Overview:
JC Ruffalo is a Venture Partner at Cove Fund based in Irvine, CA. For the last decade, he has been a member of the Southern California startup scene, advising startups including Hyperice.
Highlights: -How to avoid being a me-too startup. The difference between a revolution & microevolution. -How to build a winning pitch deck -Why storytelling is important when pitching investors -Advantages of being first to market vs. fast followers -Why 30x returns are important from a VC perspective -Pitfalls when choosing an investor -The key components of a data room when raising a round
Jeremy Stein: Tell me about Cove Fund
JC Ruffalo: With Cove Fund, we're a seed stage venture fund and we focus specifically on Southern California. The company's headquarters or the founding team ideally needs to be based here. From Santa Barbara down to San Diego, seed stage, kind of a moving target, but they're raising somewhere between two to four million on average, but we see anything from one to five and our check size starts off at about half a million and goes up from there. We'd love to syndicate and partner up on deals. We don't mind being the deal lead and sharing our diligence. We're industry agnostic, everything from high tech to life science. We tend to shy away from cpg, I'd say is probably one industry space where we don't focus in as much, but we'll still take a look, and see if we can add value. B2B SaaS, Enterprise SaaS across a variety of industries and then medical device would be our two specialties.
This is our third fund and we've invested in almost 50 companies across all three funds. 20 in the first, about 20 in the second and then we'll do about 20-25 in the third. We do on average about five investments a year. We see about 2,000 deals every year. We’re very selective and we have an extremely high bar. We look at the founders first and make sure they’re someone we get along with, and understand and they know what it takes to keep the lights on and make payroll. We're looking at more people that have been in industry, seen a problem, and knew they could pivot faster and make changes. It comes down to the founder first and then also has to be a large market and a really unique technology that's compelling and we want to be a long-term investor that's adding value. We don’t want to be just passive, unless the entrepreneur needs us to be and they got it. But, we want to be able to add what I like to call relationship capital long term. Help them with whatever their needs are whether it's opening doors to a strategic or providing some relationships or some expertise where we can or resources, whatever it is. It's really fun, there's a lot of great ideas here but a real lack of capital, so being here at Cove Fund and deploying capital here locally and helping these companies at seed stage grow here and make an impact and then ultimately if they do have an exit those proceeds stay in this region, that's what we're really trying to do and elevate that so as the saying goes, rising tide lifts all boats, that's what we're hoping for from a VC fund perspective and investing here locally.
Jeremy Stein: In terms of Cove Fund, what do you look for most in a startup? What gets you really excited about a startup?
JC Ruffalo: The founding team really gets us probably first and making sure that when we could build a good rapport with them long term and then also, really compelling solution that offers something unique and then, massive market, hopefully, so all those three need to align for Cove Fund to get really excited. We see a lot of me too stuff out of the 2000 companies that we see a year. That's maybe making a small microevolution, versus a revolution. So something that's really unique. So we see a lot but the ones we really get excited for I'd say is when it's the team that's been there, done that, and knows how to really grow and scale a business and then obviously compelling technology in a big market that we can really lay into.
Jeremy Stein: How do you avoid being a me-too startup? What are the traps to avoid and actually build an exciting startup?
JC Ruffalo: From a life science perspective or medical device perspective, make sure you have freedom to operate. Make sure you can actually step into that marketplace. There's a lot of me-too products that then come to market and then realize they’re infringing on someone else from an IP perspective, but maybe let's go back to maybe a technology like a SaaS company that's offering some streamlined ability inside some service role or something like that. Is that really going to move the needle from an ROI perspective for them to get away from the stickiness of some software platform onto yours? Is that really going change them? When it's just the return from the customer’s perspective, finding that product market fit is key and we invest in seed stage so sometimes these companies have built a unique technology rather than talking to the customer first and fitting the needs there. You want to make sure you're deviating and doing something from a unique perspective rather than just a simple little extra add-on.
Jeremy Stein: What differentiates the winning startup from the mediocre or unsuccessful startup?
JC Ruffalo: Yeah, as cliche as it sounds, but you have to be better, faster, cheaper, stronger than what's existing in the marketplace or at least be good at two if not three of those, at a minimum. So that would get us really excited and from a perspective to differentiate and again at seed stage, it's kind of hard. But one, we look at, can this entrepreneur that we're looking to back pivot and change when need be to fit into their marketplace.
Jeremy Stein: What are the characteristics of some of the best teams you worked with?
JC Ruffalo: Good leadership qualities, good communication, being transparent, up front and honest and then, really knowing the industry. We don't want to invest in someone that's maybe coming from a medical perspective and then trying to get into maybe B2B SaaS. I'm sure they could teach themselves and do It ultimately but we'd rather go off someone who's got some experience or at least the foundations of growing and scaling a business within that industry or being within that industry for a while. We've seen some deals where this founding team doesn't have that maybe long-term experience in that industry field to really understand the needs and the bottlenecks.
Jeremy Stein: Can you tell me about Hyperice
JC Ruffalo: Hyperice went through an accelerator that I was running called Launchpad. It was 2014 and that was interesting because it was a consumer product. It was a sports recovery technology, and it was a foam roller that vibrated, but it had this really unique battery technology and they were based in Laguna Beach and it was just two founders and they did a really good job at marketing themselves. I think it really came down to the founders access to relationships with LeBron James and Dwyane Wade from the early days and then they ended up scaling the business and they were one of Irvine's rising stars. They've been around for 10 years now and they've done just amazing things and they're all over the NBA, PGA, the Golf Channel for doing sports recovery. My involvement with them was really helping them with their investor deck presentation, making sure they're getting their value proposition out and up front early to our group of panel investors at the time.
Jeremy Stein: How do you help a startup improve their value proposition?
JC Ruffalo: Storytelling. You have to be really good at storytelling, creating a storyboard about your company, you, the market, the market need, the demand, the market size, all of that, the investor deck if you will. Whether you're sending it out via email via cold or you're presenting it to a large audience of tens of thousands or maybe just one-on-one presentation. There's very, a lot of different ways, but you have to have the core elements of storytelling. Your value proposition, your uniqueness, the market, and how you're going to win the market and how you're going scale this business to really attract interest from an investor or maybe a customer.
What we did at Launchpad and what I continue to do every day is try to provide feedback to a startup on storytelling, pitch decks & value propositions. So just providing some feedback and helping them craft a story in a more compelling way was what my role was prior to joining Cove Fund for about eight years at Launchpad and then kind of a natural transition running into Cove Fund and reviewing so many decks and seeing hey this deck really tells a good story or maybe this deck I don't understand anything that they're trying to get across here. So that's one of the first baby steps if you're looking to create a startup, is creating a pitch deck that's compelling and has a good story.
Jeremy Stein: What differentiates a winning pitch deck vs. an ordinary pitch deck?
JC Ruffalo: Yeah, I could go on for days about that question, but it's really when you see one presenting on stage like a demo day. Maybe it's the emotional tie that they have. You have the first 30 seconds to hook and grab the interest of the audience. That should be transcribed as well into your deck. So if you're presenting on stage, grab it with an emotional story of maybe why you're doing this business or what got you involved and then maybe in an email or in the deck that you're sending out same thing and it also wants to be about hey, this could really be a unique and big opportunity and here's why, so that would be the way to stand out.
Jeremy Stein: What gets you really excited about a massive market? Would you prefer a startup attacking a small segment first and looking to expand, or outright going for a massive market?
JC Ruffalo: It depends on the situation for sure would be the quick answer because sometimes we don't want to be the first to market sometimes because then you could open the door for the fast followers to come. But we want to make sure that there is a real market there, one, and then a market that you can carve out inside of that. It's all variant on the company, the deal, the market and the opportunity.
Jeremy Stein: What markets are you really excited about right now?
JC Ruffalo: I feel like that constantly changes with these new fads whether it was crypto, fintech or now we got ChatGPT and AI there's so many, we like to play in the lanes of markets that are growing, that have been existing and maybe there's submarkets inside of that, that we could carve out. Anything specifically that we're looking at. We do a lot of medical device, cardio, neuro, ophthalmology and ortho so all those are growing and they will always be health issues and will always need compelling solutions that are solving and changing lives for the better. Then everything we see from a tech perspective doing good out there, and I'm not just talking about the social good aspect too but really adding value and creating something unique. For us, I'll tell you we're looking at every deal to hopefully get 30X because we're going invest in 20 to 25 startups and we feel that half of them will succeed but we understand that, half will probably not and then of the half that will succeed probably two or three will hopefully really stand out and then recover the whole fund, and then everything else can be cherry. So being VC is very challenging and you have to be selective on the deals and understand that not every deal you invest in will make it but you want them to and you want to provide everything for them to become successful.
But at the end of the day, there's things we can't control but 30X is what we're looking for. Everything else would be cherry from there and we're taking big swings here. So obviously it's got to be a big market, big opportunity that will provide big returns for us.
Jeremy Stein: What tends to differentiate a 30x+ startup or 5x startup or even worse?
JC Ruffalo: Yes the saying goes it doesn't matter when you sell, it matters when you buy right that's where you make your money is on the buy not the sell so much sometimes so it’s just making sure the valuations within range for our expectations of returns and we do a return analysis on every deal that we look at some on back of the napkin and some in real deep dive financials. Needs to be a deal that could hit our IRR (internal rate of return) multiple that we're looking for. So, making sure that the deal terms are in alignment for us. And then two is just can this company really scale and make that unicorn half a billion to a billion plus exit.
Jeremy Stein: What are some differences between life science & B2B, and what are some takeaways they can learn from each other?
JC Ruffalo: Yeah, I would say it's 80% similar across both in terms of the foundation of business at its core that can transfer between tech and life science from the business perspective. I think with a lot of startups and I'd say the life science people probably know this more is that you have to have a lot of patience. It's not an overnight success story. It's a five if not 10 year overnight success story that they've been toiling in the mud for, so that would be the biggest takeaway that you meet with a lot of startups. Especially the young ones that are maybe our generation, they have this perceived notion of hey, I want it now, I want to succeed now, I want to be on my billion dollar yacht in five years. So I think the life science founders understand that because they have a regulatory agency in place like the FDA where they put a lot of roadblocks in place for good reasons that maybe a software company should be a little bit more understanding. Granted they don't have those barriers, but they should just take patience and persistence are the things that a life science founder would really help advise a technology founder.
Jeremy Stein: What can a life science founder gain from a B2B startup founder?
JC Ruffalo: Selling. Attracting customers and just getting the value proposition out there. Sometimes it's more challenging for a life science founder to do that. I'm not doing a broad stroke of the brush with that statement, but more of just I think maybe a software founder could help them from that regard.
Jeremy Stein: Would you have any tips for a new founder?
JC Ruffalo: Listen more than talk. That would probably be my first one, to be a good listener.
Jeremy Stein: Any additional tips for founders?
JC Ruffalo: Founders I would say one make sure you do diligence first on who you're reaching out to as for the investor who you're bringing in, just like I said, there's got to be a good rapport, good chemistry, because it's kind of a dating experience when you're out there fundraising because you're kissing a lot of frogs, a lot of brain damage to go out there and pitch and send emails and do follow-ups and wait. So make sure you're targeting your investors properly, making sure that from an industry perspective or check sizing perspective, it's a good fit. A lot of founders just do the blanket shotgun approach. So be tailored with your messaging, be tailored with who you're looking at potentially getting involved in your organization, be very selective whether that's from an investor or somebody bringing on for the management team or hiring for certain roles as the company grows.
That would be probably my biggest thing is make sure that they're targeting and then making sure that investor is adding value. I have seen it too many times where investors are very passive or maybe over aggressive at the same time and can cause a lot of issues and turmoil in the startup. So it can be more harmful to have a wrong investor than helpful just to have capital so be super selective.
Jeremy Stein: What are some common errors in due diligence to watch out for? What is an example of perfect due diligence?
JC Ruffalo: Yeah, perfect due diligence is simple, have the data room ready, step one. Have the deck, have the executive summary, the basic stuff in there, have a financial model showing those expected returns, have an organization chart, who you're planning to hire, future funding rounds, when you anticipate those, having all of that in there, the cap table, I could list off, IP, you name it. For us at seed stage, we try and prepare our startups, especially the ones that we are going to invest in ultimately is, having that data room already set up. Our diligence process is pretty rigorous. It's almost as rigorous as a Series A, Series B kind of round where you’re getting more sophisticated investors involved. We want to help them do that earlier for the seed stage. So we're going in there. We ask for a lot of criteria a lot of stuff, granted they may not have it but as they go through our process and diligence, we'll want them to complete that eventually especially if we ultimately invest because at our stage we anticipate they're going to raise a series A and Series B hopefully so having all that stuff ready early and organized and constantly maintained is key.
Jeremy Stein: What are the key components of a good data room?
JC Ruffalo: All the deal documents, the pitch deck, the organization, the legal, the IP, financials, market research, market analysis, the technical roadmap, maybe manufacturing roadmap, all those sorts of things, sales and marketing information just really having a lot of that in a robust data room. That's probably 15 or so items, but you can have a lot of subcategories within that, but, that's really what we want them to have prepared. Whether it's a Dropbox link or deal doc, some type of shareable format but something anyone can easily access that's potentially investing to take and have access to.
Jeremy Stein: What parts of the data room could really derail due diligence?
JC Ruffalo: It could be any of those things, right, not having good market analysis, not having a sales and marketing use of funds break down or financial model that just probably would show that they're a little too early for us. They haven't thought of that. I doubt that a company would get to the diligence part for us to not have that. So it's very rare and again if they don’t have 15 items and they only have six of them or seven of them it’s still okay with us, we'll ultimately help them get their making sure and it may apply maybe only eight of them apply out of the 15 so it can be a multitude of different reasons.
Jeremy Stein: How early should startup founders think about data rooms?
JC Ruffalo: Before they even start reaching out to investors. They need to have everything prepared. Kind of like that statement goes, luck comes to those who are best prepared. So they should be prepared before they do any outbound research. Make sure they have the items that an investor really wants and it starts with a pitch deck. It starts with a one-page or so executive summary, making sure you're incorporated especially if you’re looking for VCs, especially make sure you're a C-Corp versus an LLC make sure you're something that's investable. That would be kind of the basics and a financial model. Thank you for reading the interview with Venture Partner JC Ruffalo. If you'd like more company-building insights like this, learn more about the B2ROI newsletter.