This Week in Startups - How to secure follow-on investment for your startup (FounderU) + Ask an Angel with Zach Coelius | E1264

Episode Date: August 12, 2021

Jason discusses how founders can secure follow on funding (1:57), then is joined by investor Zach Coelius to answer listener questions on technical co-founders (38:21), successful founder traits (40:41), founder red flags (46:07), why startups fail diligence (56:17) and more.

Hey everybody, I'm still in Italy, having a wonderful time with my family in the Italian Countryside. I'll be back next week with a lot of news programs, but for today, I pre-taped an amazing Founder University segment. Founder. Dot University is an educational program we run where we try to help founders learn how to have a more successful startup. And today, we're going to talk about follow-on funding. This is a critical thing. You got that first seed funding, you got some friends and family, how do you increase your chances of getting your current investors and new investors to give you more money? Because there are very few startups that are won and done. After that, my friend Zach Collius, an amazing early stage seed investor, is on the program with me doing an

S-Jason segment. Stick with us. It's going to be a great episode. Starting next week, I'll be back with the news. This week in startups is brought to you by LinkedIn Marketing. To redeem a $100 dollar LinkedIn ad credit and launch your first campaign, go to LinkedIn.com slash this week in startups. Snackmagic is a stress-free way to treat your global team, clients or sales prospects with a build their own snack box. Get 10% off with code twist at snackmagic.com slash twist. Zendesk.

Qualifying startups can join the Zendesk for startups program and get six free months of Zendesk products. You'll also get access to an exclusive community of startups for advice and connections. Visit Zendesk.com slash twist today to get started. And our next founder university is August 23rd and 24th, a free online two-day class for pre-Series A startups. The August class is for underrepresented founders. Application and agenda are at founder.com. University. Okay, today I want to talk about follow-on rounds and how you as a founder can increase your chances of getting a follow-on round and then also talk about investors, you know, angel investors, seed funds, venture firms, and maybe talk about how they make decisions and the best practice is there. So let's do some definitions here right up front because investors are all looking to place bets and get an outside, uh, the norm return, an outlier. Investors want that outlier investment. They want a dollar to turn into

$100, $250, or $500. So that is the goal of investors. We know that. And they're going to place bets on a lot of companies to try to find but one company out of 20, 30, 40, 50, that will return 100x, 200x. That's the framework that most early stage investors are coming to the table. Now, What are founders coming to the table with in terms of their expectations? Well, they don't want to run out of money. They want to have enough money to reach product market fit. The product is so good that the market wants to use it. In fact, the market pulls it from the company.

They can't get enough of it, in other words. And that product market fit journey can take time. And time is the enemy of founders. Every month that goes by, you're burning. a certain amount of money. Let's say you have a 10-person team and on average your team cost $8,000 all in, right? Eight times 12 is $96,000. Maybe you're paying people on average $75K. They have some benefits, they have a computer. So we're talking about a remote company bare bones, you know, and you've got, you know, 10 people getting paid $8,000 or $9,000 a month. That means

you're spending a million dollars a year. Maybe you're spending $100,000 a month all in. you get the idea. Every month that goes by, if you have, I don't know, a million dollars in the bank, is 10% of your runway. Runway is a term that we use in the industry for how much distance do you have before you crash into the fence or go off the cliff, depending on the airport's topography. How much runway is how much time do you have to get the plane into the air? Getting the plane in the air and not crashing into the trees or the mountains. side. That is your runway and it's expressed in how much money you have and how much money you have is expressed and how much you're burning. Now, let's talk about pro rata. Pro rata is another

term of art, if you will, here in Silicon Valley. It means you get to keep your percentage ownership in a company. So if you are an investor and you own one percent of a company, And let's say when you paid for that 1%, it cost you $50,000. The company was worth $5 million, so 10% of $5 million is $500,000, and then 10% of that is $50,000. You get the idea,

1% of $5,000, $50,000. So you made an angel investment of $50,000 in the company, you own 1%. Now they're raising money at a $10 million valuation, and you want to maintain that amount. Well, if they're raising a million dollars, you need to be 1% of that million dollars. In other words, you have to put another 10K in

to keep your percentage ownership up. Easy way to figure this out. Whatever your ownership in the company, roughly speaking, you're going to be that amount of the new money raise. So if you own 10% of a company, which is typically what our firm owns these days, 10 to 15% of the next round,

the next round, the next round in order to maintain our percentage ownership. Some people don't care about pro rata they make one bet like I used to want Uber or, you know, Robin Hood or, you know, some other early investments. I would just make one quick bet and then I would get diluted down. I would not keep my pro rata. Now we're trying to keep our prorata even as our companies get to, you know, a valuation of $500,000 or $600,000 or $500 million. We're trying to keep our percentage.

If they're raising $30 million and we own 10%, which has happened to us recently, we needed to be to keep our prorata, we had to be three of the $30 million. So the numbers get bigger and bigger as you go. Lucky for us, we have the syndicate filled with angel investors and a fund so we can start to hit those notes. Follow-on funding just means simple term in our industry. Follow-on means funding that's coming in the next stage. It's follow-on funding. So we did a seed round. Now there's a series A, and people are following on to that initial investment. A bridge financing is a type of funding, and you'll get many different definitions of a bridge, but it's a short-term financing. This will enable the company to hit their goals before they do a big financing.

So let's say you were at your, you did your series A and you were at a million dollars in revenue, and to raise a series B, the market wants to see you at four million in revenue. But you only got to 2.5. You can go to your existing investors and say, you know what? We don't want to go to a market until we hit the $4 million in revenue a year moment, right? $300, $350K a month, $10,000 a day in revenue. Will you bridge us to get there? And usually the founder is going to go to the existing investors and ask for a bridge. Some folks will look at it and say, I like working with this founder.

They've kept me up to date. And the growth has been great. Maybe they didn't hit exactly their plan, but they hit 80s. 80% of it, depending on the terms of the bridge financing, I might want to keep going with this investment. Now, you as an investor, let's go to the investor side of the table, you've placed this bet on a company, you own 1% of the company. And now they say, hey, we didn't hit our goals. We need some more money. We'd like you to give us another 50,000. And you have to ask yourself, okay, if this company didn't hit their goals, and I'm at 15 companies I've invested in,

and it typically takes 20 or 30 or 40 companies to find an outlier, in other words, to hit an Uber or a Facebook or a Google or an Airbnb, that doesn't happen every day. You might need to invest in dozens of companies to hit anything close to that kind of an outcome, you know, just have a unicorn investment, a billion dollar company. So, what most angels are. investors and early stage investors are going to have to ask themselves is, is this a bridge or a dock? Is this a bridge that actually that 50,000, I'm convinced that 50,000 is going to get them there.

No problem. Easy peasy. They're at 2.5 million in revenue. You know, they're doing 200K a month. They're easily going to hit that target of 300, 350 a month. It's just a manner of hiring two more sales executives and an SDR, a sales development rep. And they'll hit those targets. It's no problem.

We can see it. The existing customer base loves it. Sure, I would love to own a little more equity in the company. And what valuation is the bridge financing? Typically, when you do a bridge financing, or at least traditionally, I should say, in Silicon Valley, this is being taped in 2021, which is a particularly hot moment in time. Typically, the bridge financing would be either at the last round, because, hey, listen, the founder didn't hit their goals, so they're just going to raise a little bit more at the last

round of funding. So the last round was that $5 million. They're going to just add $500K. They're going to dilute 10% more. Almost like that's a penalty for them. They don't get to go to market and get double their valuation. They're just going to accept a lower valuation. Other times people say, hey, you know, you did make progress. So your next round was going to be at $10 million. You did the last one of five. Okay, we'll make it six or seven. We'll give you a little bit of credit, right, in the valuation before we put more money in. That's good for the founder. It's actually good for everybody, if there's a little increase in valuation, if it's warranted, so that the company optically from outside appearances looks like it's growing. It looks like investors are willing to

pay a little bit more for the company because of the progress. If it was flat or if it's a down round, God forbid. We'll talk about down rounds another time. But if the valuation goes down, thus starts the debts pile. Who wants to invest in stocks that are going down, right? And shares prices that are going down. Right now, LinkedIn is going to give you. you a $100 credit towards your first ad campaign. I'm telling you the call to action up front. It's so good. LinkedIn.com slash this week in startups to get that $100 credit towards your first ad campaign. If you want to get a group of people who are receptive and who are doing business, they're doing business on LinkedIn, right? When you market on LinkedIn, your message reaches

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LinkedIn equals business. Business equals LinkedIn. It's that simple folks. And here's how LinkedIn marketing stands out. They have the tools for brand building or lead generation. You can pick. You can target professionals down to their job title, company name and location.

And you can even. engage folks you already know based on previous site visits or outreach, right? So you can do that retargeting thing. So do business where business is done. Get a hundee. Get a $100 ad credit right now. Go to LinkedIn.com slash this week in startups once again for a hundy. LinkedIn.com slash this week in startups. No spaces, no dashes. LinkedIn.com slash this week in startups. Terms and conditions apply because they're giving you a hundie. So the bridges can either be done out of weakness or strength. And some people will call a bridge an extension. This is really window dressing. A bridge looks weak, an extension of the previous round looks strong. So an extension really is

the last valuation. We're just going to add some new money in and get a couple more months of runway. So all of these situations, the investor has to ask themselves, is the money better spent in this company, which isn't hitting its goals or hit half of its goals, or should I place a new bet on a new company, or should I give this 50K to one of my high-performing companies? So if you were me and you had Uber and Robin Hood in the early days, and one of your companies that's failing says, hey, can I get another 100K? Would I not be better giving 50K each to Robinhood in Uber, and therein lies the challenge and why so many investors say, we don't do bridge rounds. If you're a founder, ask your investor, what do you do for bridge rounds or extensions?

Do you participate in them? Have you participated in them? And under what circumstances, will you participate in them? I've been very clear with people, we don't do bridge rounds or extensions unless the company is growing at double-digit percentages, month over month for the last six months. and then we will consider it. We'll consider it. Now, there are preemptive funding rounds.

That's different. If we see somebody in our portfolio who truly is growing 20% a month for six months, and the company is doing four times as much revenue in 2021 as it did in 2020, so they did, you know, 300K last year, but now they're on pace to do 1.4, we might go to them and say, hey, would you like us to give you a million dollars at this valuation? That's called a preemptive offer. So sometimes, instead of a bridge or extension, you can, you had a preemptive funding offer from your insiders.

That's called an inside round. And these three things all seem similar, but they're very different. A bridge is we didn't hit our goals. An extension is the same thing as saying the bridge. It's just a word people prefer to use because it doesn't sound as weak as bridge. So bridges and extensions, pretty much the same thing. And then on the other side, you have opportunistic rounds where people will give you a preemptive offer. And so we've seen this many times where companies are going,

gangbusters and some investor owns 5% of the company and they really want to own 10. So they'll just say to the person, can we put another $10 million in? We want to increase our ownership percentage. We know we got a winner here. So how do you get to convince people to invest and not have them stand pat? So what is standing pat? It's a term from poker. Basically, when you're playing draw poker, you can say, I am not going to take any more cards.

So if you had the ability to give two cards back, or you can ask for one card or two cards or three cards, or all four cards if you have an ace, that whole concept in draw poker where you can throw cards in, you can say, I'm standing pat. I have the hand I want. I'm not going to change.

And we stand Pat often because we have so many investments in our firm that we want to focus on the next set of companies or rounds that are priced by other investors and new money. So when you have a, a follow-on round, that's a series A, and some new investor comes in, they say, this is what I value the company at, this is how much I want to put in. That is the best way to show strength as a founder, and then your investors have to decide if they want to take their pro rata or not, and you're off to the races. If you can't get that done, nobody is so compelled to lead your

next round of funding, new money, putting a price on it, which is really good hygiene, they're looking at the company and saying, okay, the previous investors invested at 5 million, we think this company is now worth 20 million, and we're willing to put in, you know, $4 million to own 20% of it, or $5 million on a 25 million post to own 20% of it. That's a great feeling for the early stage seed investors. Great. Sequoia, you know, Chimoth, Kraft with David Sachs or Bill Gurley, a benchmark. They're pricing this new round.

Great. We have new people coming to the board meetings with great ideas. and new money coming in, doing their diligence and saying, this is the value of the company that I think it's worth. And that makes it really easy for existing investors. If you can't get that done, then you're falling back to a bridge, extension, whatever you want to call it. Most seed investors are going to stand pat. That's just the nature of seed investing. You're trying to make 30, 40 bets, hoping one breaks out. Some early stage funds like ours launch and our syndicate, we will take our pro rata if the company's still growing. We have to make that decision.

you know, on an ongoing basis, look at all the facts and the totality of should that money be best, is that money going to get the best return by investing in a company in our portfolio or by a new company and placing a new bet or going to another company in our portfolio that's performing really well? Remember, capital allocators and the reason why Silicon Valley and capitalism is winning so big in the world, perhaps too big according to Bernie Sanders, Elizabeth Warren,

and many people in the country, there's a small vocal minority of people who feel capitalism is too vibrant, too successful. And I understand their argument. It certainly does seem like these companies get bigger than ever. You must think as a capital allocator, I need to hit a certain return profile. So as an investor,

I need, when I have a fund, to give back three or four dollars for every dollar I'm given in order to be considered a success. Well, if I have this pool of capital and your company's failing, another company is growing, and a new company is surging, where would you put the money if you were in the capital allocators? Where you'd go with the surging company or the high growth company in your portfolio already?

Because you have information that they figured out product, market fit, and they're growing. If you want to get people to participate in a bridge financing as a founder, you need to think about what that capital allocator is going through. They're trying to maximize returns so they can stay in business, just like you're trying to raise money so you can stay in business. You better have a pretty good argument for them. Now, here's one little tip. Let's say you didn't hit your goals, but you need a little bit of money. You can go to your seven.

Let's say you just had seven investors and say, listen, the seven of you invested 500,000 in our last round, on average, 70. you know, the seven of you, you know, invested on average, uh, whatever, you know, 70K each. We would like you to come in. We need $100,000. So we'd like you to each do 20% of your original investment. We want to spread the pain across it, but here's our goal. And, you know, by doing that, you might be able to get the bridge down. And I've challenged founders to do that too, you know, where they've, you know, literally begged me. And you want to be sympathetic as an investor, but if you just keep giving money to the same investments or failed experiments, failed startups, because we do look at them as experiments in the early stages, if you keep giving

money to a failed experiment or a failed entrepreneur, I'm going to say very candidly, you're not doing your job properly because you're the steward of this money for other people who are expecting a return. So you're literally using your ammunition to fight a war that you can't win. And that's not, it's just basically you're putting bad money, good money after bad money. You shouldn't have made the first bet and now you're putting more money into it when you're going to put it into a growing company. That is the challenge that we all go through as investors. I can't tell you more candidly than that. And you feel terrible with a founder. But that's why a lot of firms will say, we don't do bridges up front when they invest in companies. I am telling

my team to let people know that. We don't do bridges, but we will when there's new money in typically take our pro rata. And if things are going really well, we'll do super pro rata. You know what? funders here, they hear like, well, you typically don't do it, but what about atypably? Or if you say normally we don't do it, they'll say, well, what about abnormally? So founders self-select for really the great ones are super charismatic and they love to, you know, convince you and they're super able to do that. So you have to have some discipline and say, if that's the case, go get new money. Or, you know, all seven existing investors, if all seven of us put money in, great, that is

another solution where you can use that in your toolkit and say, hey, listen, if I I can get all seven of you to put up but 20K each. We're going to get there and we're going to be super disciplined and here's our plan. A final thing, sometimes people will put a pot sweetener in. They'll say to folks, hey, listen, we can't raise money. New investors don't want to invest. The existing investors, only half of them want to invest. Now what do you do?

Right? So it's really easy when you have a new investor, give you a term sheet. You got a new round going. You just go to your existing investors. Do you want your pro rata yes or no? then if you're growing modestly and you need an extension or bridge okay depending on how well you did okay you're able to cobble a little bit of money together uh great you know you keep going in business it's important to be memorable and sending gifts is a classy way to create a great

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people want to invest. You don't have enough money here. What are you going to do? There's two final salvos you can do before selling or shutting down. Because that's kind of where you're getting to. There's actually three. No, there's four actually. One, you can run the company for free and not take salaries. I've seen people do it. You think it's crazy. Two, you can get to break even immediately, which is you cut half the staff, you take on a consulting job, and you raise your price is 50 percent, and you figure out a model to get to break even or profitability. So sort of cockroach mode on one end or just making severe cuts and raising your prices, being more cutthroat, getting to a place of stability is another option. So one is

run the company on fumes, don't take a salary. Two, cut staff, raise your prices, and get to break even, right? A third one is, and this is before selling your company or shutting it down, the third option is to offer people a spiff, a sweetener, a pot sweetener, if they partake in this round, in this bridge. So you say to people, hey, we're doing a bridge and we're giving everybody warrants. We're going to give them 10 to 1 warrants. We're going to 5 to 1 warrants.

What that means is, if you put in 100K and we give you 3 to 1 warrants, we're going to give you another three shares that you can buy at this price for every share you bought. Now, those warrants, if the company succeeds, let's say it was a dollar a share. So I gave you $100,000 for $100,000. I have the right to buy another $300,000 shares for $300,000 anytime in the next 10 years, or five or whatever the window is. I would say between five and 10 years is typically what these warrants would last. So let's say the last 10 years.

Okay, now I have a free option. If the shares become worth $200 each, I can buy them for a dollar and get the other $199. Fantastic. I can execute those warrants at any time and get great tax treatment, long-term capital gains. And then what that Potsweetener can do is it can incentivize some people who are on the fence to get greedy and say, you know what? That's a pretty good deal. Okay, I want to own more of the company. And then finally, Potsweetener, then there comes the recap, the deadly, brutal recap.

And what's a recap? Okay, you know, we only have one investor who wants to invest. We raised a million dollars for 20% of the company. This new investor will put in 500K, but he wants the existing, you know, 20% of preferred shareholders to be common. And they want to own for their million dollars, you know, 25% of the company. But they don't want those other investors to get anything. So that's called pay to play. And pay to play means if you want to get advantage of that new round, you have to put up money.

So it's kind of like putting a gun to the existing investor's head. And so much so that you can be sure you've burned your investors and they probably will not work with you in the future if you do this technique. There are rare occasions where everybody knows you tried your hardest, you communicated well with the investors and it just didn't work out. So what do you do? You say, listen, we're recapping the company. 50% of the company was owned by investors, 35% by the founders, 15% by the employees were recapping the company. All of the current shareholders will become common and they own 20% of the company. The two founders out of the four who want to keep going, they're going to get 30% each.

The new management team is going to get 10% and the new investors are going to get 20%. You come up with some formula like that. And sometimes people will sign off on it if you've presented it well and they feel like, like the other option is the company closed down. If you do it and it's selfish, like I own 50% of the company, I own 60% of the company, I want to own 90%. I own 40% of the company. Now I want to own 80%.

You probably are breaking securities law doing that because it's an inside transaction and you can get all kinds of trouble for that. Not that investors, typically sue founders. They only do it in the most extreme of cases. I would say one out of every two or three hundred investments at a venture firm might result in even the threat of legal action like this because it's kind of like lighting off a grenade in a conference room. Like, nobody's going to get out of the conference room.

You really do not want to go to war with your investors, your founders, and the team and everybody because there's no time. We talked about runway earlier. There's no time for this nonsense. You pull the pin on that grenade, whole room blows up. Disaster. Everybody gets shrapnel. Nobody wins.

So founders have to be very careful about this. As investors, you have to be disciplined. And if you are keeping people up to date, you are doing a great job as a founder. So if the investors feel like you've kept them up to date, you send a monthly update, you let them know what went wrong, and you've really learned a lot from the mistakes you've made, you'll increase your chances of getting that bridge round if they, in fact, do bridge rounds. Some people literally have a policy at their firms, they don't. So here's an example of a bridge round that investors,

would probably pass on. After looking at company X and their request to be bridged, you already own 10% of the company. Okay, you've already placed a big bet, and you've got a lot of ownership. And they have slow revenue growth. They're not three times year over year. They're growing 10% year over year.

Or maybe they're declining 10%. They're slow or no growth. They don't have a lead investor. And you, just as a philosophy, don't invest in bridge rounds. Well, that's a perfect example of standing pat. you don't want to increase your position and you just say we're happy everybody always wants to know the language

you're happy with our holdings and we don't want to increase them at this time very simple way to say to a founder in a very tight, non-negotiable way we have hit our ownership percentage and we're not going to increase it at this time we're happy to talk to other investors we're happy to help you any way we can

except we've hit our ownership target and I think if you're a founder that's kind of reasonable You know, somebody hits 10% ownership, can't keep going back to the well. And that is the rookie mistake of early stage investors. Now, putting on your founder hat, okay, you're raising your follow on funding

and you had a really nice high valuation. You know, you're going to have to ask yourself when you're dealing with these investors if they want to put more money in. Was this investor great to work with? Did they check in with me? Did they help with introductions? as my friend Ruloff, both says to me, you know, you don't have to have like a really helpful

investor, a neutral investor is okay too. Somebody who just puts in cash but doesn't cost problems. That's a high quality investor in a way. You want high quality investors who are going to add tons of value as demonstrated by their reviews from other founders and the outcomes and how many outlier outcomes have they had. That's really who you want. So when you think about a firm like Sequoia, like, okay, trillion dollar companies. Apple, Google, they've been involved in Facebook. They kind of were involved in by selling Instagram and WhatsApp there, which were the primary shareholders in, or larger shareholders in both of those companies.

So aside from the founders. So you really want to pick your investors wisely. If they have not been a drag and they've really helped, great. But you want to clearly communicate why you need the bridge round. If something went wrong, yeah, you could say, like, listen, we didn't hit the targets, what we came within this amount and here's what we're changing. giving people a plan. You know, asking for more money without a plan

is kind of like a really weak way to go about it. It's like, I lost all your money. I deployed all your capital. I didn't hit the targets. And you're like, okay, what's the plan? And you're like, give me more money. And that gives me 24 months of runway. That to me is not super compelling.

I'll be totally honest. Now, if you said, hey, we need 500K, that gets us 24 months of runway. We want you to put in 250K now. And if we hit, you know, 450K, $1,000 in revenue for the year, we want you to put the other 250 in. That would be a tranched financing,

two tranches, and it's milestone-based. Man, that sounds a lot better, doesn't it? If you were the investor, you'd probably go, well, that sounds pretty reasonable. So a tranched financing like that is another device that sometimes investors will use. Well, they'll dole out the capital slowly. We've done that at times where things were going wrong.

We needed to clean some stuff up. And we said, you know what? Okay, show us that you can hit the goals and we'll release the capitalize you. do. So that's another device that people have out there in a hot market. Some of these things don't apply. Companies go to the moon. Everybody's a genius in a down market. Maybe these things become too punitive towards the founders, right? So you have that option. There are a lot of reasons, you know, for a bridge round, but they just generally bridge rounds are not a strong way to present

in your company. You really want to do a proper Series A, proper Series B, not do bridge rounds out of weakness. You can always open up a note, which would be opportunistic. So let me tell you about that. And this is totally something different than what we've talked about already. Sometimes a founder will open up a $1 million round for 10% of the company, the seed round. You might call this an angel round, friends and family, but let's just use the word seed round. It's not the series A. It's only 10% of the company. It's not 20%. And they raise that seed round from 20 different investors, 50K on average. It's a party round. Nobody's leading it. It's a party round. Now you hit your million dollar goal. Founders don't want to dilute anymore. They're really confident.

And the million dollars is going to get them 20 months because they burn so little. They only burn 50k a month. And revenue is raising. So maybe they can even hit break even. And then you close around. And once you close around, everybody comes out of the woodwork, oh, you closed around. Oh, you closed around. Oh, that famous person was in there. Oh, J-Cal was in there. Oh, David Sachs was in there. Oh, Chamath was in there. Sequoia's in there, whoever. Can I get in? Can I get in? And you have to say, no, come back to us in two years. Well, here's an idea. You open up another note and you say, yeah, we closed the $10 million note. I got approval for my board and my lead investor, or in this case, if you didn't have one, my co-founders, we opened up another note at a $17 million cap or a 20% discount to the next round. And we can raise up to

$2 million on that note. If it's of interest to you, the note's going to be open for the next six months. And what you'll have is people who literally just missed the $10 million valuation three months ago will say, you know what? I'm going to give them credit for the next $7 million.

And I'm going to give them a 70% lift on valuation just three months later, even though nothing's changed, except they got those great investors and that money in the bank. And that is something I'm seeing more and more. I'm advising my founders to do more and more. if you are sold out and a great investor comes along,

you can always just open up a note for that investor. I had one very notable company. I won't say which one. They closed their round. Then they said, we really want you in. And I said, oh, when's the next round? They said, well, just open up a note. The last round was at 20.

We'll let you in a 30. And I was like, sure, sounds good to me. I'm not an idiot. I used to be an idiot. I used to like debate the valuation. Oh, my God. I get jealous of those previous investors. Oh, they paid a dollar for their share.

Now you want to charge me a buck 50? Now I'm just like, wait a second. Those are really smart people paid a dollar. This is a buck 50. And the shares of Uber and Robin Hood and these other companies, they went 2000X, 500x, 250x. Like, why am I sweating? A huge percentage increase in the early days and missing the 10 year vision for the company, right?

So sometimes you really want to understand that like anything under $100 million for a company that's going to change the world is cheap. And even people who invest it, at Facebook at $10 billion, like Yuri Milner and Microsoft and the people who came in later, they look like geniuses now when it's a trillion-dollar company. You know, that takes 15, 20 years, but it does happen. And so I hope this is helpful for you. If you have any questions, or you want to share this with any other founders, please let us know. And we are starting our founder university program.

It's going to be a 12 to 16-week program. We're still figuring it out. And you're going to be able to apply at Founders. Founder. University. We don't know if we're going to charge for it or not or if we'll take a percentage of people's equity in their next company. But I wanted to take Founder University and all the work Jackie and I and the team put into it for our two-day events and make it a 12 or 16-week course where people who haven't started a company before but are interested in starting a company can come with an idea or a mock-up. And then over the 12 or 16 weeks,

learn how to build a company, get an MVP, run a couple of of tests, lean startup style, and get that company ready to go to an accelerator or raise an angel round. That would be a good outcome, raising 100, 150,000 from angels or going to an accelerator. So that's our goal of Founder University. It's going to be sort of our gift back to the community to help more people, hopefully some non-traditional people, older people, people from communities that maybe haven't gotten funded as easily as other communities, and really teach you everything we've learned about having an idea and getting to that MVP, minimum viable product, that prototype with a couple of customers and a couple of tests so that you come with credibility to get

into Y Combinator Techstar's launch accelerator or maybe even raise 100 or 250K or maybe even 500K from Angels. That's our goal with Founder University and we're going to have 50 people, I think, in the first class. So please do apply. We're going to pick people based on, well, we haven't figured that out yet. So we're going to pick a bunch of people and we'll see how it goes. It's not going to be just one class. We're going to probably do it four or five times a year. Okay, thanks for joining us. Everyone knows Zendesk is the go-to for customer support,

but what you may not know is that Zendesk also offers a suite of sales tools so sales teams like yours can spend more time on what really matters having better customer conversations so they can close more deals faster. Zendesk is offering this suite of sales tools plus their industry-leading support software for free for six months as part of the Zendex. for startups programs. Along with free access to all of Zendesk, you'll also get access to Zendesk community of startup founders and partners to help you better serve your customers. They'll even offer dedicated onboarding guidance and support to get you up and running in no time. Stizi

Studio, one of our watch portfolio companies that sells consumer SaaS products, you know, dance tutorials. They love Zendesk. And through the combination of Zendesk Explore and their ticket tagging system, Steezy can track which features their users are most excited about and relay that info to the product team. For Steasy, Zendesk is more than a CRM tool. It creates a positive relationship with members and empowers them to contribute to Stizi's growth in return for some awesome dance moves.

You can get six months of Zendesk for startups free at Zendesk.com slash twist to qualify for the program. You must have under 50 employees and have raised venture funding at Series A or below and be a new Zendesk customer. So it's pretty fair. And check out Zendesk's new podcast,

Sit down, startup, available on all major podcasting platforms. Every customer accounts when you're a startup, especially now. So start building the best customer experiences with Zendesk. Okay, Zach Kulius is with us again. Here we go. High energy Zucco, high energy Zucco, as opposed to low energy Zucco, who was on the last episode, what is your opinion on having a technical co-founder on the team versus outsourcing to a dev shop? We get this question all the time, Zach.

what's the difference in how a company's looked at and how a company operates with an in-house team versus an external team? I don't think I've ever invested in a business that didn't have technical co-founders very quickly from the beginning. Sometimes they'll go and they'll build sort of like proof of concepts or they'll build sort of early early iterations to basically validate the value that they're bringing into the market. But, you know, almost immediately thereafter you have to go find the people who are going to

build the technology in-house or on your team because you internalize that cycle in terms of the ability to make changes and evolve and adapt and you internalize that knowledge whereby when that sits external to your team like you're going to run into a world of pain when the time comes this would be like running a bakery and then you're ordering your pastries from a factory and then bringing them to your bakery and then putting them out there and you dress as a baker that's what a person who doesn't build the technology in-house is basically doing. And eventually, you know, imagine you're investing and you're like, oh, wow, tell me how you made the croissant.

And they're like, well, I go to this website and I order how many quassants and they bring them and then I put them in our box and then I sell them. And it's like, well, I want to invest in a baker, in a bakery. You're a storefront that buys from another bakery. So what is your skill exactly? There have been examples. Callan Lee is one where they were able to build it. The founder sunk hundreds of thousands of dollars from his corporate sales job into it,

from what I understand. So it can happen for your MVP, maybe. But I think with no code now and all these great platforms bubble and type form and if this than that and Zapier and, you know, notion, slack, I mean, Airtable, all this stuff, Asana, they're all working together. You can build a no code. solution and maybe get there on no code too. So keep that in mind.

Okay, Jake, via email, what is the most attractive, intangible qualities of a founder? Is it grit, tunnel vision, empathy, flexibility, clarity of thought, etc. I like to say I love founders that are dumb enough to bash their head through brick walls, but who are smart enough to realize sometimes you can walk around it. Yeah, great. So you like to have that, like they'll never give up, they'll be dogged. but they're also savvy and they're willing to, you know, think outside the box and try other strategies. You know, at the end of the day, many different intangible qualities can make a

successful founder. I've met introverts, extroverts. I've met engineering, you know, folks, and I've met artistic folks. You can have a designer like Airbnb. You could have a dogged, you know, Travis with Uber, who is just a great leader of people and a visionary. You could have Larry and Sergei who are engineers. You can have Elon who's an engineer. You know, there's a lot of different prototypes here. And the truth is having a product that you want to see manifest itself in the world and you are relentless in the pursuit of that and building a great team. If you can build a great product and build a great team, it tends to work out. So I think who can build a great product, who can build a great team, somebody who is good at building

product and somebody who's good at getting people to join. So if you can't find your co-founder, if you can't find your first employee, you may have failed the first test, which is you're just not able to recruit a team. And if you can't build a great product, well, back to that Baker analogy with the previous question that's kind of like, well, who are you? What qualifies you as a founder? You don't have the ability to build product and you don't have the ability to recruit teams. I've always been really good at recruiting people and building enthusiasm and conceiving

of products and marketing them. and branding them. That's been my skill set. I've always been able to find technical people to work with me. So no big deal. But some people are not good at the recruiting thing and they're not good at product.

And I'm like, what are you good at? And they're like, I don't know. I'm like, well, maybe I need to work on that. There seems to be like, the thing I find problematic about this question, Jake, is what are you going to do, change your personality? to fit what Zach and I said here. At the end of the day, build a great product, build a great team, delight customers and have

them not shut up about your product. Those are things you can actually change in the world. You're not going to be able to change your empathy, flexibility, clarity of thought. Like, these are hard things for you to change in our personality. Just make a great product, build a great team, delight customers. And you've got a really good chance of getting funded. Okay. Matt, via email from your career as an entrepreneur investor.

What are the similarities between all successful startups you're seeing? Again, back to pattern recognition. I hate these questions because they really show a lack of knowledge of the space, which is many different things can succeed. And the similarities, you know, there are similarities, but many different things succeed. I don't know. Can you think of similarities or do you get annoyed by these questions like I do? Yeah, I mean, I think there's there are both.

It's like, I think everything in this business is there's a yin and a yang. and that each side of the coin is true. So on one hand, all great businesses are new. There's some new idea that hasn't been done before. There's some insight. There's some aspect that is amazing. But the other side of it is like some great businesses are just like taking existing business that's not new at all and just do a way better job of it.

And like we've seen that over and over. They just make it. They just go in and they realize how stupid it is that this existing business does something in this dumb way. And they're like, okay, we're just going to fix it and do it right. And they're just the same, but way better. So, and I think in every aspect of this business, the yin and the yang is a truism. It's that all things are true, but in their own particular ways around startups.

So, but yeah, I agree with you. There's, there's no, there's nothing that's consistent. It's, they're always different. Well, it's, yeah, there's many different ways to get to the destination, many different ways to win. The things that don't change is building great product, building great teams. and delighting customers. As far as I can tell those three things, do not change. I've never seen an outlawyer business

that did not delight their customers, had a terrible team, and they didn't know how to make a good product. Like, is there an example of a team with a bad product that succeeded? A stupid team? Yeah, there's tons of teams that, like, built really crappy products

that have become very successful. What's the most successful crappy product? I don't know. I mean, WebEx, like, God, But at the time, I think it was the best of the worst. So it's only bad in relation to how good Zoom and some of the new products are, I think. Yeah, but I mean, I think there's a lot of products. I don't want to like start pointing fingers and naming names.

But there's a lot of products out there that I have to use on a daily basis, and they're terrible. And the businesses are amazing. Well, that's the opportunity then for somebody to make a better one. Somebody's going to talk to those guys. Well, I mean, actually, if you think about it, think about how bad friends were in MySpace were before you use Facebook, you know? Facebook actually made it stable. Okay, Jillian, via email, as an angel investor, what are some low-key red flags that you might not want to invest in a founder?

Not talk about glaring ones like the terrible product, no business model, 20 minutes late to meeting, etc. But just low-key things, things that make it less desirable to invest in the company? I treated one today that I, the other day that I like, which is, you know, a lot of founders are really proud of their organic growth rates And they're like, hey, look how great we're growing. Our CAC is zero and we're growing this fast. And like, for me, that's actually like a red flag because paid acquisition and sales,

marketing, understanding your channels is a muscle. You have to start doing it and iterating on it and learning and you do it and you realize something's not white and you get better at it. And like showing that you basically very early on in the sort of life cycle of your business realize that this is a muscle that needs to get big and strong for your business to get as big as it could get, and starting to build it and starting to think about it, and starting to get good at it is like super-duber critical. And I think there's a lot of sort of examples in businesses like this in every aspect

where being proud that you don't do something that you eventually will have to do, I think is for me, it's a red flag. I'm like, oh, you mean you haven't started learning how to do this yet? Like, that means it's going to be painful when the time comes. Yeah. And really it is. when you think about marketing as a muscle, you know,

you can go through 10 campaigns and really achieve very little. And then all of a sudden you get, you figure out some audience or some new channel or some new creative and it just goes 10x. And all of a sudden, your cat goes from $100 to $10.

And you're like, oh, there it is. So it's pretty humbling, like how difficult it is to actually get to the point where you make something that actually breaks out. So you definitely want to, stick with it. And yeah, I think that is a bit of a tell. I would say low product velocity.

I find super annoying. And I also find super annoying people who obsess over things that are not critical to the business. So, you know, I have one founder who is obsessing over, you know, the super voting shares. And, you know, I'm like, this. You don't even have product market fits. and we're talking about super voting shares, what's going on here? Like, let's get product market fit

and then talk about that. Or, like, they were concerned about their board comparison. I'm not saying that's not an important thing, but I was like, you don't even have a thriving business here and we're, like, debating stuff that's not important.

Then other times that people say, like, hey, yeah, we're going to get this done, we get that done, and they just don't get it done. And I'm just like, you know what? There's no plan here. And the cadence is too slow. You have to move fast with a sense of urgency. and I just watch people meander and meander

and I'm just like, where's the sense of urgency here? Just pick a date that the new product comes out and tell the team version two is coming out October 1st, the end. And if it doesn't come out October 1st, you're all fired and we're starting over. Like, you at some point have to put your foot down and say, we're going to be competitive in the marketplace. And some people do this, you know, really aggressively.

And it has great success. And listen, it might burn some people out. It might rub some people the wrong way. trigger warning, if you don't like, you know, intense work environments, startups are not for you, but man, have a sense of urgency. I think that's one of the big reasons why tech and the media and this woe crowd are having this, you know, big battle is because startups are about going fast with a sense of urgency.

And then socialism, communism, and work-life balance and living a full 360 life life where you're focused on you and your self-care is diametrically opposed to trying to beat competitors and to, you know, trying to act with a sense of urgency. And so neither side can understand the other side. If you don't want to be an intense environment, you go work for the post office, go work for Starbucks, go work for, you know, any number of jobs where you're not creating any new things. You're just punching a clock or creating a delightful product day and day out, but you're not trying to change the world. That's fine. But if you're at a startup with the clock ticking and you're running out of company, you know, cash, you have to move fast people.

You cannot dilly dally. Speed is success and going slow equals death. You will get caught. The zombies will catch you. They'll overwhelm you and you will be ripped to shreds and they will eat the flesh off your bones. You need to beat out the other people. Sorry to say it's geographically. But it just, I mean, how annoying is it when you invest in a company and they just turn into the post office? And they're like, yeah, we're not working this weekend. Yeah. I don't know if we're going to get that done.

Does that happen often to you? No, thank God. It doesn't happen that often, but when it does happen. Yeah. That's a huge filter for me. It's like the speed of execution is everything in startup life. And if, you know, if you're, if you're slow,

you're dead. Okay, here we go. Here's our one token crypto question from Patrick. If you were interested in investing in crypto, but wary of the coming regulations from the U.S. and abroad, good, he's paying attention. There's a lot of regulation. What would you do?

Is it still worth investing in Bitcoin and Ethereum? Or have I missed the boat? Should I look into alt coins that have much lower entry prices? Oh, my Lord. I mean, look, I'm going to give it. I'm going to say something that's going to piss off all the crypto. bros and they're going to come chase after me like I always do. Here comes your out mentions.

Trigger warning guys, you should turn off the stream because you're going to get mad of me. We got laser eyes. You're all so dead. Basically my thesis and I've been wrong since crypto, like I looked at it when it was like 55 cents. So at this point I'm like 100,000 X wrong. So like don't believe the word I say, but here's why you're dead.

So I believe that the Chinese government is going to roll out a centralized digital. well, they have right now, but they're going to really roll out a centralized digital coin that works just like Bitcoin. So basically, you have a secret key and basically you have a public key and you're going to be able to move money around using like the same innovations that are in the entire crypto ecosystem. But instead of being distributed, they're going to centralize it. And from a from a strategic perspective, it's like unbelievably powerful because they're going to say, hey, you know how the US dollar has all these KYCs and regulations and you have to go through. all these banks. Not if you want to basically use our coin, you can do whatever the hell you want. It's got to go through our database though, so we get to

see everything. But if you're a drug dealer and you want to move to money around, we don't care. And so then you can imagine a world where remittances and global money movement across a single managed coin that is going to hold its value and isn't going to

fluctuate up and down and it isn't being manipulated by a bunch of people like Tether is suddenly a superpower and the Chinese government is in a position to basically become the next global reserve currency because everyone will use their currency. At which point the U.S. government slowly and stupidly will do the same thing, at which point crypto as this sort of like decentralized libertarian wet dream suddenly becomes a very, very small part of the global currency movements. So it's the old sort of Microsoft world. They're going

to embrace your innovations. They're going to extend their capabilities using your innovations. and then they are going to extinguish you, the lovely crypto people. It's the long hug. It's an embracing long hug. We love your innovations. And now we will, like a boa constrictor, take the life out of you. Every breath is going to be your demise. I mean, it really is a sinister plan.

And I think actually probably the most likely plan, they kicked out, if you just look at their behavior. I always say, like, just look at the behavior. They kicked out all of this. all the Bitcoin mining, they made Bitcoin illegal, they're tightening everything up, they experimented with their digital lawn, and there's a Rem&B, whatever it is.

And your premise is perfect, which is, hey, we don't care if you're funding terror, we don't care what you're doing. We just want to be the global supply. Then, oh yeah, by the way, you felt like you got your money stolen, yeah, and you know somebody in the Chinese government, yeah, we could reverse that transaction for you

because we control it, right? centralized and not being able to reverse things is a pretty cool feature. Unless you're a powerful person and you want it reversed and you got, you know, Xi Jinping will take your phone call now. You could flip those things. It's a really interesting point. And then I think everything goes in the United States, goes regulated. The U.S.

Reserve currency comes out. And then they just say to anybody who's doing anything in crypto, either use the United States dollars, anything else is going to have a 10% tax on it coming in, coming out of it, selling it, trading it, whatever. They can pick whatever tax they want. They can pick whatever regulation they want, and they will strangle anonymous, decentralized money if they want to. They'll strangle it through regulation and taxation.

Doesn't mean it goes away. You can still use BitTorrent. You can still, I'm sure, use, you know, any of those peer-to-peer stealing file networks, whatever. But why would you bother if you can use? Spotify and Netflix and Disney and get 4K and not have to f*** with that. Yep. And that's really, I think, the end game here.

So I would, I'm with Zach. I mean, why bother buying this stuff? If you really love crypto and you know the code and you know the code base and you can evaluate the technology and you want to dabble in it, sure. Sure. Sure. But I don't think it's the casual thing to invest in. Live from YouTube, Hoda asks, hey Jason, I have a question about.

Some of the reasons you may find in due diligence that makes you avoid investing in a startup. Great question. We do serious diligence these days. I'll tell you some of the things that are very quick for us. If what the founder told us in the meetings, does it match what we find in diligence? Well, that's kind of lying or stretching the truth. We'll often have people tell us they have one amount of revenue and then it's not what we see or was exaggerated in some way.

Then if we see accounting problems where they're doing cash-based accounting instead of accrual and they don't have good books and they don't have control over their books, that's a problem. If they have lawsuits pending and they haven't been able to resolve them, if they're major, that could be problematic. And then most of all, I think, you know, the number one thing is we find problems on the cap tables. And the problems could be they gave 50% of the company to a development shop over four iterations of their product for 10 to 15% each time because it was 250,000. K worth of work and they did it for free and then all of a sudden you gave a million dollars of your equity, which was half the company and now you lost control of your company, then nobody else can invest in it. Or you had four founders, all four got all 25% given to them day one, and two of them never worked at the company past month one. Now you got half the cap table's dead

money. So cap table problems are always problematic. You really want to have good books, great accounting, great IP assignment, everybody signed over their assignment, great vesting, really clean cap table. Investing means all the founders get their shares over four years as opposed to just getting them day one and then somebody quits and they get all their shares for free.

Those are the red flags that we see most often. What do you see, Zach? I think you just hit all the nails. I mean, there's a lot more, there's a lot of stuff in sort of like figuring out that there's a legit business

that operates correctly that has real customers, has real revenue, has real bank accounts, it has real legal documentation, it has real lawyers. It's like all the stuff that needs to be real.

But yeah, I think you nailed it. One of the things that happens is when we ask for diligence, in the cases where we don't need to do diligence, they give you a folder in 90 seconds after you email them. Hey, we're ready to go to diligence. They go, okay, here's a document library. And they just share it with us on Google Drive or Dropbox or whatever it is. And then when there's a problem, they're like, what do you want to see? And we're like, here's the list.

And they're like, oh, and then we don't hear from them again. Like, literally, they'll be so embarrassed that they can't even get through this list. And it's like, if you can't get through this list for a $1 million investment, what do you think the $20 million investment's going to look like? You know, they're going to be getting up in your accounting. Okay, live from YouTube, George Washington. You can talk to angels. I don't know what that means.

You can talk to angels. Yes, you can. Thank you, George, for incredible observation. You can talk to angels. All right, Zach, you're awesome. We'll see you all next time. Bye-bye.