Money Rehab with Nicole Lapin - 411 on Venture Capital with Jesse Draper, Founder and General Partner of Halogen Ventures

Episode Date: January 7, 2022

For Money Rehab’s 200th episode, Nicole discusses all things Venture Capital with Jesse Draper. If you want to figure out how to invest in companies that have a promising future, Jesse’s your gal! Or, if just hearing “Venture Capital” typically makes your eyes glaze over, Jesse will put the “fun” in Venture Capital Funds.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Before we get started, I can't help but point out that today is Money Rehab's 200th episode.

Can you believe it? It's true what they say. Time flies when you're having fun. And also when you put out an episode every day of the work week. I think the best way to celebrate is with a 15 second dance party. Let's do it. Okay, I'm done doing the sprinkler. Back to business. Today, we have an adventure in venture capital with a very special guest, Jesse Draper. Jesse is the founder and general partner at Halogen Ventures, a VC fund focused on

supporting female founders. If you want to figure out how to invest in companies that have a promising future, Jessie is your gal. Or if just hearing venture capital typically makes your eyes glaze over, Jessie will put the fun in venture capital funds. So let's get into it. Jessie, welcome to Money Rehab. I'm so excited. I feel like this has been a long time coming and I'm so happy to be here with one of my very good friends. I'm honored to be on your show. I'm honored to have you here. And I want to dive into your firm Halogen, of course. But before we do, can we take a step back and look at this big picture of this VC world and explain to our listeners

what a VC does? 100%. And it's confusing. I think high level, you hear about stocks, and you hear about private investing. We fall under private investing. Stocks are public investing. That's public companies. You can buy stocks. We are the riskiest asset class. And I'm in an especially risky asset class because we are early stage investors. So I get into companies at the earliest stages, like three to five employees at a time with an idea and a PowerPoint presentation, sometimes a product, sometimes not. And often you're betting on the people. And so that is sort of a high level look at it's private investing. But then also what I do is I go and I raise a big pool of money. You raise a big pool of money and you invest it thoughtfully for your investors.

And then the model is basically, I have to make back all of my investors' money. I have to invest in companies that grow big enough that when they sell or go public, that that will return hopefully my fund many times over. That's the business model. So how much money did you raise so people can follow the money trail and how much you're going to have to make and then how much you make ultimately? Because this is not a charity. It's not. It's not a charity. So the first time I went out, I pitched about 500 potential investors,

mainly because you don't know what an investor looks like. And I used to run a talk show, as you know. And actually, a lot of the people I pitched for my first fund were some of my guests on my talk show. Valley Girl. Valley Girl. Must see. Go back into the archives. Please don't.

So basically, I went out, I pitched 500 potential investors for fund one, I raised $10 million, 10.4. And then use that invested in, you know, 20 to 30 deals, went and raised another $20 million. And now we have about $50 million, which are assets under management because we do direct deals and we have just a lot of different vehicles. And so we manage about $50 million today. And how do you make money from that? What is the 2 in 20 model? Yes.

So the 2 in 20 model, which we've pushed up to two and a half, and I think is a little more standard at two and a half now because, well, here's the model and this is why it needs to be more. So I go and I raise a $10 million and the two and a half and 20 model means I get two and a half percent of that per year to manage my team, pay myself, etc. So on a $10 million fund, that's $250,000. And I need to hire a team. So we have to be lean and mean. We're a startup ourselves. And that's why you have to keep raising these funds and get management fees where you get 2.5% from them, the $20 million fund. And it usually tapers down. So after four or five years, you actually don't get anything from that fund anymore,

hoping that some capital has returned or you've raised another fund that you're using that management fee. It's a weird model. And it's where most companies make more revenue and grow. I always joke that VC is like the land of constantly depleting resources. So you're sort of like, I need to grow my team, but I have less than I had when I started. And so you have to go raise another fund and take a percent from there. So in the beginning, it was sort of like me. And then I hired this incredible woman, Ashley, who has been with me for the last five and a half years, is now VP. And now I have a bigger team. And we'll go out for another fund at some point and have an even bigger team. That means the way we hope to make money as a VC because of this constantly depleting resources issue is we hope that we invest it well enough that then we multiply the fund many times over. So the deal in my fund is basically all of my investors within 7 to 10 years, get their full investment back. And then on the second,

on like the 2X and the 3X, et cetera, I get 20% off of the top. So they get 80% of the profits essentially, and I get 20%. And that goes to, can fund my management company, can be great bonuses for my team, especially they'll have equity in our fund typically. And so that's how I get paid. Can be college money for your three boys. Hope so. So there's so much lingo in VC land. I don't even know where to start, but I'd like to try to get through some of them because I think the language is the biggest impediment for a lot of people to start investing. So pre-seed, seed, series A, those definitions.

So our fund is a pre-seed, seed fund. And we invest very, very early stage. And that could be pre-seed, seed. I mean, I joke you can call them the banana round and no one will really care. It's just, I think what pre-seed seed, I've seen a seed one, a seed two, really anything before the series A. So it typically goes angel. It's like friends and family round, angel round, pre-seed, seed. If you need more time with your seed or you want to raise a little more, sometimes there's a seed one, two, three, four, five, six. And then there's a series A.

And I think the series A is really the big round that everyone's prepping for. Typically, VCs like myself will collect data on what valuations look like at that type of company. of what valuations look like at that type of company. Often it's like a multiple of revenue and we will decide how much that company is worth at a series A. And that's really, I think, where VCs pay the most attention to certain milestones that the company's made, whether it's like, typically for Series A, you'd have to have a million in revenue in some industries or 100,000 users. Certainly a million in revenue. I feel like that is a very big milestone for Series A.

So what I explained with the seed and the seed one and all of those is sometimes people raise a seed to get them to a million in revenue and they're not at a million in revenue. And so they raise a seed one to continue to get them to a million in revenue so they can go out for their series A and say, I have a million in revenue. And that's just, you know, that's one case, but I do feel like I hear that a lot right now. And an angel round is like a friends and family round. You're asking individual people who probably have a lot of money and invest. Exactly. An angel round. And, you know, it's becoming much more democratized now. We're seeing a lot more. You can crowdfund,

you can use angel list where if you raise under $10 million, you can have as many investors as you want, where I'm limited. If it's over a $10 million fund, I'm limited to 100 investors for SEC issues. AngelRound and Friends and Family Round could essentially be the same thing. Sometimes people just call it Friends and Family Round, and it's literally like going around to whoever you know, who might have some cash to get you off the ground. And who usually it's people who want to bet on you. And angel investors are very important to me because they kind of tell me, okay, someone bet on this person and, or a couple people bet on this person and that makes it valuable in some way. And they've already raised some money from their

friends and family. And I now would come in and be like, they've raised $100,000. And I want to come in and write a million-dollar check to help get them to the next level because I see that they've done a lot with a little or whatever it is. But I feel like angel investors are really important because they often spot the talent before we do. Hold on to your wallets, boys and girls. Money rehab will be right back. Now for some more money rehab. And getting to the next level means getting to a higher valuation. How do you figure out valuation? a higher valuation? How do you figure out valuation? Valuation is the best rules that I kind of live by. And I often tell our founders, which is not the best negotiating tactic sometimes

because I should be like evil investor who's like getting the best deal I can. And I am. But I'd say the rule of thumb is investors are constantly trying to push the valuation down. Because if I'm writing a million-dollar check and I want to own 10% of the company, it has to be at a certain valuation. And I'll try and bring that down because investing a million dollars at a $10 million valuation is very different than me investing a million dollars at a $5 million valuation. I would much prefer to invest at a $5 million valuation. And so investors are constantly trying to push the valuation down because they want to own the biggest piece of the pie they can. Founders should be, but often

aren't, which is why I try to be fair because sometimes I'll be like, this deal is too good. And just so you know, you could get into trouble later if you give away too much of your company too early. If someone's investing a whole bunch of money for 20% at a $1 million valuation, you're just going to be effed when your company is a $50 million valuation because you've already given away too much. You probably will definitely own less than 50% of your company, probably significantly less. And by the time companies have raised multiple rounds of funding and all of these things I'm telling you vary on industry and whether it's like fashion e-commerce or software, like all of these things

vary a little bit. So, you know, don't set them in stone, but your valuation, like for a hardware company, you're going to have to raise a hundred million dollars over time. And that's a capital intensive business. And so if you've already given away 20% of your company for a million dollars at a $1 million valuation, which doesn't even totally make sense. But I occasionally have founders say like, oh yeah, we're raising at a 2 million or whatever. And I'll say, okay, cool. I actually feel like we should bump this up just a little bit just to set you up for success because I need to incentivize you to have enough of the company to take this thing all the way for me. So valuation is just what your

company is valued at. And the different data points that I look for are revenue, often in consumer technology or direct-to-consumer products. It's a multiple on revenue. So like we sold, we sold a company called This Is L to P&G, and it was about a 5x multiple on revenue. And that's the type of thing that, that we kind of like look for. But then also sometimes the company is valued more based on their brand. So it's like, what are all the elements that go into making a company valued as high as possible? It's the brand. It's the proprietary technology. It is the team because they have a lot of experience and they're former engineers at Apple. It is the product, the traction, the revenue. So you kind of look at all those things and dictate a valuation. Okay. Did I miss anything?

Probably yes. But I think those were the general terms that stump people right in the VC world because they think they look at Shark Tank and they're like, oh, I'm just going to go on Shark Tank or go on a show like that. And if I don't know Mark Cuban, I'm fucked. But there are a lot of other ways that you can raise money as a company. What are some of the things that you tell companies before they start taking in outside money? I mean, the first thing you should think about if you're running a company is the best case scenario is you don't raise any money.

You don't even come to me because then you'll own 100% of your company. And if you sell your company for a billion dollars, you get that billion dollars, the whole thing. So the more you take capital, the more of your company or the less of your company you own. So that billion dollars, as you start to own less and less percent, could turn into a hundred million dollars. Still a lot of money, still like a lifetime of money plus more, but could go less and less. And so the best thing you do is don't take money. And then realize that when you do need to raise money, because most people don't have a million bucks in their closet to get a company off the ground or build a prototype or what have you, there are moments you have to raise. And that is totally normal and fine. But

no, the moment you take a check from me, you have to have a plan to make it back. So what is that plan? Are you going to exit in seven to 10 years? Are you going to go public? How are you going to be a billion dollar opportunity? And then, you know, if you need the capital, the best time to raise is typically when you're breaking at the seams. So you're like, just running like on a hamster wheel and you feel like you're working as hard as you can, but you have all of these opportunities that you can't even capitalize on because your team isn't big enough. You need to go hire some new engineers and some salespeople just to capitalize on these great opportunities you have. That's a great time to raise where you can go out and say, look, we're doing a million in revenue.

We could be doing five this year because Walmart wants us and this wants us, but we don't have the team. So we need to raise a quick $2 million right now. But we don't have the team. So we need to raise a quick $2 million right now. That's a great moment to raise because you're breaking at the seams. There is a need for the capital. It's very clear what it's going to. And it'll help you get to a new milestone, which is that $5 million of revenue.

So I think that's always a good time to go out. And then, yeah, and just, you know, get out there. Just like take that first step. You're of course an expert in this world. Yes, I like to sometimes think I'm an expert, but I think no one is truly an expert, you know? Although I would say that you are definitely an expert in all of these things. No, we're all still learning.

We're all still learning. That's, I feel like that's- Although, I don't know, Jessie. I'm going to put my footsie down for one second. If two dudes were on this show, they'd be like, fuck yeah, I'm an expert. You are so right. We should be like, we are experts. Yes, we are experts.

You're an expert. I'm an expert. You're right. Yes, you're right. You're right. You're right. For today's tip, you can take straight to the bank. When you're looking to invest in a company, you should look at who is in the boardroom. Do the

people running the company have a good track record? Is company leadership clued into their customer's demographic? This isn't a given. For example, for a long time, the cosmetics industry was run by men who were targeting their products to women. Later, these executives realized it made a whole hell of a lot of sense to have a woman who could speak to the perspective of the customer in the boardroom. We all have cultural and societal blind spots, myself included. And if the leadership team of a company are demographic clones of one another, then they probably have the same blind spots. It's important to have a diverse team, one that includes the perspective of key customer demographics, to make sure that they have the

finger on the pulse of important trends within their customer base. Plus, obviously, we want to support companies that are taking diversity and inclusion seriously. Don't forget that with investing, just like with any other financial exchange, a dollar is a vote. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself

so that you can get it together and get it all.