Money Rehab with Nicole Lapin - Decoding Venture Capital with Jesse Draper, Founder and General Partner of Halogen Ventures
Episode Date: June 15, 2024Originally aired 2021 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 futu...re, 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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One of the most stressful periods of my life was when I was in credit card debt.
I got to a point where I just knew that I had to get it under control for my financial future
and also for my mental health. We've all hit a point where we've realized it was time to make
some serious money moves. So take control of your finances by using a Chime checking account
with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two
days early with direct deposit.
Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up
to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that
I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then,
that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime.
Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN.
Chime. Feels like progress.
Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A.
Members FDIC. SpotMe eligibility requirements and overdraft
limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject
to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.
I love hosting on Airbnb. It's a great way to bring in some extra cash,
but I totally get it that it might sound overwhelming to start or even too
complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time
in San Francisco and you can't go to Maine every time you need to change sheets for your guests
or something like that. If thoughts like these have been holding you back, I have great news for
you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with
Airbnb experience that can take care
of your home and your guests. Co-hosts can do what you don't have time for, like managing your
reservations, messaging your guests, giving support at the property, or even create your
listing for you. I always want to line up a reservation for my house when I'm traveling for
work, but sometimes I just don't get around to it because getting ready to travel always feels like
a scramble, so I don't end up making time to make my house look guest friendly. I guess that's the best way to put it. But I'm
matching with a co-host so I can still make that extra cash while also making it easy on myself.
Find a co-host at Airbnb.com slash host. 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 have.
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. Jessie 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 am 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 am 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?
A hundred percent. And it is, it's confusing. You know, 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, you know, 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, you know, 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 used that, invested in 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. 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 a two and a half percent 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 kind of 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.
So you have to go raise another fund and take a percent from there.
So, you know, in the beginning, it was sort of like me.
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. And then the 20% on the other end. So 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 seven to 10 years get their full investment back.
And then on the second, on like the two X and the three X, 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, you know,
can fund my management company can be great, you know, can fund my management company, can be great, you know,
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. Yeah. 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 kind 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 AngelList, 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 gotten, 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.
One of the most stressful periods of my life was when I was in credit card debt.
I got to a point where I just knew that I had to get it under control for my financial future
and also for my mental health. We've all hit a point where we've realized it was time to make
some serious money moves. So take control of your finances by using a Chime checking account with
features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to
two days early with direct deposit. Learn more at Chime.com slash MNN.
When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an
OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte
and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story.
Make your fall finances a little greener by working toward your financial goals with Chime.
Open your account in just two minutes at Chime.com slash MNN.
That's Chime.com slash MNN.
Chime. Feels like progress.
Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A.
Members FDIC.
Spot me eligibility requirements and overdraft limits apply.
Boosts are available to eligible
Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply.
Go to Chime.com slash disclosures for details. I love hosting on Airbnb. It's a great way to
bring in some extra cash, but I totally get it that it might sound overwhelming to start or even
too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine
every time you need to change sheets for your guests or something like that. If thoughts like
these have been holding you back, I have great news for you. Airbnb has launched a co-host network,
which is a network of high quality local co-hosts with Airbnb experience that can take care of your
home and your guests. Co-hosts can do what you
don't have time for, like managing your reservations, messaging your guests, giving support at the
property, or even create your listing for you. I always want to line up a reservation for my house
when I'm traveling for work, but sometimes I just don't get around to it because getting ready to
travel always feels like a scramble, so I don't end up making time to make my house look guest
friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash
while also making it easy on myself.
Find a co-host at Airbnb.com slash host.
Now for some more money rehab.
And getting to the next level means getting to 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. 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's
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 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 we 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 $100 million. Still a lot of money. Still 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 7 to 10 years? Are you going to go public? How are you going to
be a billion-dollar opportunity? And then if you need the capital, the best time to raise is typically when you're breaking at the seams. So you're just running 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. That's a great moment to raise because you're breaking at 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 customers' 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.
Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are
Morgan Lavoie and Mike Coscarelli. 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.