Up next in 10
Learn from seasonal entrepreneurs 👴 what it takes to get funding 💲 Some of the topics covered in this virtual event are:
💸 What it takes to get funding
💸 Angel vs VC vs Private Money
💸 Equity vs Convertible Note
💸 How much money is ideal for the angel round vs next rounds
💸 Capital Raise
💸 Role of the team, advisors in fundraising
💸 Preparation before meeting an investor
💸 How to close a round and get more
❓and lot more.. followed by your questions.
Guest Speaker 🥳
🗣José Mallabo @JoseMallabo
CMO, Growth Marketer Working in Higher Education, Entrepreneur
🗣Harrison D. Lee
CEO & Founder Aetho
Show More Show Less View Video Transcript
0:00
Hi, good morning, good afternoon, good evening, everyone
0:14
My name is Stephen Simon and welcome back once again to C Sharp Corner Live Show
0:20
In today's episode, we're going to talk about on how you can raise your money for your startup
0:25
today's session is going to be very interesting as we have Mahesh Chant, Jose and Harrison
0:33
joining us from the United States who brings a years of experience in the field of startups
0:39
and investment and they're going to talk to you about some tips and tricks that will help
0:43
you raise money for your startups. A quick check from the events page today on what we are going to cover is we're going
0:51
to talk about what is angel, VC and private money. We are going to cover equity versus convertible note
0:58
We're going to talk about capital raise, role of team and advisors in fundraising
1:04
All these things we are going to cover in this episode of this live show
1:09
So if you guys are watching us from Facebook, Twitter, YouTube and Twitch, put a comment, your questions, say hi
1:17
You can put ask questions to the guests and those guests are going to reply you your questions in this live episode
1:25
So I'm really excited for this event. And let me call upon the host for today's event
1:31
He is Mr. Mahesh Chan. All right. Good morning, Simon. Thank you
1:38
How are you? I'm good. I'm good. You come all prepared. But today
1:44
Yeah, I'm all prepared. Yeah. Could you put my slides in? Thank you all for joining us
1:50
This is going to be an interesting session. Usually, Simon does all these shows and today we are going to talk about startups
2:01
And when you think of a startup, any founder who has gone through startups is really they
2:08
realize the hardest part of a startup is to raise money. And my name is Mahesh Chand
2:15
I'm a founder of C Sharp Corner. I am a serial entrepreneur. I have been involved in startups for past 20 some years
2:24
I started my own companies. I co-founded some companies as well. And I'm advisor on several startups
2:31
Startups can be from apps to large companies, say consulting companies. I'm also a CEO of Mindcracker Inc
2:42
It's a software consulting firm I founded in the year 2003. So let's bring in today's guest. Today we have two guests, Jose Malabo and Harrison Lee
2:59
Both of these, Jose and Harrison has been a good friend of mine for past several years
3:07
We have worked on several projects. Jose is a former eBay and LinkedIn director and vice president level
3:16
He has ran several departments at these corporations. As you can see from his bio, he's co-founder and CEO of ViroLabs
3:27
He also co-founded and CEO of Tudelisius. That was one of the startups I was also learning from while Jose was building this
3:37
In the past, Jose has also been involved in eBay as a corporate marketing and vice president
3:45
of digital communications and so on and so forth. I will let Jose talk more about himself after this
3:52
And the next guest we have is Harrison Lee. Harrison Lee is a co-founder and CEO of ETHO
4:01
ETHO is a very interesting startup. I will let Harrison talk about this
4:05
He's also Managing Director of Oversea, and he has also founded several other startups
4:11
and he has helped startups and companies build their various presentations, PowerPoint
4:19
and he has also helped putting together term sheets and the other paper you need to raise funds from investors
4:26
So let's call our guests, Harrison and Jose, on the screen. Hey, Harrison, Jose, welcome to the show
4:35
I appreciate that. Yeah, no problem. This is a C-Sharp corner show
4:40
And we are here to glad you're here. I will let you guys start introducing yourself
4:48
Maybe Harrison, you start introductions and then Jose. And then share what you have done in the startups world and past your experience, what you learned from it, what you're working, exciting thing, anything you're working on right now
5:02
And share that. And then after that, we will do some questions. I have some of my questions
5:07
And then in the end, we will take questions from the audience. Yeah, no problem
5:12
Hi, everyone. I'm glad you guys are able to actually join us here today. My name is Harrison Lee
5:17
And as Mahesh pointed out, I currently have a startup. It's called, a company's called Aetho
5:23
And we have a product in the augmented reality space, which is called Beam
5:29
And what this product is, is actually it's kind of the next generation of video conferencing, so to speak
5:35
It allows you to actually come together in a physical space and you can bring participants into the room virtually so that you can come and communicate and collaborate together
5:45
Inside this space, as you're actually communicating with others, you can bring in 3D or 2D assets
5:53
And this allows you to actually visualize the information that you're working on together much more naturally
5:59
And it becomes much more powerful because of, especially in an enterprise setting, being able to streamline workflows when you're thinking about whether it's engineering teams or in the construction space or the medical field, being able to share information that you can talk to directly at it
6:16
It's very hard to describe the power of it without actually giving you any type of visual
6:22
So what I would love to do is actually share a video if that's okay
6:26
I'm going to put up a quick video and just take a look at a few quick clips here
6:35
Let me share my screen. Hi, Ahmed. Good to see you again
6:46
Hey, Harrison. So good to see you. Where are you? I'm in New York. How about you
6:52
I'm in London. So good to see you. I think we've got Ian here as well, haven't we
6:56
Hi, Ian. Hey, guys. I'm in downtown Atlanta right now. Thanks for joining me
7:00
I forgot my magic leap, but I've got my phone handy, so joining you through here
7:04
Thanks for joining us. Ian, how can I help you? Yeah, you know what? Obviously, coronavirus is top of mind at the moment
7:13
and I wanted to find out from you if you could explain a little bit about what type of symptoms
7:17
you'd be looking out for, and should I be experiencing it, how to go about managing it
7:22
That a great question of course Harrison it obviously on everyone mind at the moment around the world lots of infection that we seeing So the first thing to say is it a bit like flu So you get symptoms of a dry cough you may get nauseous you may have a fever
7:38
you may get some muscle pain that you often get with the flu. It's those kind of things that we worry about
7:43
More importantly, it's about if you've had contact with people with flu
7:47
or coming or travelling from an area that might have had some infection recently
7:51
So those are the things that we ask for our patients. Once we ascertain that fact, if you're at risk, we suggest that you undergo what's called self-isolation
7:59
Stay away 14 days so that you reduce the chance of infecting other people
8:05
Making sure if you sneeze for example, you sneeze into a handkerchief. Then you wash your hands regularly but thoroughly for 30 seconds
8:12
That's the area of precaution. You'll see that this virus here at the moment is quite infected
8:20
It's got this S protein on the surface here, which can penetrate human cell membrane by going through what's called the angiotensin converting enzyme pathway
8:35
So I just wanted to give you that quick clip so you can have an idea what it's about
8:39
Just talking very briefly about the business model. This is a subscription based business
8:44
It's a SaaS model for enterprise businesses. It would actually allow you to combine information and content to integrate with common applications that you're already using throughout the organization
8:57
And then the last point, just understanding my background, it is in product and marketing strategy
9:01
I've had a former startup in the SaaS space for small and medium-sized businesses and communications, and that's where this originated from
9:12
So with that, I'll turn it over to Jose to share a little bit about his background
9:16
Thanks, Harrison. Thanks for having me, Mahesh. So, you know, you hear the term serial entrepreneur, and it's kind of hard to not gravitate towards that. But I look at my career, Mahesh talked about it. I feel like my 30 years at work has been, I work in industry for like five to seven or eight years, and then I come up with a great idea, build a team, and put a startup in place, maybe raise some money, walk away, go back and go back to work
9:42
So my career has sort of been in the investor relations space
9:47
And then I started my first company, Raised Money, 1999, just before I met Harrison
9:53
In a really difficult market, we were working actually in this investor portal space where things were changing in the United States regarding SEC trading
10:03
I spent another five to 10 years working at some of the jobs I've talked about
10:09
Started another company in 2010. I self-funded that one. That's an interesting lesson
10:15
I don't know if anybody here is self-funding. I think there's some thought that you have to put into that if you're going to put your own money at stake versus raising outside funding
10:26
Went back to work again for a few more years. I currently moved into education
10:30
We have an education technology company called Vireo Labs. We did a raise on convertible debt about four years ago, three or four years ago
10:39
we're still pivoting into a new product space. We're in the middle of that right now
10:44
And I'm also working full time in education. So this is the first time where I've done both
10:49
But I think what might be interesting for later discussion is that in those big corporate jobs that Mahesh talked about at eBay and LinkedIn
10:56
I got to see what companies would do that would court to partner or buy your companies or companies like yours in technology
11:05
And there's only three or four main reasons of a big company would buy a company. startup or emerging company. And I think if you're looking towards an exit, as you plan this round
11:14
you need to think about what those companies are looking for and why they would buy you
11:19
Very few companies ever, ever go public, right? To give you a sense, there's only 6,000 publicly
11:25
traded companies in the entire United States, right? Most companies exit either through failure
11:31
or through being bought by another entity. So I think those are things that don't get talked
11:37
enough about. The other piece that I think Mahesh and I talked about, Harrison and I have talked
11:42
about when he was here in Georgia, is in the last three years, I was actually teaching entrepreneurship
11:47
and as a startup catalyst for the Georgia Institute of Technology or Georgia Tech
11:52
I got to see about 40 different companies that were in my portfolio and advising their startup
11:57
founders on everything from customer discovery, product development to fundraising. But at the
12:03
core of it is I think in your agenda is the team. I think that piece, having worked with both these
12:10
guys on the screen, is pretty critical and can't be understated how important that is because
12:15
I've known Mahesh for almost 10 years. I've known Harrison for over 20 and surrounding yourself with
12:22
solid entrepreneurs that have big networks is pretty important. So with that, I'll kick it
12:29
back to you Mahesh and any questions you guys might have. So that's good you just mentioned
12:35
about the team right so when any startup you know founder they start a company they are usually by
12:42
themselves or they have one more partner. What is your ideal recommendation of having is it one
12:49
partner two partners how many people should be there in a company to start with or you just go
12:55
by yourself and how do you see that you know based on your experience what you recommend that even
13:01
this partners or co-founders should they be you know i also see that four guys or three guys from
13:07
same it background start to come they start coming and they end up having issues with marketing and
13:14
other parts so you want to share something on that based on your experience both of you can add into
13:19
that you want me to go first harrison yeah please yeah so i think there are very few companies that
13:25
quote, make it to scale, right? Let's, I'm not going to talk about exit to scale in terms of
13:31
revenue and traction growth, right? Market penetration that are solopreneurs, right? Solopreneurs are the bane of the existence for the investment community. It's very, very difficult
13:42
to walk into an angel investor, pre-seed or VC round. And Harrison and I have been in some of
13:48
these rooms with just one guy or one person, meaning yourself. Because the investor's mindset
13:55
if that's your goal is to raise money, the investor's mindset is that, look, if this guy
13:59
Jose cannot convince one of his colleagues to convince to come and join him on this venture
14:04
how am I going to get my money out of this company? So I don't know if there's a magic
14:09
number, Mahesh, but it's certainly more than one. Yeah, I think Jose brings up a very good point
14:16
there. And then the other part of this is circling back to what Mahesh said initially, is that in a
14:21
lot of instances, especially in tech companies, is you have several tech guys that come together
14:27
knowing that they can actually build the product. But the go to market strategy is far more than
14:32
that in itself. And this is where it's very important to have people on your team that have
14:37
complementary strengths, not the same strengths. You need people that are going to be able to
14:43
fill the void of those areas where you might not have enough experience in and you need to be able
14:50
to work effectively together and it always about the handshakes i always say that across the board and this is true whether it a startup or any other type of organization is you have those gaps that you need to be able to fill and fill seamlessly without any
15:05
friction. And that's where, in a lot of instances, personality comes into play as well. And you just
15:10
want to make sure that you are aligned truly on vision. And if you're not, that you can actually
15:17
have a very constructive conversation about it going forward. And that's another area, as Jose
15:24
was talking about of things falling apart is if you don't have the right team in place that in a
15:29
lot of ways is going to harm you and not so far down the line. So we hear all these stories right
15:38
that oh these three guys started a company and one guy didn't like it he left the company he
15:42
started his own company right so can you add more to that like when you're looking for a co-founder
15:48
or when you're looking for a partner to join you what do you look for that is there I'm sure
15:53
there's no you know magic formula but at least based on your experience what do you say when
15:59
i'm looking for my co-founder or you know partner what should i look for in that that person and
16:06
also how does the equity play in that role they like equal partners or you do one's one guy has
16:12
more one has less how does you know that play out you want to take that first man uh yeah i'm happy
16:19
to talk about that uh this goes back to there's no magic formula i mean every company is different
16:25
and uh every uh i guess the way that you actually had uh formed a company initially it also plays a
16:33
role so meaning uh let's say you mahesh had actually initially came up with the concept
16:38
and you're six months down the line and building out the mvp and you decide hey i need to bring
16:43
somebody on board to help me market this thing in that instance you might tap jose and say hey
16:49
hey, Jose, I got something going on. I want you to check it out. I want to see if you want to
16:53
become a part of this. I'll even give you a co-founder title. So in that instance, you might
16:58
be looking at this from, hey, we now came together and we are going to take this thing forward
17:02
And you have to think about how much value does Jose add. And this doesn't necessarily mean
17:07
because you've already started this and so you're six months down the line, that you should take 90
17:11
and Jose should only take 10. Because you know that your strengths are only as far as being able
17:16
to take it to a certain level, but you can't actually finish that or cross that finish line
17:21
This is where maybe it makes sense because it's still not a full product yet to actually become
17:27
an equal weighted partner for Jose. And again, this is just mental math that each one has to do
17:34
and be able to actually come upon some solution that's viable for each side. And just think about
17:41
having roles that you know is going to overlap, but at the same time, each side needs to take
17:46
responsibility and accountability at that point. The other thing I do want to point out that a lot
17:52
of, I think, early companies where they make the mistake is they don't put necessary documents in
17:58
place with each other. And that is important to do. I'll kind of leave it at that and maybe
18:03
Jose can touch upon it as well. Yeah. So, Hash, in terms of, I think your question was
18:08
what do you look for? I don't know if this is right, but I think my experience tells me
18:13
and I've seen a lot of companies, I've been on the buy side of over a hundred companies
18:17
meaning my company or my client has purchased over a hundred companies. And I think the one
18:22
thing you see from the founders that got to that point is that their motivations are all the same
18:28
You have to align people's motivations on what they want to do with this project
18:32
because odds are it's not going to be about the money. If you run into a person that is all about
18:37
the money, they're the first person out the door when things go sideways. And it always goes sideways
18:42
right? Very few companies, like these stories you see on TechCrunch, like, oh, I got a napkin deal
18:48
and I showed it to an investor and he gave me a check. And that didn't really happen at the scale
18:54
people thought it did. And it's certainly not going to happen in COVID world. So I think those
18:59
are things I look for. And where I go looking is through my network. It's very hard to find
19:05
And you said it when we were talking last week. Finding a co-founder is like getting married
19:09
It is very hard to found your spouse on the sidewalk. It's probably going to be through someone you know
19:16
And so working professional networks that swim in those lanes where startup, second, third generation co-founders are sitting in is the best place to go
19:27
Because you have people that can vouch for them. So I think that's where you start
19:31
But if their vision and their motivation for being in a startup are different than you as the initial founder, it's going to be very difficult to get along with that person
19:39
But I think in terms of what Harrison talked about last, and we've done this together, you need to have shareholder agreements that say you are on, just like when I was at LinkedIn, I got equity vested over time, which made sure if I left, I wasn't going to take the whole company with me, right
19:56
So you need to have agreements in terms of intellectual capital between the CTEO, CMO, CEO, that they cannot take that with them and that their equity vests over time
20:08
And really, most of those documents are free. You don't have to go to a lawyer for that
20:13
Just go Google it. And so unlike in 1999, I had to pay for this
20:19
All this stuff is there, right? Do you have any recommended website where people can go
20:25
uh y combinator has some really good documents yeah okay that's great so that's great you brought
20:31
up this point right so you meet some investors or you meet a partner or you meet some potential
20:37
or possible you know co-founder and sometimes you're worried that what if they steal my idea
20:43
we are always i always talk to people like oh i don't know you're gonna steal my idea
20:48
so is there you know can you share something on that number one is like how do you as a as a founder
20:55
basically protect your idea by and before you sharing with your co for your friend or
21:03
co-worker or even investor angel investor what should you do or precautions you should take
21:09
to make sure that you know you're not getting screwed over i have a good uh um story on that so
21:17
there's a gentleman I had the pleasure of meeting with. He was one of the co-founders of Guitar Hero
21:24
Him and his brother built that company up with a third co-founder and eventually sold that off to
21:29
Electronic Arts for, I want to say, a quarter of a billion dollars. I can't remember the number
21:36
And they built that up self-funded. They didn't take any outside investment
21:41
And that question comes up, especially because there's a hardware company, and it's very hard when you have a hardware company to think about
21:51
okay, is China going to rip me off? So in asking that question to him, he's like
21:57
if that's where your focus is, you're focusing on the wrong thing
22:01
You should be focusing on innovation that's going to take you to that next level
22:04
if somebody gets to the point where they've caught you on where you are today
22:09
So that's just something to keep in mind is that if you're constantly innovating
22:13
that you've got to think about defending yourself at all angles. And it's not just about the product, but really how do you get to market
22:22
how do you scale this thing how do you acquire those users and keep them on board So that the little story that I wanted to share Yeah And I think there been a on this subject matter in general because it hard to
22:36
I don't know what the audience's ideas or companies are focused on. I think my point of
22:40
view chain is based on what kind of business they're in, right? If you're researching the
22:45
cure for cancer, you know, odds are you tell everybody because you want to basically cure
22:50
cancer, right? And the more people that help, the better. But in certain instances, no
22:54
But I think culturally in the startup world, we went from in the 90s and early 2000s going to investors and asking them to sign an NDA
23:04
If you did that today, no one would sign it. And they would think you being sophomoric, right
23:09
But you don't understand how this works. So I think the biggest advice that I heard years ago that stuck with me, and I tell your audience
23:19
If your idea is so good and it's going to revolutionize and change the industry and the world and you're the right team to do it, you should be telling everybody
23:28
If you can't put it together, then it's just natural competition that somebody else did it
23:33
But to Harrison's point, you can only spend so much time and money playing defense on your IP and your idea because you only have so many hours in a day
23:42
I'd much rather if I was advising a company with a great idea, I'd focus on getting them to iterate that idea and not worry about all the NDAs
23:51
It takes time and money. And it also constricts thinking, in my opinion
23:57
Okay, great. So now let's talk about this. You know, you said you based on self-funding, right
24:03
There's self-funding. I hear this from angel investor. I hear VCs. I hear all these, you know, friends and family round
24:11
Can you share some light, some different type of investments, how they usually work, and when do you really talk to which one, which type
24:21
I'll take the self-funding one real quick, Harrison, and then you can maybe jump in on the other types
24:28
So I've raised straight equity in an LLC. I've raised friends and family
24:34
I've raised seed in convertible note and, I guess, pre-seed. and I've self-funded as well
24:42
And I think what was an S-Corp. I think the point about the self-funding
24:48
my, you know, what they call experience is what we give the name to our mistakes
24:53
So I have a lot of experience. And I think in that instance, I had the money
24:58
I had the drive and the cash to do it. And I did it
25:03
But in hindsight, I think I would have probably spread the wealth and the risk a little bit more and raise money. Not because of the exposure to risk
25:13
but because of the exposure to the network. Because when you put, and this goes back to
25:19
an original thought I had when you asked this question, I think founders need to have a skin
25:23
in the game because other investors actually are moated by that, right? They know if you have money
25:28
in the game or skin in the game, you're not going to go anywhere. You're going to give it your all
25:31
I think by self-funding, you don't get the network effects of having seed investors that can help you
25:40
And I think that was a learning lesson for me. So if I had to do it again, if I had the money, I'd still probably do a little bit of a raise if I needed it
25:50
Yeah, I'll talk to some of the different types of investment vehicles that you might want to consider
25:58
so uh when you're first starting out and then you talk about the round um the first round that
26:04
you're usually going after is a friends and family uh again this goes back to what jose
26:08
mentioned earlier it's that network around you i mean the people that are closest to you if
26:13
you're actually uh very excited about this and you believe very passionately that this is something
26:18
going to take off uh is the people around you uh just as excited about it do they also believe
26:24
in what you're describing because it goes back to, can you convince that next person? And those
26:31
are the people that would be most likely to be honest with you. So those are the people that you
26:36
might want to go to to see if they're willing to actually put their money where their mouth is and
26:40
actually back you up on your project. So that would be a first round that you might want to
26:47
look at. That's not to say that that's the only round that you should be considering. And that's
26:52
not to say that in a lot of instances that the people around you also have the means to be able
26:57
to actually financially support you. But in that case, as you actually progress and you put your
27:01
own money towards this and you build this thing up, you might be looking for money from individual
27:06
investors, angel investors. These are people with high net worth that could actually infuse
27:15
capital into your organization. And that's where you got to consider what's the best way to actually
27:21
take the money. And there's several criteria that you want to consider for this. In my mind
27:27
the biggest criteria in all this is speed of execution. And when you actually think about
27:32
actually getting money in the door, documentation is important, especially on the investor side
27:37
to make sure that they're being protected, they actually have the preferential treatment for being
27:41
the first investor in the door. In that case, that takes up time and takes some money. And a lot of
27:48
that legal money is money that's going to be footed by you first before that money even comes
27:54
through the door. So that's where in a lot of ways, a convertible note or more common these days
28:01
especially on the West coast of the U S is a safe note might be something to think about instead of
28:08
a price round, a price round being where you actually provide equity in exchange for
28:15
the funds. That said, not all investors are going to be willing to accept that
28:23
So talking about the convertible notes and the safe note for one second
28:27
a convertible note is basically a loan, right? You're taking money. There's interest tied to
28:34
that money. There might be a discount factor or rate tied to that. And what that means is
28:40
on the next round when their note converts and you and that investor are deciding between the
28:48
qualified round at what it converts at. Maybe you're saying I'm taking $25,000 right now
28:54
And at $500,000, that's the qualifying factor for when they actually convert
29:01
And at that point, they would actually receive the benefit of the discount. Plus, there might be a
29:08
valuation cap that is placed. And we'll get to that discussion a little bit later, but these are
29:14
just different terminologies and different points that I'll bring up for those of you that might not
29:18
be aware of them. A safe note is very similar, but it's even simpler than that. It's a very quick
29:26
document that is put together. It's like a convertible note, except there's absolutely
29:32
no transfer of obligation of a loan. It's just basically a note that dictates
29:41
I'm sorry, it basically is an agreement that dictates that at the next round
29:46
I am going to convert to equity and I'm going to get this discount
29:50
and maybe there's a valuation cap. So there's no difference there except there's no interest or loan amounts tied to it
29:57
So those are a couple of key points. that I wanted to bring up there
30:03
In terms of valuation, I also just want to touch upon it for now
30:07
and we can continue that discussion later. Yeah, so there is a question
30:11
I want to cover that question as well. Okay, we can go back to that later. Valuation, let's pick this a little later
30:17
because I have a separate part on valuation. So just back to this convertible note and safe note
30:24
if you have a, as a founder, if you have a choice
30:28
which one would you pick? You're asking both of us? Yeah. Well, I'm a big fan of the convertible note
30:38
I think people, at least in the early stage, you know, it wasn't the first for this last company
30:43
It was the second money in. People seem to like the assurance of the discount
30:50
and liquidity moment having a timetable, right? And it actually allows me to adjust it
30:57
So I've had to adjust my note upon an expiration date, and it was very easy to do so
31:02
I thought it was also very easy to explain to people. I think it was – don't take for granted the fact that you as a co-founder not only have to explain your team, your idea, your team's ability to execute on the idea, the implied or the explicit valuation of whatever term sheet you're putting together as it relates to your revenue projections
31:23
And then you have to convince them that the term sheet or the container in which you're going to take the money actually makes sense to them
31:31
There's a lot to educate on. So to me, the convertible debt, when I found it to be easiest to explain, because within this stage, and this is something we could get into, and Harrison kind of touched on it, early stage investors are people that believe in your space
31:47
So particularly in this downturn that we're going to face shortly, if you are in the hardware space, you're going to have to court people that believe in hardware for the industry you're in
31:57
It's very, very hard to convert non-hardware investors into a hardware space, right
32:03
I've seen that the investors early stage tend to invest what they feel comfortable with emotionally
32:10
So you see doctors investing in medical technology because they're emotionally invested in that space
32:15
they are not going to invest early stage into education technology, right
32:21
That is something that I think investors or startup co-founders need to think about
32:27
It's very hard to convince a Republican to vote Democrat. And that's the same mentality you have to take when you're going after early stage investors
32:38
Yeah, go ahead. I just want to add one thing to what Jose said there
32:41
And that's very important also when you think about strategically what type of investor you want in the door
32:48
Because if you did have a doctor that wanted to invest in your hardware company, what can they really help you with
32:56
So that's something that you really need to think about because it's about the network that you want to build
33:01
So you are saying that if no matter who's giving money, you should always think about if they can also help your business
33:09
To the extent possible, you got to give consideration of value to that, right
33:13
Right, you do. And then you also have to kind of gird against, well, we can get into this, but don't give
33:20
away your board seats. Okay. So we'll go back and board. There's a separate discussion on that
33:25
So there's a related question in the comments from Vivek Sharma. Vivek Sharma is asking, in the friends and family round or maybe angel round, how much
33:34
equity you should give away? And let's say there's an investor. He likes your idea
33:38
he likes your product and he says you need money i'll give you you know 100 000 or whatever
33:43
but i need half of your company what should you do in that case and you really need money
33:49
it's just like two three questions combined i will go you want to take that
33:55
right so the reason i'm asking this question i talk to the investor they're like oh it's a good
34:01
idea you build the app oh i have 100 000 or whatever i want half of it if it was so is me
34:07
and this is now would be let's say this is in my current startup if somebody did that to me now
34:12
because this is my third startup i'd say i would look for who they are what they have value they
34:18
can add if they can't add any value that's a dumb money right it's probably somebody who just
34:23
believes in you mahesh you harris and me jose i would take it as a loan i wouldn't let them buy
34:30
into the company um it's if it's the first money in and they're saying here's 100 grand take it go
34:36
way, I'd say, okay, fine. I'll take it as a loan. I'll write it as a loan because it's really hard
34:43
to anticipate your capital needs. If the money's coming to you, how it's going to impact your cap
34:47
table, how it's going to impact your ability to hire other co-founders. If you give away too much
34:51
of your company, that means you can't hire a CTO or a CMO with equity because you gave up half the
34:57
company to a friend. Yeah. So I want to put it in practical terms of how to look at this also
35:08
from the perspective of an entrepreneur. I think too often entrepreneurs hold what they have near
35:17
and dear and they are not always the most practical in how they think about valuation
35:25
and a lot of times they think what they have is uh worth a lot more than it really is at this point
35:31
in time just to be perfectly honest until you actually have a product at the door you have
35:36
customers uh you have no real proof of concept and this is something where you need to give
35:42
consideration for that maybe it's not 50 but if you do have to price it and it is as jose pointed
35:48
out the right type of investor that has the right network and can get you to that next level
35:53
you have to take that for what it's worth and realize that this person might be somebody that's
35:59
very valuable to me and maybe it does mean giving more of my business up initially and you'll have
36:05
to just figure out what the best vehicle or instrument is to make that happen and maybe it
36:11
is that you know there's a certain amount that you're taking now and if they're offering more
36:18
than you need, always just take what you need. Because as your company, as more development
36:26
happens, as you grow the company, as you actually show further proof and validation of where you're
36:32
at, valuation grows with it. And then you can take that next sum of money at a higher valuation
36:38
So you just have to think creatively about how best to structure it
36:43
So you just mentioned, right, you just mentioned that you have to have product ready and some
36:48
users and I meet, you know, I meet all the time, these entrepreneurs, startup founders, they say
36:53
oh, build this cool app. I'm building this cool app and I need to raise money. Is that the right
36:58
time to go to the investors? What do you think is the right time to go to the investors
37:05
These are all existential questions, right? You know, friends and family, you can go to friends
37:12
and family when you wake up on Monday with a great idea
37:16
I think those investors are going to believe in you because of who you are to them
37:23
It won matter where you are with a startup idea I think if you are in this wireframe of an idea and I tend to talk in software terms and you have a working demo you better have some proof that there is a market for this
37:39
right? Because then you have no leverage. You have no leverage. And what Harrison's talking about
37:45
is taking too much money too early at a too high evaluation. And your next round is a down round
37:51
where you value the company, let's say, at $500,000 when you first take your first $100,000
37:57
which means you gave away 20% of the company for a half a million dollar valuation
38:02
And then you have a down round, which gets you down to a quarter million dollars
38:06
Very few companies survive that, right? You have to build based on equity in the company and proof of traction
38:13
so some proof that a market exists for what you're trying to um solve is always better than
38:23
going out with just a napkin in my opinion harrison you want to add something to yeah so uh
38:30
there's several criteria to look at in that and uh one of them is your track record uh not only
38:37
about this startup but let's say you actually had a previous exit well then yeah i mean somebody
38:43
would look at that and say, hey, this person does have that recipe for success. I want to be the
38:48
first one in to participate in this idea. And that then that might make it easier. But in terms of
38:56
the type of investor, it generally is either friends and family or angel investors. Too often
39:06
I think first time entrepreneurs get confused and they're thinking I'm going after VC money
39:11
just recognize that VCs are not your risk takers. Institutional money only comes when they see enough traction that Jose is
39:21
talking about. That's when they come in the door is to say, okay, this has been proven out and now I want to take a bet on this person
39:28
Even the ones that are, uh, uh, build themselves as early stage investors
39:33
you just have to recognize that. And this goes back to your question, Mahesh
39:38
At what point do I take money or go after money? You're just spinning wheels and you're wasting a lot of time if you think that while I'm still building and I have not yet put any customers on board or showed any real traction aside from me actually developing this thing in my garage that an investor is going to put money in
39:58
Very rarely does that happen. Yeah, and I'll add Harrison, because I'm sure the VC thing will come up
40:04
Understand, you're right. Their business is to mitigate risk. It sounds like when they're marketing collateral that there are these risk eaters
40:11
They're actually completely the opposite. And what they want at the end is a 50 times multiple exit, right
40:20
So if they put in a million dollars, they must return $50 million to their investors
40:25
That means they're taking probably 30% of their business with one check
40:32
So that's why know that you have to cultivate your business in the early pre-seed and seed round with angels and super angels
40:40
If you're going to a VC with a napkin, that's when they're looking at ideas
40:44
There are biz dev people and venture firms that just want to see what's out there so they can assess where their investments are in a portfolio that is around your business
40:55
I've been in those meetings and you can feel it right away. All they're doing is trying to see how you compete with their portfolio
41:01
Okay, great. So let's, you know, just I want to clarify this one more time. So let's say
41:07
I build an app and this app is for say students learning online and I'm building this app
41:15
So do you, are you saying that I should have some few paid users before I go to investors
41:22
Is that the right time or just build the app and show how it works that the right time
41:27
Go ahead. Sorry, I was going to say, yeah, obviously paying is kind of the holy grail, but that's not necessarily the case, right
41:37
You just have to think about it from the standpoint of what it is that you're building
41:41
Let's say you're building this online learning app, but then you get somebody in the gaming industry that says, okay, I see the value of what this could be used for
41:50
I want to give you a little bit of money so that I can actually turn this around and use it for my stuff
41:54
That's not the core purpose of what you built that for. And for an investor, that doesn't really show that you've gotten traction on what you're doing, right, even though you've collected revenue
42:03
What's more important is that you've gotten these focus group tests out there and you've actually shown that of these 25 universities
42:11
you're actually seeing positive results from all the students that are have played and experimented with it and they're very receptive to it
42:19
And there's a need to continue that discussion. Maybe it's just a memorandum of understanding, an MOU that you've put in place with a couple of these institutions that says, hey, we want to continue to work with you on this to build it to that next level
42:33
That's proof. That's traction. That's something viable for an investor to be looking at
42:37
Okay, great. Let's take one question from audience now. Lerner Atul from on the Twitter
42:46
asked question, how does investor evaluate the value of the startup and then decide that
42:53
equity percentage? So how much you give up and how do you know what the value of the startup
42:57
is? It's valuation. Hey, so the art of valuation is more art than science, right? I'll give you a bit of a sense, right? So if you are that company you're talking about, Mahesh, right? Company that's an online education company
43:17
an investor the question was about an investor not a co-founder i think we need to talk about
43:23
the co-founder valuation the investor would look at your nearest competitive peer in the market
43:28
to try to infer a valuation whether that company has raised a round that i can infer valuation from
43:34
and it will apply those metrics that underlie that valuation to your company right so if there's
43:40
another company that just did a C round that was valued at $3 million at the same stage you're at
43:48
now with a similar product or company, I'm going to imply those underlying metrics to your business
43:56
and probably work my way down from that and give you a discount because you're chasing the other
44:02
company. So I think that's your first, like, it's just like anything else, right? When I was at
44:07
eBay, every investor, same concept, though we're publicly traded, had an implied valuation for
44:13
Amazon and put that onto eBay Incorporated. And eBay was in a tough spot because their business
44:20
model was similar, but not the same as ours. So we were being judged by Amazon's cashflow
44:26
their inventory turns, their gross margins, the amount of cash that they run through Amazon.com
44:31
versus us. And it was apples to oranges, but that's what investors do. They try to make you
44:37
look the same as somebody. So this goes to, I think, what I said earlier, and then I'll shut up
44:43
That is, you better have a good internal valuation metric in which to take to market
44:49
because otherwise that's what I'm doing as an investor. Okay I will take one more question And this is like I see this also all the time especially the young guys You know they either just done with the school or they are doing school or they are like first time entrepreneurs They jump on different things from time to time They will do this thing for six months and jump on something else Or sometimes they will work for multiple times multiple things
45:18
So question is from Sweta. Is there any reason for somebody to work on two, three startups rather than just focusing on one? And what is your advice to these young guys? I mean, they're probably students usually
45:30
I can start to talk about that. I mean, and this might be personal to me
45:41
I believe you should really just bet on one horse that you think is going to win
45:49
Because if you're dividing your time on a startup in the very early stages, that's not going to end well
45:56
you really need to stay laser focused on what it is that you think is going to be
46:00
the one that's going to hit and be successful. That's not to say that in the early stages
46:08
you're not experimenting with different things, because even within the course of one company
46:13
the most important thing to recognize is to think about pivoting, and pivoting very quickly when you
46:20
have to. And when you're actually building a business, and a lot of times you might realize
46:25
that in the very beginning, what you're thinking that it's going to be is not what it's going to be
46:29
in the end. And that happens far too often. And you should assume that that will happen
46:34
So as you're building this thing, as you're actually getting creating that feedback loop
46:39
and hearing what people are telling you, it might be that you're going to have to start tweaking
46:43
whether it's the business model, whether it's a product, whether it's a feature set, all these things are very valuable to learn, and just to hear what others are telling you
46:53
you might think that this is the greatest thing but if people aren't buying into it
46:56
it's just not going to be anything that's productive for you going down the road
47:02
so pivot very quickly all right let's take one more question for jose let's do what is your best
47:13
what is your best approach to test your idea So early stages is this piece. You can Google it. It's just called customer discovery
47:24
There's multiple ways to test product. The earliest stage is customer discovery, and that is
47:27
testing your hypothesis. So my hypothesis for my mobile platform was that young high school
47:35
students would use a mobile app to discover what their career interests are and chat with
47:40
college reps about the education needed for those careers, right? That's our hypothesis
47:46
And the only way to test that is actually going and interviewing those types of customers on how they're solving for that problem now
47:54
Removed of your product, removed of your idea. That is not a product test
47:57
That is trying to understand, is there somebody in the market, enough people in the market, solving for the problem that I see being that I'm trying to solve for
48:07
So just identifying how they do that. And that can be, you know, 50 to 100 people that you iterate on
48:14
But then there's all the other things that I think we can talk about in terms of once you get past wireframe, past prototype of A-B tests that are really more like user experience tests with your product, whether it's digital or physical, to see if they're viable
48:31
But I think I'm guessing that, Mahesh, that was a very early stage question
48:36
So I wouldn't look at it as product testing. I'd look at it as consumer testing. okay so let's take one more question from facebook for harrison um which is my statement
48:49
which investment is better made by a person who can help me develop my idea or by a person
48:56
who has a good knowledge of market uh that's a great question i mean if it's kind of an either
49:03
or um i don't know that i have a a great answer to you other than part of that is going to be
49:09
be personality as well because um let me kind of break it down of the thought process that would go
49:16
through my head and actually making this decision i would look at my internal team and what i have
49:21
within my resource pool right now right do i have more developers or do i have more people that are
49:26
knowledgeable at the market that might help make my decision a little bit easier if i have more
49:32
development help right now well maybe i need somebody that has more knowledge of the market
49:36
to give me further insight to tell me which direction I should be actually taking it when
49:40
we actually go after customers. And then going back to the personality side of the equation
49:47
who's going to fit better, whether as an advisor, as an investor, and who's going to
49:52
from a standpoint of maybe demanding results, these are all things that you got to consider
49:59
because a lot of times investors, when you take money, you're going to have to show how far along
50:05
from a progress standpoint you're making. And the more reporting, the more updates that you need to give
50:12
or the more input that an investor might have, that might, for better or for worse, shape where you're going
50:20
and that might not always be productive. As an investor, you know where you're headed with this
50:25
or you should, with enough clarity that you've got to separate the signal
50:30
from the noise and know sometimes what you're hearing is either going to help develop further where you want to take the product or not
50:39
So those are all key points that I think you have to keep in mind
50:44
I want to circle quickly because I know we're running out of time back to an earlier conversation
50:50
And the reason I want to make this point is because I know this comes up a lot when you're talking about investment and from investors
50:57
sometimes in early investors one demand non-diluted equity never give that up that becomes a huge
51:07
challenge down the line and what that means is that somebody says i want 20 equity in exchange
51:14
for however much money that i'm giving you uh what they're saying is that as you actually go
51:19
and raise further rounds they don't want to uh dilute at all meaning that they want to keep their
51:25
20% even as the company needs to expand. Well, what that means is that you're never really going
51:31
to be able to grow that pie. And this goes back to what Jose was talking about of having enough
51:36
equity available so that you can bring on additional people that is also going to be
51:42
equity employees and being able to raise additional rounds of capital. So I just wanted to bring that
51:49
point up very quickly, but I'll turn it back to Jose to continue on this question
51:54
Yeah, I think the question was about, you know, somebody knows the market. There's only four kinds of companies, right, that start up. And most of those companies that are startups are either going to resegment or disrupt an existing market or create very few of them create their own markets, right
52:13
In today's world, there's very few markets that are not in existence because somebody's
52:18
built it. So if you are looking at this thing and saying if all things are equal meaning I giving you half a million dollars for the same equal share same term and you have a guy that completely of no value to your strategy and a woman that is of value to your strategy you always take the smart money
52:37
But I think it's a piece that Harrison was talking about that I want to also clarify on in terms of negotiating
52:44
When you get into the late stage round or late seed stage round, some of these bigger investors are going to not just ask for non-dilutive type terms
52:52
They're going to ask you for, can I have a seat on your board? that's a very, very careful discussion you must have with your co-founders
52:59
Because I'll give you an example. So if you add more about the board, right, before you go to the seat
53:05
like every startup should have a board? Yeah. So typically the co-founders comprise the board, right
53:12
So in order, at least in the U.S., I'm a Delaware LLC
53:17
you must have a board of governors. Typically they're your co-founders. Typically you each have one
53:23
So if three of us were co-founding a company, We each probably be on the board. But if you only have two and you bring in an outside investor and give him or her a share of the board and you have to make a pivot into a new market, you might be hampered because that board member doesn't want to do it
53:39
Right. And that's the piece I've seen investors, I'm sorry, entrepreneurs make mistakes on
53:45
They give somebody a board seat and then you have to change. And you're like, wow, I need, according to my bylaws, he needs to vote with me
53:53
and he can't he doesn't want to and you're stuck okay can you a little bit more spend a few minutes
54:01
on the smart money versus not smart money who is that dumb money what is that other
54:05
people yeah you mentioned some smart money a few times already and i think some people may not know
54:12
that um i think at the highest level smart money is money that knows your industry and your business
54:18
and can provide the added value to your business beyond the money
54:24
Dumb money is like if Harrison asked me for money for his enterprise
54:29
and I gave it to him, I really can't add a lot of value because I don't know augmented reality real well
54:35
So it's more passive. Now, if you were to go ask Reid Hoffman for money, that's smart money
54:43
Or your Shark Tank, right? Shark Tank, I'm sure. Or if you get money from then, even if it's a little bit money, they're going to probably help you take your product everywhere
54:52
Well, you see when, you know, like, for example, you see the startups on Shark Tank that have fashion or accessory stuff
55:00
They tend to gravitate towards, you know, Damon. Right. They tend to gravitate towards the sector expert
55:06
If you want to go to software, you go to Mark Cuban. Right. So it's that what we talked about earlier
55:11
investors tend to invest in things that they're personally good at. Okay. There's a question on YouTube. Can you put that question up, Simon
55:25
What if after two years of startup, only two out of five are focused spending time
55:30
money and input thoughts? So this looks like they have five co-founders
55:36
Yeah. This is a pretty good question, I think. I'll let Harrison talk because my throat's tired
55:45
That's a great question. So this goes back to putting those founder documents in place that Jose had talked about earlier and actually having a time limit on those documents, meaning that you might be saying, okay, each co-founder is going to get 20%
56:02
But there is that 20% is only earned over four years. And there might be a 25% cliff on that
56:10
And by that cliff, what we're saying is that this person has to be involved for at least one year, if it's 25% of four years, before they earn any equity whatsoever. And they're only going to earn as much as the amount of time that they're actually spending in it
56:26
So you have that five co-founders and then three are almost out of the game at that point
56:32
What you need to think about as a team is do you keep those people on board
56:38
Keep in mind, just because you're a co-founder doesn't mean that you can't get fired
56:43
You can get fired. And it's something that as it grows, that might be the reality of it
56:50
That doesn't mean that you're taken away from that co-founder title. And that doesn't mean that you're taken away from the equity that you've already earned
56:57
That still remains with you. But if you're not putting the time and effort into it, it's time to move on and part ways so that there's room for those that want to continue is going to be able to bring on the right team to make it happen
57:14
Yeah. And I think if you're not contributing the company and other guys trying to grow it, you should definitely you already have your equity
57:21
there's no reason for you to like stick around let them do their job that's what i would think
57:27
right yeah i mean it's it's tough right i mean there are some people that get pushed out that
57:32
obviously are not going to be happy with it because they feel that uh they belong there um
57:36
but um yet that this is where the board uh that that is comprised needs to sometimes make a vote
57:44
and just depending upon how the board is organized uh maybe 60 vote uh is kind of the deciding
57:51
factor. So that is another question from Facebook. Can you put that up? I was going to ask the same
57:59
question during this COVID. First of all, do you see any difference or changes in the startups or
58:06
funding or investments? And also what advice would you give to a startup company
58:12
get a job um so i i'll talk to this and i know we're going over time i can stick around
58:21
that's all we have enough we have a little extra time no worries yeah so i say this in in u.s terms
58:29
and then i'll speak to it globally in the u.s in 2008 and 9 we had what became the great recession
58:34
right at the time it was the most it was the most intrusive economic downturn in modern history
58:41
short of the Great Depression. I was working at LinkedIn, traveling internationally of all places
58:46
There's some places, India, Australia, other parts of Asia, Europe, and South America
58:51
And in the global sense, it was called the global financial crisis, the GFC
58:55
Opened my eyes in terms of how the world looked at the American causality of this economic downturn
59:02
I believe by most indicators that the downturn we're about to go into will be greater
59:08
an impact on the investment in capital markets than that was. I say that because unlike that one
59:15
that recession tends to travel geographically over time. It usually starts on the east coast
59:19
of America and travels west and goes around the world. This one happened instantly in every corner
59:25
of the world at the same time. So I think all the sectors that are impacted in the 2008, 2009
59:31
sort of while the rest of the world was getting hit by this crisis America was
59:37
getting healthier right and this is different so I think the challenge for
59:42
anybody in the startup space now going after money is going to be all things we
59:46
talked about you have your plan in place you have your papers in place your terms your team ready to go after this because it's going to be harder than
59:54
ever in my opinion and I raised money in two recessions to convince people in
59:59
even your friends and family, to let go of something that we find very, very personal here in the States
1:00:05
and that is their cash. It's a very personal thing to write somebody a $100,000 check
1:00:12
It's emotional even if they come off like they don't need it. It hits every part of your being to cut a check like that to anybody
1:00:21
Because for the most part, you're telling these people, I think entrepreneurs should tell these people
1:00:26
assume this money is gone. Now, that should be in your mindset when you go and ask for money is that this is high risk, high reward
1:00:34
But if they are network friends or associates, you better be honest with them that the odds of returning this money to them is less than 1%
1:00:43
Right. That's that's the startup. I think 98.7% of startups will fail
1:00:50
And so you're playing in that 1.3% of return on investment. And you have to understand that the window of success now in the form of an exit or getting to scale or an IPO is going to be longer than it was before
1:01:06
Great We almost done with the time If last one advice you will have to give to a startup founder co entrepreneur What would that be from your learning experiences both of you
1:01:20
I just want to reiterate something I said earlier because it's the most important thing that you can learn is if you need to pivot, pivot very quickly
1:01:28
And I think too many entrepreneurs hold on to their idea and are unwilling to listen to the feedback that they're receiving until it's too late
1:01:37
Just recognize what people are telling you, recognize what the market is telling you, and just make sure that you're adapting necessarily
1:01:45
Yeah, I'll echo that in a different way. Best definition I've ever heard of what a startup is
1:01:50
A startup is just an idea looking for a business model, right? So don't get stuck on your idea
1:01:55
and if you can the best cash you can drive is the one you can control it's called revenue
1:02:01
all right that's great i think this was a great session thank you both for coming and this time
1:02:09
we appreciate it and hope to see you soon thank you guys have a good one
#Business Finance
#Venture Capital
#Financial Planning & Management
#Business Formation
#Crowdfunding