking it badly. The number of founders that insult me after a pass is mind-blowing! This is a long-term game, and it’s all about reputation. At seed, founders usually meet with 50 investors before getting a “yes”. Learn to brush them off or learn from them.
Junior people at funds don’t always have no power. They are the ones doing a lot of the work. In smaller funds, there are just 4–5 of us and any disrespect is a turn-off. Give the junior person one meeting before expecting to speak to a partner.
Sarah: Have a templated one-sentence email when you get rejected just saying thanks for the time and let’s keep in touch.