The fund focuses on the collision of healthcare and technologyRead more...
Female Founders Fund makes 6 to 8 investments a year, with $500,000 initial checks
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Most recently, Dong was an investor at FirstMark Capital where she focused investments in the healthcare IT, fintech, ecommerce, and consumer application space.
Previously, she was Director of Marketing for Norisol Ferrari, a New York based couture and luxury outerwear brand. She also held Sales and Marketing positions at MarketFactory, a FirstMark portfolio company developing software applications for high-speed trading platforms.
Dong holds a B.S. in Finance and Marketing from the Stern School of Business at New York University.
VatorNews: What is your investment philosophy or methodology?
Sutian Dong: From a very high level, Female Founders Fund is a New York-based Internet and software investor.
What makes us different from most other folks is that we, as the name suggests, invest in female founders only. We were founded in 2014 with this thesis that the face of entrepreneurship 10 years from now is going to look drastically different from the face of entrepreneurship 10 years ago. With respect to female founders, specifically, we saw a massive opportunity in investing and supporting the companies that they were creating. There's a ton of larger trends that are contributing to this wave of innovation that is being led by women, and our belief was that, as a fund, if we focused specifically on female founded startups then we would be able to capitalize on the next wave of innovation and the next wave of companies who are disrupting massive markets and creating new ones. That's the reason why we were founded: we felt like we had a unique point of view into this market and could be really, really early not just in identifying this trend but investing and supporting this new generation of entrepreneurs.
There are three things we see that have opened up this opportunity. First, the number of women who have grown up professionally, so to speak, in large software companies, like Google, Microsoft or Facebook, has really increased. You not only have women who have worked in technology, but also women are domain industry experts in areas where it's now possible to start companies without having a huge technology background. So more and more women are coming through technology and they have an innate understanding of the possibilities to leverage different parts of technology to solve the personal and professional problems that they've identified.
Number two is that it's becoming cheaper and easier than ever to start a tech business. Before you had cloud technology it was really expensive to start a technology company, because you had a bunch of infrastructure that you had to buy. Now, when you think of starting a business, all that stuff has become pay as you go. There's all these tremendously good and efficient platforms as a service products, and also platform as a service packages, that you can leverage to stand up your business without having a ton of upfront costs. I do think that because technology is touching so many more aspects of our daily lives than ever before, what VCs are looking for now, and are excited to invest in, is tech-based and tech-enabled businesses. So high growth, high margin businesses, which historically have been enterprise SaaS, but we're seeing high growth, high margin businesses in areas like e-commerce, like direct-to-consumer retail, and beauty which, I'd say 10 years ago, a lot of VCs wouldn't even think about investing in. The reality of those companies is that their growth prospects, their capital efficiency, is equal to, if sometimes not better than, your best in class enterprise SaaS business.
The third point is that the sheer number of people who are online, and how that's grown exponentially, and also the reality that women control 85 percent of spend on the Internet, either by directly purchasing or influencing where that money goes.
When you combine all three of those things, we just believe that from the perspective understanding the customer, and also the perspective of being able to capitalize efficiently on opportunities that they're seeing, the companies founded by women are at a really interesting inflection point, where the opportunity to start a company and start an innovative, industry defining company, has ever been better.
VN: What do you like to invest in? What are your categories of interest?
SD: We invest in Internet and technology really broadly. Our view as investors, and what we look for, is really founder/opportunity fit, so we're really founder focused. As a function of that, we have invested in industries that range from fintech, healthcare IT, enterprise SaaS, all the way to media, content, direct to consumer e-commerce.
We are just looking for amazing individuals who demonstrate a lot of the characteristics that we look for in successful entrepreneurs so that we can be the first institutional money in that company and provide, hopefully not just capital, but also the community, the network, the expertise, the value add services, all the other intangibles that help take a company from zero to one and then to scale.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
SD: In our current portfolio we've been fortunate to invest in companies like Rent the Runway, Zola, WayUp, Rockets of Awesome, Maven, Primary, Minibar and Thrive Global.
What we've seen and what we've gotten really excited about in terms of these founders, and these companies, is that a lot of them have really leveraged their unique points of view as female founders to create interesting businesses in markets that have, historically, been underserved by tech. A great example of that would be Zola, which is the fastest growing online wedding registry in the U.S. It's sort of a one stop shop for couples to add anything they want to their wedding registry, anywhere on the Internet.
I mention this company because I remember when Zola was first out in the market, a lot of funds had concerns about the opportunity because it was weddings. A lot of people would say, "You only get married once, and so what's the recurrence of having registries? And what's the biggest company in space and what’s their multiple?" None of it made weddings seem like a compelling market to innovate in. However, if you took the flipside of that approach, and thought about it like we did at Female Founders Fund, which was, "Weddings are a multi-billion dollar industry in the U.S. alone. There's so much money that goes into weddings and not just from the registry piece, but everything: sending out invites, booking the venue, people getting flights, hotels. All of those things go into that massive, massive market that has, to date, been really untouched by tech."
We were super excited by Shan-Lyn Ma and Nobu Nakaguchi, who had been co-workers as Gilt Groupe, had worked together for a really long time, and then partnered with Kevin Ryan to create Zola. We were really excited about that team. And we just believed that there was this opportunity to own this market by creating a really designed focused, great user experience for this new generation of Millennial couples who were getting married, and were used to this type of service online. For us, that's an example of a company that is doing really, really well in the market, where the founders had a unique point of view about the opportunity. As investors, we had a unique point of view compared a lot of other funds about the opportunity. And this is also an example of a company where, after we invested, we were very actively involved with them, and ended up introducing Shan-Lyn to Lighstspeed, which led their Series C last year.
Whether or not the fact that other VCs didn't recognize the opportunity because of gender bias, I'd say yes and no. I don't think that investors weren't excited about the opportunity because the CEO is a woman and she was pitching them. It was that, as funds with primarily men, speaking in broad strokes, wedding just aren't on top of mind. You go to them, but a lot of planning for weddings, and again speaking in generalizations, it's not an area that a lot of men spend a ton of time thinking about. So, understanding that opportunity would take work and research and really thinking about the market and getting up to speed on the innovative things that were happening and all of the opportunities to innovate because there was so little happening in the market at that point. That all takes a lot of work and, so, when people think about opportunities they tend to, if you think about each partner at a fund investing in one to four companies a year, it's a lot easier to invest in what you know and what you understand. I think that leave a lot of other opportunities, that are amazing, on the table because they take work to get comfortable with and we think that, as female investors, we can see things that are a little more non-obvious to the broader market.
Another example of a great founding story is a company we're fortunate to invest in called Maven, which is women’s telemedicine platform. It's focused on women’s health but you can use Maven to get a birth control refill, to talk to a nutritionist, to talk to a therapist. They came out to market initially with a B2C product, so consumer-facing, really beautifully designed, a really intuitive and great user experience for everyone who was on the platform. They're a marketplace, with practitioners on one side and consumers on the other. We're seed investors in the company and, over last year, Kate Ryder, who's the founder and CEO, has also branched into creating a really interesting and innovative B2B product, called Maven Maternity. It's a 15 month program for employers that enables them to provide a better care package to their pregnant employee base. So, it's not just better maternity care and communication during the pregnancy, but it's also postpartum. There's a lot of services and support and counseling that helps new moms become comfortable with the new changes post pregnancy and, more importantly, for employers reduces the churn rate of that population who decides after they have a baby that they don't want to go back to work.
We also introduced them to their Series A leads, Spring Mountain Capital and 14W, and they have really scaled the B2B side because they've taken a lot of the learning from the B2C product and applied that same designed focused mentality into creating this great maternity experience that benefits the employers and also the employees. They've grown that piece of the business tremendously quickly.
VN: What do you look for in companies that you put money in? What are the most important qualities?
SD: When I think about founder/opportunity fit, we really look for founders that have a unique point of view on the market that they’re tackling. What unique insight have they discovered, whether it is through working in that industry, whether it's experiencing a personal problem in that industry, whether it's through doing a lot of research because they're interested in a certain industry? What has led them to have that unique point of view about a market that they can clearly articulate and also sell people on? So, unique point of view, salesmanship, the ability to sell the dream and also, people call it a lot of different names, like perseverance, grit, hustle, etc. In startups there's never enough time or money, so the ability of the founder, in the face of limited resources, to extend beyond what they have and keep going. Those are a lot of the things that what we look for and I also, when I think about founders that we get really excited about, these are women where we think that whether we end up giving them a check or not, they're going to do something really amazing with this business.
Before you invest you do have to have some interest in the market, some understanding about the size of the market opportunity. It has to have a big market, because the opportunity has to be big enough to be VC backable. Those things are fairly consistent across all VCs and all of those things we look for as well, so it's not like we're throwing that out the window in the face of, 'Oh, this is somebody really interesting, but they want to create the best bodega in New York.' That's obviously not a VC opportunity.
When we think about the size of the opportunity, and what they've built and what about that company is really interesting, it can vary. We're seed stage investors, which means that we've invested in companies that are pre-product, and we have invested in companies that are post-product and have demonstrated a little bit of product market fit as well. In terms of where companies are at in building out and realizing the vision, it can be varied. I'd say, when we think about the opportunity and why that specific opportunity would get us excited, we have to have agreement and an equal amount of excitement as the founder about what they're doing in that particular market. Some things we have more expertise in, like vertical e-commerce, for example, healthcare IT, HR technology, restaurant and hospitality tech. We know a lot about those industries. Some we're sending a lot of time learning about. For instance, frontier technologies like AR/VR, like the next generation of bioinformatics, like cryptocurrency. We're spending a lot of time learning about them because we believe those are going to be real areas of innovation in the future. And then some areas, like security and infrastructure, for a lot of those companies we don't have a deep enough understanding of those market, so we're probably just not the right investor, and not the best value add money that they can get.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
SD: Largely, it really varies. We're looking at the founder and what she's done in the past. Has she demonstrated that she can built this business and demonstrated that she, as a leader, can scale?
In terms of numbers, again, we're really early, so it's not like investing at the Series A, which I used to do, where you'd say, "Ok, this a company that's doing $120,000 in MRR, we think that next year they'll be able to triple that, and this is what their sales efficiency and sales pipleine, look like." In the reality of not having that data, we're looking for more quantitative traits about founders that will allow us to really be excited about supporting them.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
SD: Starting from the top, our dealflow, from when the fund was founded in 2014 to now, has grown 10x, which is great for us.
In terms of the deals that we've done, the majority have actually come through referrals from our existing portfolio companies, which we think is fantastic. I think it says a lot about us as a fund that our existing portfolio would tell their friends and professional colleagues about us and make those introductions and be excited for us to meet those new founders and vice versa because we've actually provided real value to our existing portfolio. That's where the majority of our deal flow that actually gets executed comes from. We've seen this really nice network effect of the companies and also our LPs referring new portfolio companies and those companies then referring in more companies. We're seeing that ecosystem really deepen.
The process, from beginning to end, is a normal institutional process so it takes us between 30 to 45 days. We've done it in less and it has also taken longer but, as investors, our preference is to lead or co-lead seed rounds and really take an active position in pulling that round together. For us, we continue to work closely with our companies, especially to get them to the Series A. So, when I think about diligence, we like data, so the more data you have the more we want to see, but the reality for a lot of these companies is that it's so early that they don't have a ton of customer usage data yet. When we think about vetting founders and doing our due diligence on them, a lot of it is vetting the founders and the team themselves. What have they done in the past? How did they work with other people? What was their leadership style like? How do we think about post investment, even, and opportunities for us to help increase strength in the executive team? Stuff like that. A lot of of the diligence that we do is heavily weighted towards the team and making sure that this is the right team to back.
VN: These days a seed round is yesterday's Series A, meaning today a company raises a $3M seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
SD: We've seen the real increase in round sizes at each stage of the funding cycle. I do think that the amount of money available at the seed stage has just ballooned, and so what that's led to is a ballooning out of what seed is as well. I'd say that 10 years ago a seed stage certainly wasn't $3 million; $3 million was the pre-money, if that, of a seed stage financing round. Now what you're seeing is that you have pre-seed capital and funds getting started for pre-seed exclusively, and also what people term euphemistically "post-seed," which is companies that need to raise a little more money to get to the Series A. Because the amount of seed money is so available, and more and more companies are raising larger seed rounds, I think the Series A investors are opting to wait and see which companies have breakout traction before they invest these really large rounds.
So, seed now has really started to resemble Series As 10 years ago, and Series As have started to resemble Series Bs, and so on and so forth. For us, when we think about the metrics that our portfolio companies need to hit to get to the Series A, that's something that we start mapping out with our portfolio companies, oftentimes before we close the series seed. It's important for us to do that because that helps inform how much money you need to raise at the series seed so that you have enough money in the bank and enough runway and enough traction to prove to be attractive to Series A investors. We have that conversation often before we invest because we need to make sure that, as a company, you're raising the right amount of capital for your business at that point in time, so that you can go out when you need to raise the next round of capital and easily raise the Series A. Raising enough now means raising enough so that you have the runway so that you can demonstrate enough traction and enough growth on a month to month bases to get to a Series A. It's all sort of working backwards. Where do you need to be in 18 to 24 months from now? How much money does that take? How do we help you get there more efficiently? Those are all conversations that most seed investors should be having with their portfolio companies. Who's dictating KPIs, and who's helping you grow to the right point and thinking about those goals correctly?
What you see is that you have all of these unknowns when you invest, and when you think about building a model, the levers of growth, you're working in assumptions. As you have more data, the goalposts move a little bit. When you sit down and plot out goals, if you take in historical performance data, to the extent that there is any, and you create assumptions for what you think you can do to grow to get to the Series A, and then as you go on in a quarter you may say, "This is actually lower than we though or this is actually higher," so all those things are moving. You need to be able to have access to that data to have that mentality so that you know that you're plotting yourself in the right direction versus operating in the dark and saying, "I hope we're going fast enough and I hope we get to the Series A but I have no idea how we're going to do that." As an investor, one of the things we work with is figuring out how we get there, and what are things that we've seen historically and in our other portfolio companies that worked really well to help companies scale faster and work around corners and not the same mistake as someone else did?
The metrics themselves do change a little bit year over year and it does depend on the industry that the company is in and the business model that they have. Obviously the metrics for an enterprise SaaS business are different than the metrics for an e-commerce business which is different from a fintech company. We think about this a lot, and we work with our portfolio companies really closely to make sure that they're growing and they're setting up the company and they're hiring the right people to get to a place where they can successfully raise a Series A without being too early for the Series A market.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
SD: The once upon a time story, so to speak, is that I born in China and I grew up in Houston, in a little place called Sugarland. It was kind of small when I was growing up but has since blossomed into its own little metro area within Houston. I went to NYU Stern for my undergrad, and when I thought about what I wanted to do, I was like, "I'm going to do something in business," but I very unclear about what business was at that point. I majored in finance, but when I picked it I had no idea what that meant either.
VC was never really on the radar for me at that point; VC as an industry is a really small part of private equity and so a lot of my contemporaries when I was in school were all thinking they'd go work in banking, or they'd go work at a hedge fund, or work at a private equity leverageed buyout shop. VC was, again, not an industry that a lot of people had been thinking actively about. Technology in New York was not nearly what it is now. You didn't have the robustness of the ecosystem, you didn't have any large exits, you didn't have a lot of the talent and all the innovation that is here now. It was all really, really early.
I ended up working in fintech and then transitioning into marketing, and was director of marketing at a fashion house in New York. Then, through a personal connection, moved into VC at FirstMark Capital. This was at a time when I think New York was still an unproven place, so the question when I started in VC about New York generally was: will New York ever be than Boston as a tech hub? That was at the time when I think that NY Tech Meetup was maybe 100 or 150 people in the room. It was all really nascent compared to what it is now. I was fortunate to be at FirstMark at that time and to be one of the early team members building up that brand and that fund, because it was really interesting window into the ground floor of what New York has become. Seeing that buildup of this really tremendous community of entrepreneurs, of startups and investors. Even the municipal government has been so instrumental in supporting innovation. It was a really lucky position to be in.
The story of how I got to Female Founders Fund is that I had met Anu Duggal after she has started the fund and she had told me the story and the thesis behind it. It made so much sense to me because in the six years that I was at FirstMark I had seen more and more female founders come through my door. These were women with interesting, relevant industry backgrounds, who were doing really interesting things, in what I thought were really big markets, and who had early traction in their businesses. They were selling the story of this being a really potentially massive outcome. A lot of stuff made my investor senses get really excited but all those founders were all a little bit too early, since they were raising seed money. I'd say, "Let me know how I can be helpful and maybe we can do something together in 18 to 24 months." It really became clear to me, as a Series A investor, that the opportunity was at the seed stage, where you could be the first institutional source of capital for these women and their businesses, and also be really instrumental in helping them get to the Series A and then to scale.
VN: What do you like best about being a VC? What makes you excited?
SD: The word I would use to describe how I feel about is "lucky." I have a lot of gratitude to be doing what I'm doing because there's not a lot of other jobs where your day to day is working with these really smart, motivated, passionate, determined individuals, who are really trying to create something new, and figuring out ways to support them in those efforts.
As a VC, you sit at this nexus of being able to see the newest innovations as they're happening, on the ground floor, and being able to support the people who you think are the most determined, and also best suited, individuals to capitalize on these opportunities. Playing a small part in helping these founders build big businesses, I think is really rewarding. It just feels like a really lucky place to be to not just help one company succeed, but to help a portfolio of companies hopefully, knock on wood, do something meaningful.
VN: Which fund are you investing out of?
SD: We are investing out of our second fund.
VN: What is the investment range?
SD: We initially invest $500,000. Over the life of the company we'd invest potentially up to $3 or $4 million, not including any growth opportunities we may have.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
SD: We'd love get meaningful ownership at first check but that has varied, and we like to lead or co-lead deals to be a larger preferred investor.
VN: Where is the firm currently in the investing cycle of its current fund?
SD: It's a 2016 vintage.
VN: What percentage of your fund is set aside for follow-on capital?
SD: Over half of the fund.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
SD: We are mostly seed stage investors.
VN: In a typical year how many startups do you invest in?
SD: We do six to eight as a firm, so three to four individually.
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