The Data Stack Show - 212: Scaling Startups with Purpose: Jonathan Bragdon’s Blueprint for Capital-Efficient Growth

Episode Date: October 23, 2024

Highlights from this week’s conversation include:Jonathan's Background in Data and VC (1:05)Working with CPG Data (3:45)Details of Purchase Data (6:20)Funding Fast-Growth Companies (12:21)Venture Studio Model (16:34)Learnings from Consulting and Incubation (19:35)Founder Obsession (21:54)Capital Stack Introduction (24:18)Capital Efficiency in Startups (28:05)Value Creation in Venture Capital (33:37)Revenue-Based Financing (38:43)Exit Aperture and Dilution (39:39)Importance of Fit in Investment (41:51)Setting Expectations Early (44:06)Aligning Financial and Problem-Solving Goals (46:21)Technical and Process Focus in Startups (49:21)Identifying Tech and Process Debt (52:39)Advice for Aspiring Founders (54:53)The Craft vs. Problem Focus (57:09)Final Thoughts and Takeaways (58:48)The Data Stack Show is a weekly podcast powered by RudderStack, the CDP for developers. Each week we’ll talk to data engineers, analysts, and data scientists about their experience around building and maintaining data infrastructure, delivering data and data products, and driving better outcomes across their businesses with data.RudderStack helps businesses make the most out of their customer data while ensuring data privacy and security. To learn more about RudderStack visit rudderstack.com.

Hi, I'm Eric Dotz. And I'm John Wessel. Welcome to the Data Stack Show. The Data Stack Show is a podcast where we talk about the technical, business, and human challenges involved in data work. Join our casual conversations with innovators and data professionals to learn about new data technologies and how data teams are run at top companies. Welcome back to the show, everyone. We have a great time planned today because my friend Jonathan Bragdon has joined us for the show. And Jonathan is the

founder of Capacity, which is a VC firm. And they have a very unique approach that I've loved learning about recently. But you also have a background in data and technology. So we have tons to cover. Thanks for joining us, Jonathan. Yeah, great to be here. Thanks, Eric. All right, well, give us the brief background. You started in tech and now you're a VC. So give us the 30-second connect the dots. Yeah, sort of eased into tech through consumer packaged goods, a little bit of like way back in the day, even 2000s and barcodes and trade marketing.

But eventually ended up in deeper in tech, doing 3D simulation, modeling, some data science, some IoT stuff, built a few companies, a couple venture backed, a couple weren't, and then started to do a little bit of a studio inside one of those companies. Never got that far, really wanted to get into doing a fund to accelerate a studio and ended up going over to the dark side after that company, the fund, about four years ago. All right. That's great. So before the show, we were talking a

little bit about a few different things. One of the topics I'm excited to dive into is what matters. So if you're, say you're one of our listeners at your early stage startup, what matters other than your financials and growth plan? Like maybe some of the obvious things, but what actually matters when you're growing your business if you're looking to raise money? So we want to talk about that. And then what are some topics you're interested in digging into? Yeah, I'd love to talk about that. I love really early stage companies, but ones that have gotten a little bit of revenue along the way. And so the obvious conversation is how's the interaction with the customer happen? But more basic than that is what problem are they trying to solve? And what's

the founder obsessed with? And then how do we move back from that? And for me as a VC, yeah, I get really interested in how do you fund those things. And so even the language around tech investing overlaps. And Eric and I were talking about this a little bit, just there's a tech stack, but there can also be a capital stack. And so I get pretty deep into the capital stack. So it'd be fun to talk about that too. Awesome. Well, let's dig in. All right, let's do it. Jonathan, I'm really excited to chat with you. This will, in many ways, be a reflection of a lot of the conversations we've had, you know, over the last year, as I've learned about your approach and your like CPG Nielsen type data much on the show. And so maybe you don't want to go back into your history that far, but I do because I think it's really interesting. And I know John has a bunch of questions about that. So will you entertain

us and just tell us what were you doing with that data and what was it even like to work with that data? Yeah, I don't know how entertaining it is. And it doesn't come up in conversation much. That's why we... Why not? It's, you know, with packaged goods, consumer packaged goods, this was 25 years ago. This is 99, 98, 99, 2000.

The way we had to interact with the customer was looking at purchase data. And then purchase data was basically what went through the register and how do you record each of those purchases. And so there were holders of that data that pretty much monopolized that. And, you know, Nielsen, IRI was another one. I can't remember what that stood for. We had to buy for a lot of money that data and then analyze it. And it was not real time.

It was weekly, get weekly data in. And then we would use that to drill down into regions and types of stores, grocery stores, convenience stores, what have you, and figure out how to compete for shelf space, just using. And so what sold through, how many turns, if we sat next to a competitor, could we outsell them? Did promotions really push the needle? And so a real lag on the time of data, but that also gave us a lot of time to do beautiful charts and put big presentations together for big brands that we could, and big buyers of the actual product. So it was a very,

the pace was definitely different and the source of data was pretty limited, but it was a fascinating for me to watch that you could take purchase data from every single register, in our case, in the country, and distill basically selling points out of that. So that was my first experience doing that. Yeah, that's really interesting. What level of detail? Was this like a sale transactional level of detail with like who bought it, what it was, like that level of detail? Or is there some kind of like aggregation process before you got it? For the most part, but it also depends on how much you paid. Yeah, of course, right? So, I mean, the first experience I had with it, we were at where they were based in Florida.

And I remember watching this presentation and, you know, there's still, it was a green screen computer monitor that had a map of the U.S. And the person who was presenting, because we were looking at buying data, it's like, well, pick a state, I picked a state. And then it would show just the state. I mean, it's just a line, right picked a state, and then it would show just the state. I mean, it's just a line, right? Just a line. And you would drill all the way down. It could drill all the way down to like, hey, there's five stores in this city. Pick a store, and you'd pick a store, and it would pull up the floor plan, and then you would pick an aisle, and it would pull up what's called a planogram, which is where all the bags of product would actually shelf. And it was just boxes, right?

There was no, you didn't see what they were. You just saw UPC codes, like just the numbers in those little boxes. And we're talking about this and one of them blinked. So wait, what was that? Well, it just went through the register. So it was real time into their system, but it was highly shrouded data all the way out to whoever could actually use it. And, you know, obviously not back to, you know, it was even shrouded all the way to, you know,

who we were presenting to as a supplier. It was pretty fascinating. And this is, you got to remember too, this is like 2000, 1999, 2000. There were so many companies. I remember there was a Wired magazine ad that had their, they like customized UPC symbols. They were sending out, you know, barcode readers that were exclusive that you couldn't use on different types of barcodes. Everybody was doing proprietary. Yeah. Yeah. You know, reading stuff. And it was almost like having your own custom browser to look at secret

websites. It was like that ridiculous. Yeah. But it's fascinating. One term you use, Jonathan, that was really interesting to me, and I may get this wrong,

but you said the way, the main way that we interacted with a customer or interface with the customer, it was very personal, right? Like that, it was sort of a conduit of how you had a relationship with these customers that your company has a hard time interacting with directly

other than the fact that they pick your product off a shelf and run it through a register. Can you speak a little bit more to that? That term really struck me, right? Because you're fighting for shelf space, but the way that you talked about it was a relationship with your customer, which I think is a really important concept when you're thinking about data, because especially with the proprietary nature, the shrouding by these people creating scarcity

so that they can monetize it, you still seem to retain the idea that the main point here is that we actually have some relationship with the customer. That's a great question. I mean, Package Goods Company then, you really only had two ways to figure out customer response to your product.

I mean, one, you could do these little surveys and get togethers where you would literally put people in a room and feed them products or show them stuff and observe how they reacted. It cost a ton of money to do that type of analysis. The other was buying activity. Like did they buy it or not? How often did they buy it? Those are really just the, those are the two ways to pull the data. So from a, for us, you know, everything distilled around customer activity. So it was pulling either the way a customer said they were going to it on the shelf. So, because if we got data, enough data to show this type of customer in this area, this location within this type of store actually bought things this way and bought our product more than the other product, then we could justify a bigger sale to that base distributor.

Yeah, yeah, yeah. Man, it's wild to think about the entire integrated systems around Shopify and Square that do point of sale, but it's end-to-end. It's crazy. Yeah, and it's faster and more locations. I mean, that's really the difference. Yeah. And it's faster in more locations. I mean, that's really the difference. Yeah.

Better data. Well, and it's funny because I think you said, so it's been roughly like 25 years. I mean, obviously we've taken some steps forward, but I don't know. That's actually pretty impressive to have, at least for their system, to be fairly real-time data into their system. And from a data quality perspective and from a data unification perspective, it's kind of a monopoly, right? So there's only a couple of companies that do it. They're in the business of they sell this data. So in a lot of ways, they're more motivated for it to be higher quality and useful than maybe they're more like the place we are right now,

there's lots of competition in the space and they're and you know stripe's really about the payment processor and customer experience and let's increase checkouts the data is there but it's a little more secondary same for shopify they want to like drive conversion rates and such the data is a little bit secondary so it's interesting where they're i suspect there may be some steps back with some of the the data quality pieces of it or or just the focus, right? Because now you have like 10 times as much data, but people may be even more confused about which data is valuable. That's why we have companies like yours. Great point. Great point.

Yeah. But I do think it was a little more of a simple how you own the market question because for them it was if you own the point of sale data, you own the market. You had the most price strength to charge and everybody else was depending on that data to run their business. Yeah. Yeah. Okay. Well, that was – thank you for indulging us. Uh, thank you for indulging us. Okay. Now, uh, you gave us a brief overview in the intro, but, uh, from CPG to serial entrepreneur to VC. Uh, so can you just give us the like two or three minute version yeah so I thought jumping into building a tech business I was brainwashed into thinking well to

build a business you've got to go raise money first let's go and that's what I did on the first first go round I learned over time there's lots of ways to fund a business and even a fast growing business. And so I learned a lot of different types of ways to pull capital into a business, which is basically how do you get money to grow before a customer gives it to you? You know, there's that capital gap, the cash gap, right? If you can pull the revenue in as you're growing and make enough, be capital efficient enough to grow really fast without outside capital, then you've just found the Holy Grail. That's, you should do that.

But so I had to learn through a bunch of different variations of that. And again, some base plants and some worked. But I think for me, the eye-opening piece to it was I realized what we learn as founders, especially tech founders, is usually a very small portion of reality when it comes to funding. It's the sexy, high-growth, big venture firms, big exits to big names that make great headlines. And a lot of the people that I met along the way made a ton of money building a fast growth business and selling it. And it was all really quiet headlines. And that fascinated me as well, because both of those paths work. So when I, the last company that I was in started to build a studio model inside of that, we, you know, we ended up building three, two, three products, two companies, and I wanted to build a fund to really, to accelerate those out of the studio and ended up

selling out of that before getting to the fund. And so that gave me a little bit of runway to start experimenting with things. And so my experiments, I was just obsessed with how do you fund fast growth companies? Does it have to be the way VCs have always done it? Is that a subset of a bunch of different things? Like what are the deal structures look like? All of it. And so I just looked at it the way I looked at a startup, which is let's just experiment and let's be able to gather, pull some

capital together. Let's do 10 investments. Let's play around the deal structure because we can get into the complexity of that, but I just want to see what worked and what didn't. And the stuff that worked, we pulled into fund two and we're running with it. So that's all. I didn't and the stuff that worked we pulled into fun too and we're running with it so that's all i didn't look at it a different i mean i was naive again thinking oh i'll start a venture fund like how hard could it be that's like the entrepreneur who was it it was the i want to say it was the someone from nvidia maybe where they asked him like would you go would you do this again and he was like absolutely not like it's way too hard it's way too hard but you do it because you don't know that going in right right um I think that's how when you look at founders when I look at founders you do look for that little bit of colorblindness, right? I don't see the world as it is. I see the world as I want it to be.

And you forget, even if you're a second or third time founder, you forget just how damaging it is. You don't get out of building a company unscathed. Everyone gets injured. That's Love it. I talked to my wife about this too. It's kind of, I think when women have babies, it's incredibly painful and crazy and chaotic. And a lot of them do it again.

Sometimes for a third time. Yeah, a fourth time. Yeah, yeah, totally. Oh, sorry. Go ahead, John. Yeah, I was just going to ask about, before we move past this, yeah yeah yeah third time yeah fourth time yeah totally yeah oh sorry go ahead john yeah i was just gonna ask about the before we move past this i want to ask about the venture studio model a little bit that you know we're throwing around a lot love your definition of it and then just maybe some learnings from doing that for a while what did you like about it would you not like about it yeah i'm not the best one to learn from this because I had so few iterations

on it. We were just borrowing that Google model of pulling really smart people off the line for a half day and working on problems that turned into products. And a lot of it, there's a lot of things that we could build, but did not have as much to do with the trajectory of the company. And so the skill sets were there to actually solve some problems that might apply or might not. So it was more of the skunkworks approach. It wasn't a, ours was, a lot of the studio models that are out there now are much more focused.

And I like a lot of the models that are in place that are really just engineered around the actual problems and the companies that that are relevant as opposed to just the side kind of a side studio you still see some of that but i just i think it's more of a it's almost like a big company's hobby as opposed to the focus in on building a real studio. And, but we're seeing a lot, I've seen a lot of really amazing work in that space. I look at it from a deal structure standpoint, like how much of a studio, you know, how much equity should they take or not take?

How much of a team should they contribute to each of the company? Like how much should they hang on to? How do they graduate? Those mechanisms. The devil's always in the details. And so the way those studios work is pretty important. Max Pag, he's all over the place. He talks a lot about Venture Studios. He's a good one to listen to.

And he's pulled a lot of people into the conversation. So I've been watching him a lot as well. I got to throw it to Eric too, since you've played in the space. Any war stories or learnings for people? Yeah, we started, I mean, it's kind of, you know, I accidentally, after starting a company and then selling it, accidentally started consulting, which is how I met you, John, and accidentally hired people. And so accidentally started a consultancy, you know, without really intending to. And, but I'm entrepreneurial, you know, in my bones. And so running a services business wasn't...

I mean, it was kind of fun to figure out the business model because I like nerding out on how do you make different business models work. But it wasn't running a service business. Once you kind of figure that out, it's not the most exciting thing to work on on an ongoing basis. And the people that I

started the company with were actually the, that I sort of ended up starting the consultancy with looping in my co-founders from the previous company. And of course, all of us were like, okay, like this is really just a way for us to, you know, sort of figure out the next idea. And so we incubated a couple ideas. And one of them had a serious legs. We just chose the worst possible industry, which is ad tech, just a horrible market. Yeah. You know, but it was based on basically some stuff that I had figured out from, you know, marketing standpoint previously and was very helpful. And so I thought we should just productize this because there's, I think, a huge market for it. But I would say, as I think about, there are two major things that I reflect on as I look back at that experience. One is that there are lots of different models, but I think you need someone who really thrives

as an operator and has a high appetite for complexity. Because all the things that Jonathan just mentioned are non-trivial just from running a business and thinking really critically about setting expectations in different parts of the business. Because the concept sounds so great, but the reality is everyone wants to work on the cool startup thing, right? And it's got to make money while the cool startup thing goes. Someone's got to make money. Everyone wants a piece of the action if there's some sort of event, you know. And that's totally doable. But I think people go, sorry, I say people, that's not accurate. I significantly underestimated how talented of an operator

and leader you need to be in order to make that work really well. You can do it, but it's very hard because there are a lot of variables there. So that's one. I think the other thing is that the, and actually another, there's a group in Indianapolis, a guy named Christian Anderson, who's a VC as well. He had a company, I think it was called Studio Science maybe. And then the fund is called High Alpha. High Alpha might be actually the studio. Anyways, Christian Anderson's a great guy. High Alpha has some real, I mean, they've done some really great work. He actually, I was talking with him about Venture Studio stuff. And he brought up a great point, which Jonathan also mentioned is the earlier is the founder obsession. And I think that's such a key ingredient

and it's really easy to think, oh, well, we can just kind of have people thinking about this problem, you know, or I'll spend half my time doing it or whatever. And the reality is for a lot of companies, like for startups are so hard. It's just not enough. I don't think, right? And so having someone in there who is completely obsessed with the problem and that's all they think about every day,

I think is a really critical piece of the puzzle just because the startups are so hungry for that. And they really, you know, it's sort of a key ingredient. So I don't know. Those are my takeaways but i almost feel that because i've talked to a lot of i've talked to a number of people that built venture studios and the ones that they're always hard to your point but the

ones that look at it like an assembly line like we're gonna we're gonna have this very talented group come in and we're gonna build this and and it's going to move to the next stage. And then they're going to build this and it's going to move to the next stage. Inevitably don't work. It's not an assembly line. You've got to have some obsessed, you know, maniac who's so focused on the problem but has access to the team and to be a product owner. Like all of that stuff in one to make it work. That's so hard. Those are long cycle things. They're not short.

Yeah. Yeah. It's not like a... Yeah. That's interesting that you mentioned that, Jonathan, because it's so tempting. Investing isn't assembly line either, but there are mathematical equations that, you know, tend to work out, right? If you invest in X number of companies and some percentage of those get X amount of return, right? And so you're sort of, and there are different ways to do that with VC, and we're going to talk about those in a minute. But you have a mathematical framework for that, and it's so tempting to apply that to the studio model, right? We're going to generate X number of ideas and it really doesn't work that way. I think that's a great way to describe it. So, John, let us know if you end up doing that with stable data.

Okay, well, let's, okay. I want to talk more about your approach to investing in some of the unique things you do at Capacity, but as a way to get into some of those details, tell us about the capital stack. I'll try to keep this simple because I could talk for hours about this. This is my obsession. This is what I cannot let go of 24 hours a day. When I started experimenting with a fund, acting like a VC, I should say, or acting the part with a whole lot of imposter syndrome, you spend a lot of time talking to founders,

but you're trying to figure out whether you should invest in them. And it's always a one-on-one binary outcome or whether they're a fit for the fund, right? And that is the job. Let's figure out the selection process. Does this fit? Is there a lot of potential here? And does it fit with our thesis? And will it build out our portfolio and all of that? But the binary nature of that was frustrating for somebody like me for a lot of reasons, not the least of which was I've got some vocational ADD and I want to solve a number of things,

not just have one super smooth process that gets repeated all the time. So for my own mental health, I just started talking to founders about the type of capital they should be raising, even if it doesn't fit VC you know, VC in general, even not even just our fund. And those 20 minute zoom, this was during the pandemic, there were 20 minute zoom calls just stacked, like those conversations distilled into this concept of, you know, a check is not a check.

You know, you're hiring money and every types of, every type of capital allocator that's putting money into a company has different expectations. There's different timeframes, there's different outcomes, different multiples on it or interest rates or what have you. Those are like skill sets, like talent that you're hiring to build a company. You're hiring money to build a company. And so what really fits? And there's never one answer because a company is a living, breathing thing and it changes over time. And so capital needs shift. And if it starts really early and there is no revenue and there are expenses, a bank is not going to touch you. You're just going to have a really hard time.

Your choices are really limited. And a big portion of those become equity, angel bester. Maybe you're lucky enough to know how to go to apply for a grant or if you get into a pitch competition or something that's less dilutive, but that's typically where you sit. But a lot of times if a company has moved down the path, experiment a little bit and had a little bit of revenue, even not a lot, their options start to open up a little bit and they can actually diversify some of the capital that they're coming in. And revenue's a little piece of it, but not enough, but they might be able to get a contract with a company that then they can finance that contract a little bit along the way without giving up part of their company.

Or maybe that goes side by side with a number of angel investors. And so they're OK, but they don't have to raise as much money because they've got other types of capital on the stack. So those conversations kind of opened my eyes. And I realized, talking to founders, it opened most founders' eyes that there's a whole bunch of different ways to capitalize a company. It's not just, hey, I've got to learn how to pitch. No, you've got to figure out how to hire money. So that's the capital stack.

And then over time, it shifts. When we invest in companies, a lot of what we're looking for is a business model that is both fast growth, but also capital efficient, which is now cool again, apparently. It really wasn't. Yeah. Are you even in venture if you're looking for capital efficient models? Come back around. Thank goodness. Like, are you even in venture if you're looking for capital efficient models? Thank goodness. But we go a little bit further and we'll even look for companies that may only need one more venture round after hours. in, or it's capital efficient enough that it really does generate enough to, even while bridging even and growing really fast, to continue to generate enough to cover that

growth. And those models are definitely out there. You know, 93% of the Inc. 500 were not venture backed. There's lots of ways to grow really fast. Jonathan, could you give us a story about one or two of your portfolio companies where it was maybe not necessarily a typical deal structure in traditional VC sense, and then they didn't take a traditional path of sort of, you know, just following the alphabet down in subsequent rounds, you know, trying to increase the valuation in each round. Can you just tell us a story of a company that sort of followed maybe an atypical path where capacity was part

of the story? Yeah. So one, we'll have to get into a little bit of deal structure. Yeah. I'd love that. It's all right. So pretty much every fundraiser that ends up going into VC is, the math that needs to work is every company needs to potentially be a really big win. Because so many fail, the winners pay for all the losers and that's venture, right? And so that gets pounded in your head as the, that's the venture capital model. And so you have to pitch to that and you have to have a business model that works for that. And so you see a lot of companies contort themselves to that model. They'll build out even portions of their business model. So it looks more

like more of a VC fit. And we did have a founder that, that talked a lot about, they were just obsessed with their own finish line. And like, I don't know, it could be a billion dollar company, but what if I wanted to sell it for 20 million? Like, is there, is there a way to make that work from a VC standpoint? I typically know, but we've been experimenting with a couple of different deal structures. One is one called redeemable equity rights. And the way that works is every company that we'll invest in, we want them to aim at that next round, grow really fast, but have a model that's capital efficient enough that they've got optionality at that point. So when they're raising the next round, an A round,

they're not raising this to necessarily survive. It's purely to go towards growth and acceleration. And that's relatively rare, but that's what we look for. But in some case, in this company's case, it definitely worked this way. They didn't raise the next round. It wasn't because – but it was basically because the founder didn't like the valuation. Like their valuations were dropping off the table and like, man, this is – we're going to give up too much. We can survive for a while. We don't have to raise a bridge round after this. Let's just kind of hang in there. And because our deal structure included a redeemable equity option, like what we do, if they don't raise that next round, they start redeeming back our equity right at a multiple.

So a little more than what we – a little higher valuation than what we put it in. So we get a little bit of return. But then we get to work with them along the way. So most of those companies in a venture fund, if you look at a portfolio and say there's 10 companies, the one or two at the top that raised more money, get all the attention from the fund because that's where all the returns come from. Company three through six or seven, fantastic companies, they get no attention from a venture fund because they haven't raised more money. There is no markup. The venture fund can't show it on their paperwork that they're worth more. So they can't raise more money for the next fund.

So they just sit there and the fund manager typically hopes they don't have to spend too much money melting it down at some point because they never raise more money. In our case, we're getting a little bit at a time going back where they're redeeming our equity rights, which gives us from a fiduciary standpoint, we can put time into the company and work on their next inflection point. And if they end up in a year later, a year and a half later, they may have redeemed back a little bit of our equity, right? But then they go raise the next round. Then we convert everything we have into that round and we just keep going. So that little hiccup that kills a lot of companies because they can't even reach around, we've turned that into a value creation model so that

we actually increase the return on the fund that way. We could return just the middle of that portfolio. We could return the whole fund if they just don't, if those companies just don't die. Yeah. And we're sitting on the same side of the table. This is what I love as I always, I mean, I think I'll always think like a founder. I can sit on the same side of the table and we think about growth because growth increases the returns whether they raise more money or not. So that's, and that's, you know, plan B. Plan A is raise according to the plan and just go to the moon and sell for a billion dollars. But there is no plan B in VC typically. So we have a plan B.

So we've had, and the fund is young enough to where that's a specific example, but there's multiple. We have, out of those first 14 investments in the first fund, it went just like the power law expected to. Two, three raised more money. The next group, we had six that were redeeming some equity rights. There's two of those that are actually looking to raise more money. So it's exactly the way you lay it out on a spreadsheet, which makes me happy. Yeah. Now, really quick. So I want to talk about evaluating companies. And I know John has a couple of questions on that front. But really quickly, we just talked about VC and your approach to, I mean, I just love the concept of like, you know, the middle set of companies that are great companies, but you know, they sort of languish and unfortunately die a lot of times in a traditional venture model. But you mentioned that there's lots

of ways to capitalize a company. Can you speak to that for a moment and give some examples of companies who maybe started with VC money or maybe started with a different type of capital and just lay out some of those options when you think about the capital stack being far beyond just VC. Yeah. If you can segment out types of capital, you know, VC angel investing, that's called risk capital for reason. I mean, the failure rate's really high, but hopefully that's justified by how big the exits are. So that's a big bucket of capital.

It's risk capital. If you go all the way to the other extreme, which by the way, if you do raise VC money, it's like hiring somebody on your executive team. They're not leaving. They're permanent until some kind of liquidity event, exit or whatever it is. Go to the other extreme of that. And you have,

you know, Hey, I have a contract for a hundred thousand dollars, but I need to, you know, hire somebody to kind of work through this thing. And it's going to cost me 20 grand over the course of two months to do this. But instead of going back to the market, trying to raise equity for some really specific things, you've got a contract, you can monetize that. There are funding groups

that will take a contract, especially from a big customer and say, I'll give you 40, 50, 60% of that now. And you pay me back with an interest rate, you know, in 60 days, 90 days, a year, whatever happens to be, but you at least pull the revenue from that one deal forward in time so that you can, so you can actually produce on it. And that's like hiring a temp. Like it's not, you're not giving up ownership. It's not a long-term thing. It's very specific to one, the contract, right?

Get it done. In the middle, there's everything from, you know, a whole lot of different types of debt, traditional stuff, you know, bank debt, which you're not going to qualify for until you've had a relationship for three, four, two years at least. And yeah, usually longer. So they'll actually give you a letter, a line of credit and it's going, but there's also some more flexible ones that come out of groups called CDFIs and they'll, they're a little more flexible with

banks. They're still regulated. So they still have their limits, but they can usually do things that banks can't. And then you've got SBA loans backed by, you know, the government, pretty much all of those, you know, they're going to ask for personal guarantees. And so there's some other things and that you've got to really think about when you're hiring that money, again, expectations and what are you committing to? And then there are things like, you know, revenue-based finance, which you've seen and, you know, there's a bunch of different versions of this all across the've seen and, you know, you know, there's a bunch of different versions of this all across the board, but, you know, some can be just as little as, hey, you're,

you know, you're selling $200, you know, you know, a week out of your online thing and they'll give you, you know, 40 bucks and then you pay that back, you know, it's, and it's just coming out of stream of revenue and then, or be all the way up to where it looks almost like venture, where a revenue-based finance group will say, we'll give you this much money. You're going to pay it back over time, a little bit at a time per month based on how much your revenue goes up and down. But we want a multiple out of that, whatever that is. And most of those don't even have a maturity date on it. Some of them do. It's just really how fast you grow.

And there's grants. I mean, there's probably five main buckets, and then there's 80 permutations inside of that, just depending on what you're trying to build and what you have. And if you've got an asset, you can get dead against that asset, and that can be as simple as $100 a month in sales or a contract or a building or your HELOC on your home. Or there's all kinds of stuff that you're dead against. And the equity side is really based on tied into ownership somehow into the company.

So it's a big stack. If you can figure out a way to be less diluted, the bigger that you get, the more ownership you're going to have in a company at the end of the day on a sale, or at least the more control you're going to have in that ultimate outcome of that company. Because what do you have? One thing I get pretty,

we actually lay a lot of this out with founders and the math side of this. The more money you raise, the more difficult, we call it the exit aperture, actually gets smaller and smaller. Because if you raise a lot of money, everybody can make a whole lot of money at a smaller sale. If they sell for $20 million and you've only given up 10% of the company, you can make a lot of money off of that. Right. If, but if you've raised, you know, $50 million, none of those VCs are going to let you sell until there's a pretty big multiple. Right. Right. Yeah. And then they're going to get all the money first and then you're going to

split above that. And so that number just gets bigger and bigger, and the bar gets higher and higher. And a lot of founders don't realize that. I didn't. I didn't realize how scared I was until it came to an exit time. Yeah. Yeah. It is kind of interesting. I'm thinking about raising money, which I've done far less of than you, Jonathan. But it is, yeah, as a founder, you kind of think, okay, I'm going to raise this VC money. And you kind of think about the beginning and the end, but you're not really thinking about the middle, which is actually the most crucial piece of it,

right? Because that's where, you know, all the dilution happens. That's where, you know, expectations are set on valuation and, you know. the dilution happens that's where you know expectations are set on valuation and you know all aboard conversation board conversations exactly yeah i'm curious about like founder vc fit right because you mentioned a while ago like hey once you get involved like you know this person's it's you know it's an executive some of some on your board that's going to have an opinion right so like maybe some you know behind the curtain a little bit like what are some like maybe positives and negatives where like this like some maybe something you've seen in the past like there was a lack of a fit between the founder and the vc and that was one of the like core

reasons like why this thing like didn't work or maybe a positive example of like hey this was a really good relationship and this really contributed to the success of this you know particular thing yeah great question that there's there's probably two two segments to that one is the financial vehicle does it fit like the deal structure does it fit what's actually being built? So that's a mechanical one. What you bring up is a big one, which is the personal. Like you're not actually getting an investment firm. You're actually engaging with people. And so you can't get away from a relationship.

And, of course, as you know, because every VC you've ever talked to, every VC adds value. That just goes with the territory. Yes. Right? Exactly. Yes. Whether you want them to add value, they will add some kind of value whether you want them to or not. Yeah.

It could be positive or negative. Value defined by them. Yeah. That's right. So that part of it is you need to, it is like hiring. And that's the closest analog I can think of because it's not just a personality. Do you get along? Are they, you know, but you're thinking through well not just oh they have a really big network or they have a really deep knowledge in this vertical that i'm in you're you've got to think the layer past that which you know what eric was talking about that middle time frame what do they do with those assets in the middle time frame do they is their network your network at that point,

do they open it all the way up? Is there a, geez, highly accessible, you know, is there a sense of, we know that our incentives are slightly different because of our roles, but we want to, but, but we want to stay on the founder side of the table as much as possible until we can't. Those kind of conversations usually don't come up on the front end because the founder certainly has not. It's an old thing where a VC has seen it 100 times, a founder has seen it for the first time. So setting expectations early on is pretty key. So asking really point blank questions of a VC is pretty important because it's a job interview. As a founder, you're interviewing them. They're also trying to figure out if they want to work with you.

How important is, I'm going to use the term worldview and I'll explain what I mean a little bit by that. And this is, again, based on my limited experience, but a startup gets pulled in so many directions. And a classic example is you have interest from a gigantic company that could be a logo that's an inflection point for the business. But, you know, you're going to build some products that really wasn't a major part of the original vision and doesn't, you know, those are extremely strong forces. And that can be a real friction point with investors because they want you to get that logo to create the inflection point. But if you have a shared worldview, then there can be some discipline to say, no, we all agreed to what our view of the world is and why we are going to say no sometimes.

Is that an important dynamic from your perspective? It is. It's hard to pre-bake what's going to happen in that. It's hard to create litmus tests around that. But one way, there are natural tension points along the way for an investor whose fiduciary duty to their investors is to maximize the outcome financially, right? And so they actually have a legal requirement to make decisions that a founder might not like. Like a lot of us have seen this before. Wow. We just got a, we got an offer. Somebody is going to buy our company at $10 million and that would,

I won't have to worry about sending my kids to school and I won't have to worry about, you know, my house, my mortgage. Right. And the investor's like, no way. Like we can't, there's, there's no upside you know right it's a natural just tension when that happens though you know that's one example those things are going to happen you know multiple times along the journey yep you last any period of time so i think one of the ways to align some of that is to make sure as much as you can that the thesis of that fund is really aligned around the problem the company is trying to solve, not just the financial. I mean, they have to be aligned around the financial outcome.

Sure, sure. the financial out i mean they have to be aligned around the financial outcome sure but if they're really obsessed with the problem you're trying to solve as well as a fund like the thesis is tied to that too then i think that goes a long way towards alignment along the way like because because when you get into tension points around financial outcomes you can at least align around like well how much more of this problem do we want to solve? Or how deeper do we want to go? At least there's some common ground there. Yeah. I think that's a great way to put it. And such a great point on the fiduciary responsibility, because in that situation, the ideal outcome is that there's alignment on, we believe that there's a much larger outcome in the future, right? If we focus on the problem.

And I think it's important for founders to really think through what their finish line is as well. Finish line for a VC is optimize as big a number as possible, right? For a founder, if the finish line is like, all I want to do is sell this thing for $20 million and take 10 off the table, that better come up in one of the first conversations. Yeah. Or it'll come up in a really painful way later. Right. So the finish line, really, do you need to align as much as you can,

even though nobody knows what the finish line is? Sure. Yeah. You just want to be successful. Okay. Well, we're nearing the end of our time together. Unfortunately, this has flown by. But John, you had some really good questions when we were chatting before the show about evaluating companies. And this sort of circles back to some of the technical aspects, especially in early stage, but evaluation. So John, dig into that a little bit, because I loved the questions you were asking. So regarding the financials and growth, we were talking about that earlier. So those are the two obvious things. What do the financials look like for a company?

What's the growth trajectory? So part one of the question, what are some less obvious things that maybe you look for? And then part two, specifically on the technical and data front, what are some things that you look for as far as technology and data? Great questions. And really, it's down to the core of what are you doing as a venture fund? So if you're investing early, you're not doing a forensics run through a product and trying to figure out how much technical debt there is. And you're not really at that point yet. You're trying to figure out, is there a process there? Is the team have experience? Do they know the flow that they're going to run through? But really what you're

looking for is how do they make decisions? And you're looking for this, what is the, what's the guiding light process, but also what's really the priority. And if the team is again, obsessed around solving the problem and they're also, there is a, an actual process around doing experiments on the problem, getting feedback directly with the customer, that's the main thing that you're, that's the main thing, even from a technical standpoint, that's the main thing you're looking for. Because if they're too in love with the product, it's like having arthritis. You can't, it doesn't move. Like if they're solving the problem, you know, the problem is going to grow. And then if the product's going to grow and evolve and become this amazing thing over time.

It's constantly going to change because it's a living thing. So you're looking for caretakers of a product who are obsessed with the problem. So how well can they caretake and build and grow and evolve a product, even if it's completely different in two years than it is today? So technical stack. I mean, the tech stack for sure is like, how are they, do they have something that's scalable, but can it evolve? Can it adapt? Is there, you know, is the cycle, is there weekly cycle? Is there a sprint cycle?

Whatever the, you know, whatever process they're using to run through, is it a proven way to do things? Do they have experience doing it? Have they done it before? And do they look capable of doing this even in the face of problems coming up over and over again? Because number one job for an entrepreneur and especially a product owner, number one job, bullet point number one is solve problems. Solve problems is the process there to do it. And they understand the tech enough. Now, there's secondary stuff you want to make sure – you do want to do forensics enough so you know yeah they're not you know is is the open if

they're using open source stuff is it really open source or is there some proprietary limitations to it um are they are you know things like that but i think early on you're worried less about you're worried less about what the product is actually able to do and you're worried less about what the product is actually able to do. And you're worried more about the practice of building the product and improving the product and talking to the customer. So it's, it really is more of a process investigation that early. Once you get into, you know, once there's a bunch of customers, now you've opened it out into, right. How are you, you know, how you, how's your bug list?

You know, what's the roadmap look like? And like all the rest of that stuff. And then you can interview customers, go, is this aligned with what you're scoping? And so you can really do some checks against reality at that point. Yeah. Yeah, I've had this conversation a few times recently related to this around, hey, if you've got really great people and really well-defined, solid processes and your tech's a little outdated, that's a great scenario for you. So, like, updating tech if you have really great people and, already you're starting to build debt because people talk about tech debt all the time. But you also kind of have this like process debt of like we, you know, we've got lots of, you know, silos around processes.

And you can end up with people debt of like we've got people in the wrong seats. So if you're like laden with debt in all three of those areas, those because, you know, we're a lot in like modernization efforts. Like that is so hard to even sometimes you figure out where to start. Which thing do I even start working on? That's the priority piece, right? How does the team make decisions as it will go through the series of S-curves? Because you're building a series of S-curves. Oh, that works.

It's going really fast. And, oh, we're getting out over our scheme. Now we've got technical debt. Now, wow, our onboarding process is just stupid. Every manual, and we've got to figure that out. So you're slowing down your growth a little bit to make sure that if you don't have a process or a team that can handle that, that you're never going to be the kind of company that a VC is going to invest in. So I don't know what all the litmus tests are, but just because again, I'm new at this.

I've only been on the side of the table a little bit, but the series of questions that get asked are more in those areas than tell me, you know, let me see some of your, let me see some of your code. Right. Yeah. Makes sense. Jonathan. So last question, maybe last question. I say that and then usually lie, but I want to speak to you. I've loved this conversation because it's, you know,

it's atypical of, of some of the conversations we have on the show, but I really hope it's spoken to our listeners who maybe have always dreamed of starting a company, who are interacting with technology every day, and they just say, man, like, I can't stop thinking about a world where this pain point that I have every day in my work is filled, right? And they've thought, okay, maybe I should just build that. What would you say to those listeners who are at the very beginning of their journey thinking about starting to build a company? Great question. A couple of things.

One of the biggest, most common mistakes I see is somebody obsessed with the product as it's built. And that can be a really good craft. And they're really proud of what they put together as a product. And there is a sense of the problem that it's solving. But if the problem is not the center of all of it, then it just will not grow and develop. A craft, by its nature, doesn't change very fast. It takes a long time to craft something.

And the business that we're in is about how fast can you actually adapt and shift and change to solve the problem that we're focused on. And so being obsessed with the problem, I think is number one. If you can't sleep at night because the problem is something that you just, it has to be fixed and you're not holding tightly the way to solve it, that's, you're already in the top 10% of, of founders that, that I would talk to. I think there's the other piece of that loosely related is the, is solving that problem valuable enough to a lot of other people besides you, right? You may have some special inside knowledge because of your experience and where you've worked, what you've

built before on how to solve it. But that needs to get married with, you know, how valuable is that, that activity? Like if, if it's not in a lot of times, well, this is better than I'm solving this better than the competition. It's better. Okay. But does that make somebody buy yours instead of theirs? Usually that's a 10X kind of a, you're not going to buy something unless it's way better and easier, faster, and all the above. And I think a lot of founders, and I'm in that group too, get lost in, but this one's better and it's built better and the code's clean like all that stuff like it's just it's superior well yeah well it's not somebody's not buying this as fast or as quick or doesn't care about the problem as much as you do and the only way to the only way to solve that as a new founder or want to be you want to build a business is to just run the

experiments run them and you know secondary even if you're not building a product just run the experiments without a brand like ask the questions if this what about this would you buy this is this problem really big like if there was something that did this like all of that stuff or sign up you know you know give us your email if you're interested in solving this, like all of that stuff or signups, you know, you know, give us your email if you're interested in solving this problem, like that, that just really basic stuff. And you know what the feature set is coming off of that. Yeah. I love the concept of craft as somewhat of a litmus test. And I faced this before too, even some of the problems that I've thought about solving, even to some extent, the ad tech stuff that I was talking about. Looking back, when I think

about craft, I realize, well, you know, some of that stuff was swimming in a very small pool of people who had figured out a very powerful way of doing something, but there actually weren't that many, right? I mean, it was pretty advanced and it was like, this is amazing, right? And it can create incredible results. But the number of people who had gotten to a level of sophistication where they're looking for something like that, it's like, huh, well, there actually aren't a ton of people who are operating at that level, you know, which is a craft thing. That's great. I love that. And it's a blind spot thing too. It's like, it'd be like, if you're an amazing woodworker and you decided you wanted to solve a transportation problem, so you're going to build

a car out of wood and do things with wood that you just, it was seemed like it was impossible. What does that mean? Does that mean built a new industry? No. There's a bunch of other crafts that probably should have gone into building a car. Right. Yeah. What would somebody want a car for? Like it's the quality of it is not the only criteria.

Yep. I love it. Now, what boats are in again though? Yeah. So I don't know. Maybe cars. I love it. All right.

Well, Jonathan, thank you so much for your time. This has been such an awesome conversation. I learned a ton. I hope our listeners learned a ton. And listeners, if you end up taking some of Jonathan's advice and starting a company, reach out and let us know. We would love to have you on the show. The Data Stack Show is brought to you by Rudderstack, the warehouse-native customer data platform. Rudderstack is purpose-built

to help data teams turn customer data into competitive advantage. Learn more at rudderstack.com. Thank you.