This Week in Startups - Republic CEO Ken Nguyen on making early-stage investing for everyone | E1199

Episode Date: April 16, 2021

Kendrick Nguyen of Republic, an early-stage investing platform, talks about the power of the retail investor crowd, how startups can convert their followers into investors (13:05), Republic's diligence process for deals on their platform (47:46), and more!

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Hey, everybody, welcome to this week in startups. I am really excited to have today's guest on the program because founders care about raising money. It's the number one question I get. Will you give me your money? How do I raise money for my startup? Well, it's typically been a small number of ways to get money for your startup. The first way is you put in your own money. The second way, you put in your friends and families money, and you risk never being able to go to Christmas or Thanksgiving again because you lost their money. Third way is your bootstrap. Very difficult to do. Possible. I love bootstrappers, but it's hard to do because that means you're making money, building product, making money, and it's a lot of stopping and starting, if you will. And maybe

you're not a developer and you need to hire a developer. And developers need to make money because they're in demand. So those are the first three ways. Now, what are the next couple ways? Raising from angel investors, raising from venture capitalists. If you're trying to raise from angel investors and venture capitalists, there's a funny thing that people don't understand. Even though there are large pools of capital. Those large pools of capital are controlled by capital allocator. What's a capital allocator? It's people like me. It's the people who are entrusted to make sure those bets get placed intelligently and that they're not wasted bets. In other words, you're not betting on a company that doesn't have venture scale, betting on a company that has fraud or

a broken cap tape, whatever it might be. And those capital allocators have a limited number of seats on their dance card, they have a limited amount of time, and it is zero-sum. The money may not be zero-sum, but the number of people they can invest in is zero-sum. So something happened recently, which is equity crowdfunding. What is equity crowdfunding? It means civilians. Non-accredited investors can invest in your startup. And my guest today can win from Republic, you may have heard of them has been toiling away at this for I think, is it five years now, Ken? You've been doing this at Republic? Four and a half, yeah, almost five years. Almost five years. So I almost got it perfect. And you started at Angelist, I believe, working with our friend Naval. And you saw accredited investors

getting to invest in amazing companies. In fact, I think you were there when I did the calm investment, correct? I was. Yeah. So you got inspired, I guess, and Naval had no interest in doing equity crowdfunding. Explain to me what the last five years of your life has been like to try to make this a reality. And welcome to the program. First of all, Jason, thank you so much for having me back again on Twist. You mentioned that it's not so much Navarre and Angelis didn't have an interest in doing crowdfunding for their masses, but that this model is so regulated and operationally complex that it wasn't suitable or that it wasn't feasible for them to do it at all. So your question is, what has it been like in the past five years? Building a two-sided marketplace in a market that didn't exist

and very nascent, which is about one of the more difficult business model to grind through. And given that people's attention span nowadays about nine seconds, how do you convince people who know nothing about investing to listen and participate? It's been a long and arduous journey, but it's been so worth it. And I think we, at the inflection point, if not already, stepping on it toward that future whereby private investing in startups and other things, it's just a mainstream awareness. So I'm highly optimistic that the future I had is exceedingly bright for the industry. Okay.

The last 30 days have been pretty epic for you. Something happened in the rules that changed. Basically, the industry, I think, forever. Explain the rule change that occurred in the last, I think, 60 days that resulted in two amazing fundraisings on the Republic platform, which you can see right now at republic.com. If I may go back even a step further down memory lane. So since the Great Depression in the 1930s, the infinite wisdom of Congress was that you've got to be a millionaire or accredited investor to invest privately.

That was the law all the way to 2030s. So that's like 80 years of, you know, American securities law. May 2016, that law came into effect regulation crowdfunding that allowed companies, private companies to raise from retail, but there was a limitation. No company could have raised more than a million dollars per year under regulation crowdfunding. It had this weird unintended effect of discouraging any company, with substantial traction with a lot of revenue to go through this, you know, somewhat onerous process of disclosing financials and filing a form just to raise a million

dollars. So in the first four years, we tried and we convinced and we sent emails to Airbnb and everyone in between. Everyone was like, no, this is not worth it. And then in March, March 15, to be exact, the law changed and allowed a company to raise up to five millions per year. So let's talk about that onerous amount of work. When you are a private company raising from accredited investors, people who make over $200,000 a year, or have a million dollars in net worth, I think is the not counting their home as the official definition at the time we're taping this. That could change.

It does change from time to time. In the private, with accredited, you don't have to disclose anything. you don't have to do an audit. They're considered sophisticated, intelligent, special people, even if they got their money through inheritance or the lottery or any number of ways playing blackjack. They're the sophisticated ones, which, you know, may or may not be true. You could become sophisticated and still not have a lot of money in your bank account, like being an economics professor or an attorney who makes $150,000 a year. You actually don't count as accredited, which is crazy because the people at the SEC who are,

making sure that these laws are followed and doing really great work, the people working on accreditation rules and executing on them might not actually be accredited themselves. Likely not. Likely not. So you have this great paradox that the people making slash enforcing the rules that Congress comes up with and our government agrees on or society agrees on may not even be accredited themselves. It seems crazy. But the onerous part is that you have to do an audit, you have to disclose financials and you have to do a lot of prep work. Most founders want to know how much does that cost? I had one founder say an audit would have been $50,000 to $80,000. Is that correct?

No, no. It depends on how many years of financial activities a company has. But for a new startup, a year, two, year, three years out, you know, at most legal and accounting fees max out about $15,000, one, five thousand, it can be as low as $5,000 to do. Got it. So it's significant, but for to raise a million dollars, much less five, that fee is relatively low. But nonetheless, it days that fee and the time it takes to prepare, Jason. Got it.

So you have about 15,000, let's say, in auditing and legal fees, takes a month or two, I think, to probably clean all this up, because startups maybe aren't keeping all these numbers and documents all in one place. They should be. Go, watch our startup basic series. if you want information on that. But what other costs are involved in this? So you're the platform.

You have to, obviously, you've got over 100 employees, I think, at this point. How many people work at Republic? About 150, part-time and four-time. Got it. So you got well over 100 people. You have to pay them, so you have over 10 million in salaries or something like that, I would guess. How do you make money? If somebody would have to raise, let's put it out there, the full $5 million, you have to put

10, 20 people on that deal. you've got to do marketing, you've got to run the platform, there's software, there's customer support. How much do you make on a $5 million fundraising? So the company typically pays us a cash commission and an upside commission in the form of equity or securities. And we typically take 6% in cash commission and 2% in upside. Now, there are cases whereby the company brings most of the investors and of course the fee would be lower. But if a company comes to us and we have to do everything, which is for marketing, we have to corral our investor base to deploy that capital right now is six and two,

six percent in cash, two percent in potential. And it's important to note the two percent is not over the value of the company. It's two percent of the fundraising in equity. Is that right? Correct. If a company raises a million dollars on a $10 million save at a $10 million valuation cap, the company would be paying a $60,000 in cash at the end of the campaign and issue a save in the amount of $20,000 on the same terms as investors had invested. So you're not getting 2% of the $10 million valuation company, which would have been $200,000 in cash. You're getting 20 basis points in that example of the $10 million, correct?

Correct. And so what that means is, even on a $5 million raise, you may. $300,000, you would need to do 20, you have to do 30 of those just to even break even as a company, a ballpark with my math. Something in that range, correct? Absolutely. And the upside one in a hundred, maybe one in 20, if that works out down the road, that's going to yield a very significant upside or payday for Republic. So in a way, Republic becomes an investor alongside our own investor. And, you know, as you know quite well, companies go through different events and sometimes they require decisions that don't necessarily have any precedent. So we, being an investor,

also look out for our own investors' interests in exercising that decision and assessing that information when the time comes. Hey, everybody, small businesses have always shown an incredible ability to adapt, innovate, and survive even more so in this past year. It's been tough for a lot of companies. I can tell you that. And now, another way you can adapt and grow is by finding the right people to help you grow your business. LinkedIn jobs helps you do that for free. That's right. At the end of the ad read, I'm going to give you a call to action with a free job post, hiring something I have been hyperactive with. I think we've hired five people for launch this year and maybe six or seven over at Inside from a curriculum designer.

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LinkedIn.com slash twist. Do it like J-Cal does it. LinkedIn.com slash TWI-S-T. Terms and conditions apply because LinkedIn is being super generous in giving you that first job posting for free. in.com slash twist. I want to talk more about the SEC relationship, but let's start with two deals that have captured everybody's imagination. Sahil from Gumroad decided that he, with his, I think $10 million in revenue company with, I think it had a million in profits or something ballpark like that. We just had him on the podcast a couple weeks ago.

You probably saw. He was the first person to try out the $5 million, correct? He was. On day one. Oh, so describe why you selected that comment. and how it went? I would say that Seahill selected us. Gumrow is a scenario whereby the credibility for a company that has already done, I think,

nearly $10 million in revenue. Typically, a company on Republic before the law changing would be much earlier. A million dollars in annual, in ARR was already high for us. So Gumbrough was very established. has a huge community. And the founder just saw Republic, a campaign on Republic, as a really strong marketing community building tool, meaning if you would give every single users and customer a little bit of skin in the game, imagine how much more active they would be and how they would evangelize

for the product and the platform. And surely he was looking to raise a series C. And I think other investors in Gumbro include Navarre and a few others. And so he raised a $6 million series C, five million dollars of which was done through the Republic campaign. And he raised that $5 million in day one within 12 hours. Was that driven by his base of users where he emailed his creators from Gumroad? And if you were, how many unique?

investors were there ballpark? Are we talking about 1,000 investors? 10,000 investors, 2,000? I don't have the number in front of me, but it must be close to 5,000 investors participating in the campaign. We have some campaigns chasing with over 10,000 investors participating. Wow. So, yeah, actually, I just got a note here, according to our preliminary research, we'll double check at 9,346 people participated in that one. So close to 10,000, which means for five million, they're putting $500 in it on average. Who drove that? Is it your, you have 100,000 investors on your list, 250,000? How many people are investors on your platform? And we have founder expect in terms of the mixture between their investors and your investors. Is it 50-50,

70-30? We have over a million users within our community. Out of that, over 100,000's active investors. But that campaign was driven primarily by the company by the founder of Sahil. And he did a ton of preparation of activating his own community of customers and fans so much that the preliminary interest, soft commitment, so to speak, for the gumbrough campaign was many times the $5 million cap. I don't remember it was 10 million or 15 millions, but significantly higher. So this is one case whereby we provided the infrastructure.

structure to enable a company to raise from its own customer in its own community, by and large, rather than Republic supplying the investor base. These are the two different models that I think you're going to see very clearly emerging and somewhat bifurcating as the industry continues to major. There has been some criticism in the industry that the companies that, that, and we heard the similar criticism of Angelist in the early days, and it didn't turn out to be true ultimately, but it might have been true a little bit in the beginning, was that going to an Angelist syndicate was a sign that you couldn't clear a market with venture capitalists.

Now they're saying going to equity crowdfunding means you couldn't clear market with venture capitalists or with the syndicate lead, and you had to go equity crowdfunding. What is your response to that criticism of negative signaling? My question for venture capitalists and VCs, and this criticism typically comes from other venture firms, is this. If you're assessing a B2C business, and here's a business that has such a relationship with its customers, that these customers would parkway with 500 bucks, not getting anything back, just on the belief that one day this company is going to succeed and they too will succeed. Is that a good signal or is it a bad signal? If a company can convince 10,000 customers to do that,

clearly they're doing something right. But what about your ability to find great companies? Because you are, in fact, in competition with that $5 million, I would think, with other sources of capital. So, you know, Sahel is a pretty iconoclastic individual. If you watch his episode, that pretty is clear. He may not want venture capital. cap table anymore. But a lot of people would be making that decision for, do I take the $5 million

from venture capital? Or I take it from my customers? And so do you, how do you make sure that you're putting out quality deals? Because I had the same issue. People told me with my syndicate, oh, you're never going to have great companies. Why would anybody do that? And it turned out 40 venture capitalists, 50 venture capitalists said no to Com. Nobody would invest in the company. Two reasons. One, they thought Headspace had already won. calm wound up beating headspace in a significant way. And number two, they said meditation is not big enough. So I said, yes, I had a different thesis than the other 50 venture capitalists who said no.

And I also thought they could catch up. So that turned out to be the greatest deal in the history of all syndicates. That investment was at $5 million. The company's worth over $2 billion now, so you can do your math with a little dilution of what that would be. Is there a similar thing happening with you that you're getting companies that maybe the venture community is passed on? Or why would a founder pick doing this $5 million raise over going to a venture capitalist? Let's take those two buckets in turn. The bucket of companies that have choices that are venture-backable, if not already venture-backed.

So with capital, the important question is, what are the value does that capital bring? Obviously, if you get an investment from chasing Calcanis, then the expertise, the network, community, the doors that you open and the advice that you provide, like the Sequoian and entries and Horowitz of the world, that is an insane value to founders and to a company. Retail capital brings a very different value. I drink casually and before I used to work for the founder of Sky Vodka, Maurice Canbar, so I know a thing or two about modern day vodka filtration. There's zero difference between Absolute Vodka and Sky Vodka. If I invest, 15,000, $20 in SkyVatka, that's all going to be ordering for my friends on Christmas, on Hanukkah,

on New Year, on Chinese New Year, whatever it may be. So that engagement, the marketing value to turn a customer into a brand ambassador, it is a very independent, synergistic value proposition, not in competition with venture capital. So in that bucket alone, I strongly believe, and even now, we have B2B companies that had raise money from VC, but decide that, hey, it's only fair that I bring in friends and family members that may not be accredited, right? So there's the fairness network. The second bucket, I also think is very additive to the ecosystem in the long run, Jason, and you're probably one of the trailblazer in looking at founders in a different lens, founders who wouldn't

be venture-backable because they, whatever, demographic and background. And so, So you have, let's say, a kid in Alabama who really doesn't know anyone in Silicon Valley or Silicon Alley. But you don't really know how to deliver on that message. And he doesn't have a technical co-founder, but he can raise $50,000 from retail, which is by going online, on Republic, and evangelize for it. And out of that, managed with that capital, build a company, get it to a stage whereby it may be interesting to Silicon Valley VCs.

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to me. Okay. Let's get back to this amazing episode. I think all competition is good is good for the space. What I love about this is it gives competition to even me. an early stage investor. Now as a syndicate, I get 20% of the upside, obviously, in every deal I put on the syndicate.com. We left AngelLest after about 40 deals decided to do it ourselves. So we get 20% of the game, but now we are in competition with you to a certain extent where somebody could go on your platform and raise a million dollars or take a million dollars for me. I don't get the 20% carry. You get a little taste of it, that little 2% of, you know, whatever the dilution might be. But oh my lord, can you imagine if Uber or

Airbnb said or LinkedIn said to drivers, hosts, or HR managers in the LinkedIn example, who knew in year one, they knew in year one that these companies were going to succeed because they were soaking in them. That's the magic here. That's why I'm so excited about what you're doing. And Jason, eight years ago or maybe six years ago, we knew that drivers for Lyft on the weekend which switch over to Uber and vice versa. Had Uber and Lyft offer equity?

to their drivers in the early days, you're going to have the kind of engagement without a narrative. And in 2018, Uber and Airbnb asked the SEC for an exemption to give away equity to their customer before they go IPO. And the SEC said, no,

you got to work with the current laws and regulations. We didn't have a product then, but now we do. So, you know, we're two years behind on that trend. But I have no doubt in the years to come, companies series D, E, F, pre-IPO would eventually engage this whole REC and RECCF to give the community. They could do it every single year because this is $5 million per year. So you could say, hey, this year we're going to do $5 million for our first, you know, 10,000 drivers.

The next year you could say, hey, we have another $5 million available, but we're going to invite the next 10,000 drivers to go first. And if there's anything left, we'll go to the first 10,000 drivers, right? You could do something interesting like that. Absolutely. And the $5 million cap right now is that cap. In the UK, the cap is $12 million. So it's completely feasible to buy 2025. A company can raise $15, $20 million from retail by spending $15,000, $20,000 doing the legwork and

then opening it up to the community. Even more, Jason, I really see the future down the road whereby product hunt. or even a platform like Amazon, that private companies are selling or introducing products, there may be a widget that say, hey, are you interested to invest as well? And they keep collect these, you know, indication of interest and down the row, turn it into an actual financing round. Amazing. That would be fantastic.

I mean, just think about that. I didn't even think about the customers of Uber or DoorDash or Lyft in the first year. They could also, in the app, just have a pop-up come up to the top 10% of users. and say, you're one of our top 10% of users, would you like to buy a share in the company? If a driver had bought the shares at the time I bought the shares, you know, I don't even want to say, but I can read it in the Wall Street Journal.

You know, you're talking about thousands of times your money. So if they had put in $1,000 and got $2 million, what is the impact on an Uber driver putting in $1,000? Not that big of an impact. They're probably making $1,000 a week. What is the potential of an Uber driver having $2 million? dollars. Well, an Uber driver with $2 million can buy a home, buy a second home, and then maybe buy 10 cars and run their own fleet. Or if it was an Airbnb, they would create this virtual

cycle of the, it could buy more homes and houses. Or that they can, making that first investment, open the door to like financial sophistication. They may start investing other, you know, infrastructure and other transportation startups and may become one of these days your syndicate members, Jason. You touched on a point earlier about, and you said it jokingly, of course, that equity crowdfunding can be competitive even with high-profile injury investors. You know from our learning, Jason, there's two ways that people invest, two reasons, too powerful driver. One, actually, it's just one, which is that they believe in a guru.

They look to a source that is credible, or it's a brand that they love, or a platform that they love. So I very much think that in the long run, investment gurus, and you obviously fit in that mold together with, I don't know, if Tim Ferriss or Navarre are the comparable figures, but the ability to build not 100,000 accredited investors, accredited backers, but maybe 30 million non-acred aspiring backers. And so when you invest in a company, you're going to have a million people put. putting $10 each. And all of a sudden, it's a massive amount of money.

And I think that influence is really going to change and probably going to be the prevailing at one point form of early stage investing for many sectors. Now, what information does this start? Two questions. These are very mechanical. If I have those 10,000 investors, are there 10,000 people on my cap table now that I have to manage? or is it done like an SPV where I have one

and then second, what information do I have to disclose in the future and how publicly do I need to disclose it? So if I were to do this for inside.com and we're doing whatever millions of dollars a year, we have to disclose what we're doing. Now I've basically explained to the public what's happened. Let's address each of those mechanical issues.

The messy cap table question is probably the number one concern and also an often misconception by founders and the lawyers who are not familiar with regulation crowdfunding. In short, Jason is a one-line item. There are different forms of how that one-line item on the cap table takes form. It can be through a rollover crowd-save. It can be through a custodial nominee framework. It can be through an SPV. but in short, no, it's just a simple one-line item.

And we even produce tools, product from Republic, this product, for social capital, that enable founders to communicate and activate the investor base after the round in the years and months to come just through Republic. They never have to send out 20 or 10,000 emails to individual people. That'll be insane. You run that email, list serve, or whatever I'm going to do to communicate with my list with my folks. So if let's say it was Uber and they're coming out with Uber Eats and they need

beta testers, they could email their 5,000, 10,000 investors or Gumroad launches an NFT product. They could say, who wants to be in the NFT beta? Boom. Now you've got, you know, if 10% of them do, you got 500 or 1,000 beta customers who have skin in the game, who are now super motivated to give you very intelligent feedback, correct? Absolutely. And that product already exists. It's called Social Capital and Republic again. Now, the second question about the financial disclosure, also a major concern, and that's why currently retail investing or equity crowdfunding is not for everyone, Jason. If you are a company that's already revenue generating, you're about to do a series A, but you

have a ton of competitors and you don't want people to know how much money you have on the balance sheet and what your revenue was last year, this is not for you. In order to raise from the crowd, you got to disclose basic financials. Again, it's not a lot. It costs about $5,000 to do this gap conversion, and you must update it at least once. But the misconception that forever and ever you have to disclose year after year revenues and information, that's not true. If you only do crowdfunding once, you only have to update your financials once, and then

you never have to do it again. But if you find raising from the community compelling, then you do after that. year after year have to update information through a form with the SEC that we also help, you know, companies produce and share with people how you did the prior year in terms of revenues and assets and liabilities. So that transparency is certainly, you know, something that some companies decide would never do. I imagine that, you know, clubhouse, probably since they haven't generated any revenue, may not want to disclose that information so openly. Let's talk a little bit about the letter you sent to the SEC on June 1st, 2020, in support of, you know, these changes to the law.

And what's it like to work with the SEC? Do they actually meet with you and take your suggestions? And how should we, as the investment community, look at the SEC's intention here because the previous administration or maybe two administrations ago, they seem to be going very slow at making changes. I had Hester from the SEC on. I forgot which episode number. I'll get that in a second. She seemed to be moving much faster. So how has the SEC changed in their approach to this? Are they moving, were they moving slow like my perception was and now moving, I would say, not slow, but maybe not fast because they can't because they have a lot of,

they have to worry about downside, obviously, and scams. We'll get to that in a minute. But what's it like to work at the SEC, and how would they change, if at all, in the last decade that you've been working with them? Jason, I had a prior career before tech and I was a securities lawyer at Goodwin, the law firm there. But my involvement in D.C. probably started in earnest during my time at Angelus.

What Angelus did in 2013, 2012, was also very new and raised some regulatory question. And I got to say compared to a decade ago when I first started out in, or more than a decade ago, even I at that time had this wrong misconception that, that DC isn't here to play ball, that they're just going to make life hard for entrepreneurs and innovation. And that's not the case. Everyone has a role in society.

The government is there to deal with, you know, investor protection and making sure to avoid mistakes and frauds and scam done in the past. They're going to move slowly, but these are, by and large, highly intelligent individuals who's going to take a little bit of time to learn about FinTech and new innovations, but the interest there is very much to move society forward. And I think that under the Obama administration, and certainly the SEC under the Trump

administration, has been moving and reacting with a speed that may seem slow for Silicon Valley, but is, I mean, unfathomable, unthinkable for me when I first graduated or in my first five years as a lawyer. That's extraordinary. They really have made a quick turnaround here. In the past, selling your business was a miserable task. Months of negotiations, tons of legal fees, due diligence, and sometimes you'd have to watch the new owners

take your precious product or service that you spent a decade building and then they would trash it and you would sit there absolutely devastated. Trust me, when I saw Weblogs Inc. We sold them, I think, sold 80Blogs. And then I watched them take all the blogs and then I watched them take all the blogs and redirect them to the Huffington Post, then redirect them again, I just heard, to Yahoo. It's just like, leave these brands alone and be good stewards to them.

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and the culture. If you're looking for a sale and looking for your internet service or product to have a new home, Tiny's the place to go. Get in touch at tinycapital.com slash this week. Tiny Capital.com this week, and they'll let you know within a couple of days. Again, tinycapital.com slash this week. Okay, let's get back to this amazing episode. Let's talk a little bit about, and by the way, Hester was on episode 11, 36 back in

November, so just about six months ago. And you expect this $5 million to turn into 10 to turn into 20. Is that right over time? Probably not in the next four years. The difference between the change in administration is that, Typically, there are different priorities. And so I think that under the Biden administration, again, no one, you know, can read the tea leaf perfectly here. But the SEC is a relatively small team compared to the economy that they supervise and manage.

So I doubt that there's going to be an effort within the SEC to revisit regulation crowdfunding and move it to 10 or 15 millions, but possibly in 2024 or beyond. Would I be correct in hyperbole? hypothesizing that their conservative, their way of dealing with the mortality rate of startups, which I expect, you know, 11 years into my career of investing in 300 startups, I expect

80% of the companies I invest in to go to zero and to return zero or close to zero dollars. And then I expect my winners to be the top 10%. And then that middle 10%, you know, might be singles and doubles. I get back two times my money doesn't really make a difference.

Is that something that the SEC is taking into account here that the hit rate is very small and you really need to have a diversified portfolio? The narrative, the private investing is high risk, very high risk, certainly is a major concern for some at the SEC or with any regulatory agency. But as the case with Reddit and GameStop, that saga, Jason, I think it became very clear that their aspects of the public markets, predatory activities, market timing, predatory trading that can be exceedingly harmful to retail investors in a way that by virtue of private investing being illiquid, it is not there. And it's also worth pointing out that they have five years now of records and it hasn't

been a single instant of fraud. In the UK's, it's 10 years, not a single case of fraud. So I think even at the regulatory level, people are waking up and shifting that perspective dramatically in the past 10 years to enabling retail investor to exercise their own discretion with some limitation and that's subjective, some parameters on what is sound and save. And that's definitely always going to be the tug, the push and pull between the private sectors and the public sector that is the government. So when you say there hasn't been fraud, you mean there hasn't been fraud from a company that people have invested in? Obviously, there have been a ton of failures, but not outright fraud.

Correct. No one has foul a form, go on past Republic due diligence, say that they're going to do acts and then take a million dollars and run to Mongolia and buy, you know, a farm and change the name and quality of that. So basically what happened with every single ICO, it seems. We have to be the ICO craze, you know, the SEC's, at their handsful enforcing everything from XRP all the way down to tons of other platforms. Do you worry about the other platforms? Because looking at the other platforms, I frequently see companies that I passed on because of, let's not call it fraud, but concerns I had about how the business was being run, the quality of the revenue or the storytelling. And I see those same ones, not on Republic, but on some of your contemporaries.

and I would put Seed Invest, Angelist, and Republic. You know, you hear me talk about your three companies, and I say, these are great places to sign up to get deal flow and read the deal memos. But I don't mention the rest of the platforms, specifically because I've seen companies that I had concerns about, just immediately go on those platforms and raise money.

Do you worry about some of the other platforms having less of a screening process than you have at Republic and describe what percentage of people you allow onto Republic versus none? That is a tough question, Jason, and I want to be very thoughtful in answering this question in this one way. Of course, because not only because we're an investment platform and we want to make sure that our customers, you know, meet the expectation down the road, which is, you know, win more than lose, but the industry is entirely new and the interest on my end and everyone on the team, and I'm sure at Seed Invest, and their platform is to see this industry. succeed in that a billion people know about private investing and participate in it.

So if everyone is being thoughtful about it, it's going to be better for everyone for the entire industry. That said, that is not what keeping me up at night for two reasons. Is a new company selling fashion, selling clothes, sit there and worry that there are the fashion brand out there that are selling, you know, products that do not meet the standard. The market is very big, and you've got to leave it to, you know, the invisible hand of the free market to decide down the road. And secondly, the question as to what is a good company and what is a bad company, I think it comes down to education and presenting a deal in a way that

a customer or an interested party understand the relevant risk. What I mean by that is this, Jason, we definitely have onboarded deals on the platform that you would not pass your lens or would pass, would not pass Sequoia lens. In fact, many of them. Now, if these companies, I'm just going to use, say, Gumbrow as an example. Gumrow is a highly credible with traction and everything like that. Assuming Gumbrow did $500,000 of revenue. and yet they're looking to raise it $80 million in valuation. But it is their community members, their fans that want to invest and say that I don't care. I just want to put $20 into this company that I love so much.

Should we, as the intermediary, if people are informed in making that decision, should we say that, no, you cannot do that? or should we launch it and make it clear to a non-customer that, hey, this company's valuation is not within the typical lens, but if you have another reason to really want to parkway with your $10, say, because it's, you know, say Asian founder and right now, say my sister is very, you know, feeling uneasy about, you know, the news about Asian American. And she just won her back, the first Asian founder that she see and she wanted to invest $15. dollars, and she's a doctor, $15 is a money that she can afford to lose.

She wants to do that. So I think that we got to be as a platform and as an industry, make sure to give that freedom for the retail public to choose. And in time, we're going to find out if their wisdom is wiser than yours, Jason. Yes. Well, I mean, this is a good point. The lens at which I look at a company is incredibly biased because having been, I don't another third or fourth investor in Uber or, you know, in Com or Robin Hood before these products

were at scale or even launched, I'm looking for 100, 200, 500, 500, 5,000 times my money back. That's my goal and I'm already rich. So, you know, it doesn't move the needle for me to 10x. Now, it might move the needle quite nicely for somebody who is where I was 20 years to turn 10,000 or 5,000 or 1,000 into 10 times that. So they have a different goal. And what you're saying is it's not just financial. There are other reasons to support something, just like people might support their local hockey team or invest in a local, you know, I have friends who really love soccer and they buy soccer teams. And I'm like, soccer's never going to make money in the U.S. Is that even possible? Nobody cares. And they're like, soccer's big in other countries.

I'm like, I don't think that's going to work in the U.S., but Mazel Tov. They just want to see it work. Or other people, when you invest in a restaurant or I invested in my friend Nick Cherokee's last film, do not email him because that's the one and done. I had to invest in his film because he invest in my funds. I don't know if I'll get as much back from his films as he does from my funds, we'll see. But I did it to support my friend. I'm not investing in movies with my friend because I want to return an investment. I want to see him succeed. I love him and I love his work. So there are different reasons that people actually invest. Jason, can I share this narrative here? So our tag lies aligning profit and passion. The

smaller, the dollar amount that you enable someone to invest, the passion bucket is going to be more and more important in their decision-making process. When someone's deploying $100,000 to back a company because they believe in you, I'm going to guess that they may be interested in that technology, but the number one thing that they want to know is that they're not going to lose this money and this $100,000 is going to be millions. If you lose all of it, they're going to be very upset. If they invest $10 in a company that you share with them and they read your newsletter, the interest and the passion bucket in that decision-making process will naturally be probably very large. So during the pandemic, you're a New Yorker and, you know, I'm sure

that you saw how many restaurants in New York are decimated. Even the SEC recognize the people's interest in backing, in investing in business models, because they want to support the ecosystem with the promise of maybe getting something back, but maybe not. So that different psychology is something that very different about what we do compared to what Angel is or accredited investing does. People have non-monetary, non-returnal returns, non-financial returns are a big part of this, right? And I think, did you see the dream funded action that FINRA took? I did not. Okay. So this is an interesting one for people to look up. Dreamfunded got an action taken against them. And it was a platform, Dreamfunded, you can just do a Google search for Dreamfunded FINRA, which is an agency that regulates this. But they basically, according to the claim, you can figure out if you believe it or not, that false claims were made. They misled investors on the level of diligence, didn't keep proper books, etc., etc. And basically they're saying the intermediaries,

i.e. you and me have some level of responsibility for the product we put out there. Explain what you do in diligence very specifically for the audience and what you don't do. So if a product is on your platform, what can the retail investor know has been done, but what is up to them to do as well? The law is very specific about a few things about due diligence. For example, we have to vet the background of founders and the management team to make sure that they didn't, weren't committed, you know, convicted of securities fraud or doesn't have these bad actor record in the history. And that's like the baseline level. The added component

in terms of due diligence, we borrow a bit from the venture ecosystem for deals that are supposed to have venture potential. That is, does the company already have some traction, show promise? I know your thesis, Jason, is that you invest in founders that are delusional, but with skills. And that's a little bit harder for us to pass because, you know, you have, you have, you've read my book. You've read my book. I've been on the podcast before. Delusional with skill is a really good combination. Conservative with skill means you're a great employee.

Delusional with skill means you're a great founder. I've asked everyone on the due diligence team to reach your book in most people at Republic, at least in the U.S., probably. have, but we are not, so we pass on that credibility lens. And then we also look for companies and founders that have a story that we think is relatable to the retail community if they are looking to Republic to bring investors in capital. So if it's a deep biotech genetic, you know, technology that no one can understand and has no other. validation signal like back by Jason, then probably even if we think it's a strong company, it's too hard for us to meet the expectation. So the lens varies depend on how late stage

a company is, but vertical it in because today we fundraise for real estate projects, for game financing, you know, from early stage restaurants all the way to the gum row of the world. So it varies. But in short, it's pretty selective, Jason. We launched in 2020, 200 plus companies out of like 8,000 applications. But even then, that lens, I just want to, you know, make it clear that fully admit that early stage investing is highly, highly risky. The only way to do it, rise, follow a guru, learn. But yes, people should invest the amount of money that they can lose, $10, $20, do it in 50 companies. And throughout that process, you're going to learn and decide for yourself whether you want to become a professional investors. And if so, you know,

choice syndication and learn. So learning by getting started is the approach for investing in my opinion. What I tell everybody to do is if you were trying to figure out how to play blackjack or poker, would you sit at the $5,000 a hand table or the $10,000 buying table, or would you start at the dollar table, the $1, $2 table? You'd obviously start at the lowest stakes table. It's part of the reason why at the syndicate.com, my syndicate, which is only accredited investors at this time, we only do, you know, when we do this, only do a $2,000 minimum in most deals. Because I tell people, listen, your first 10 deals,

even if you're rich and you're accredited, do your first 10 deals at $2,000. If you feel like in $20,000, you can easily afford to lose, it's no big deal for somebody with a net worth over a million dollars or $200,000 a year. You make it back quick enough. But then you can always add more. If the company succeeds, they're going to raise another round

and you could ask them to put in $10,000 or $25,000 or $250,000 later. But job one is to learn how to pick the companies, get educated on the process, and to have diversification in your portfolio. One of the initiative, Jason, that we're aiming to do this year, hopefully, with the right partner, is to bring financial or private investing education to the high school level. So I grew up in the Bay Area, and Apple and Dell donated laptops and calculators to high school students. Imagine a republic or myself personally or whoever else donate $20,000 and give students $10 or $20 to invest. And they got to explain why they pick this company. Out of 100 kids,

I bet you they're going to be 10. That would be way more savvy by the time they enter college than I was. By the time I graduated from law school, I knew nothing about private investing. And I think that these are all different ways that when you lower the barrier to entry, private investing becomes an amazing learning tool and an equalizer for society in terms of financial equity. Let's talk about something that was a little controversial,

but I don't think super controversial. Arlen Hamilton did a raise as well on the platform. She raised $5 million, I think, in a week or two. Explain what... In a week. Great. She's a friend of the pod, a friend of the show, a friend of mine.

But I got a back channel that, hey, this is a little bit weird. She's selling part of her venture fund or future returns. You're not an investor in, you're not actually an LP in the fund. So explain what she did because I think it falls into part of what you were talking about.

I had a venture capitalist who I think was a little jealous of this, who was like, what is this about? This is not cool. Why should she raise $5 million? And it's not even an LPs. And I was like, I think you're just a little jealous, bro, but I'll leave it at that. What exactly was she selling their

with backstage capital because it was a little confusing to people and does it fall into that category of investing for returns or investing because you want to see the world change in a certain direction as you were mentioning or some combination of both. So the equity crowdfunding law

only allows operating business to raise capital from non-accredited investors meaning a fund, a pool investment vehicle, cannot take in money from non-acred. Which seems crazy. Why can't that happen yet? You know, just in the same way that they decided at the outset that $1 million seems like the right cap, not necessarily there's a whole lot of rationale behind it, but currently that that's the law.

Do you think that's going to change? And have you written letters to the SEC about this? Is that something you want to get? into is having Republic be a platform where when I raise launch fund for, if I do, I could put it on Republic and get $5 million from, let's call them, non-accredit civilians? I definitely don't see that happening in the coming three or four years, Jason. I do think that that model eventually would make sense, but our focus at Republic is on direct investing.

There's like this psychological value and is so fulfilling to back directly an entrepreneur that's building a business. Now, a venture capitalist building a venture firm is an entrepreneur. And so backstage has an operating company that is the management company that is advising the fund. But backstage is also building a community, a model of, VC that probably we haven't seen before, not having seen too often. So what Arlen did was that she was raising for the operating arm of backstage and not for the fund. Of course, the revenue potential for that operating arm ties to the success of the fund, the carry interest. So by virtual, by investing in the operating company, you also have exposure to the success of the fund. We definitely

have had, you know, some people loved it. It got amazing press. And on Twitter, you know, fans and even knew commerce to backstage capital absolutely loved what she was doing there. And this is a model that backstage and a lawyer crafted and we, we support it. And it definitely, there were many critiques like many things in life. And I think that some of them, you know, are not unfair at the end of the day. What is the criticism that's, um, fair. And then what is your answer to it? Like, so I understand why, I understand what's happening here, just to do the math for folks, five million dollars at a 50 million dollar valuation, that five million bought 10% of the operating company. So if you were to buy 10% of launches

operating company as they invested or 10% of Arlins, if she would have returned 250 million dollars, she would get back 50 million dollars in carry. Right. So if her investments eventually return $250 million in profits. So she invests $50 million returns $300. The original $50 million comes out. There's $250 million in profits. That would be a 6x fund. Or if she did that three times, it would be $3, $2.000, $2.000, $2.000, $0.000, $2.5 million. Am I correct? correct uh jason given that the the campaign is still live there's a there's a you know restriction on my ability to comment on the deal that's still live in the platform but to answer a little bit more generally jason it's sold out by the way yes uh it's it's sold out within a week uh but but it hasn't fully

closed yet okay so i won't force you to do that but um the fact is this is pretty well explained there and if you were to buy 10% of social capital or 10% of sequoia or 10% of my funds You know, theoretically that would have worked out. If you bought 10% of some other venture firms, it wouldn't have worked out. And it's new and it's interesting. It got me thinking like, hey, it wouldn't have I sell 10% of my fund. We don't need the money right now, but in her case. And just reading what people said, Kevin, who put in $2,000, who's an active investor,

said I invested because I want to be part of closing the funding gap for women, people of color, and LGBTT plus backstate capital is transforming, impact investing, but finding the opportunity to come along. on their journey. I couldn't be more excited. So Kevin Piers, who wrote this publicly on the site two months ago, $2,000, not a major investment for him. That might be a weekend in Vegas or might be, in my case, 20 minutes and one bat in Vegas. I thought it's playing poker. That might be one hand of poker. So why not take a flyer and why not support the change you want to see in the world? I think that's what people don't get about this when they criticize it. And then the VCs who are

criticizing it, I think frankly, they're a little bit jealous. I'll be honest, because it seems like the investors here do understand what they're doing. And they have a different return profile. I think for them, if they got, I think if Kevin Pires listed here got, you know, a thousand of his 2000 back or 5,000 or 10, based on his review here, he doesn't care about any of those potential outcomes. He just cares about seeing the change in the world. I agree completely. And we know this because similar to the other campaign, Gum Road, Arlen was primarily responsible for seeing the $5 million raised done. It is her community that she's been building over the past five years, and she succeeded at some pieces of her in the past five years. She probably said that she could do

better, but it doesn't matter. This community absolutely love what she has been building and beliefs and what she can do with this capital. So this is one of those scenarios whereby we got to present it, and I think I responded to some of the critiques by saying that we understand it quite well, and there's always room for us to make sure that we clarify that this is an unusual structure. One of the common criticism is that how many investors actually read the deal page and fully understand this complex waterfall, and I don't know, you know, we've done a study and people seem to understand it. But more than anything else,

the vast majority very clearly believe in Ireland and want to support what she's doing in addition to believing that they're going to make some money out of this. But the passion component is certainly as big, if not more so than the return on capital for many of these investors. As we wrap here, and congratulations on the success.

obviously, investor and founder to founder. It's really great to see you have this amazing success. Thank you. And just a quick announcement here. I've decided that inside.com, the startup I'm CEO of, is going to do a fundraising on Republic. And you'll be hearing more about that in the coming weeks. So I wanted to have you on and let you know that we're going to do that. And I think it's great.

And the reason I want to do it is I want the hundreds of thousands of people who subscribe to our newsletters to be able to participate. It's more interesting to me. And I'll be investing alongside them. so I'll have additional skin in the game. When, just as a general warning to founders, a general advisory to founders, when raising capital,

it's extremely important that you are not being anything other than factual and very detailed in the claims you're making. Why is this so critically important, Ken? Well, any misstatement, particularly intentional, misstatement of facts can potentially give claims to securities fraud. The extreme case is probably Theranos. So because of that, and if you're going to raise and put out yourself out there to the general public, take in 10,000 investors who are investing indirectly, but still, you know, into your

company, is even more crucial to be very prudent and very, very, button up with information that you present about your company and your plan. So I can't, you know, agree more with that. As an example, if you have 10,000 people using your product and they're not paying, calling them customers is not exactly inaccurate, but not the most accurate. You would want to call them users. And if, I don't know, 100 of those 10,000 were paying, you would call them customers. And you would be very clear about this, correct?

Yes, Jason, do I do have a question for you, which is out of the hundreds, thousands of companies that you have coached and invested in, how many would you say at one point was faking it into making it, which is describing things in a more rosy description and how far do you go for that to become? It's a great question. I am very serious about this now because I've had two companies get investigated, one by the SEC, one by a local jurisdiction, because investors complained.

And in one case, it was because they had people listed on their website who no longer worked at the company. Now, the charitable, and they had also had, I believe the other claim in this instance was they had people listed as partners who actually weren't in an active partnership or customer a relationship. They might have had talks with them. So in both of those cases, you could say charitably, well, they met with the company. So they were in partnership discussions, I guess, but it would be better to separate those out and have one slide, these are paying customers. Two, these are customers who are unpaid on a trial, and then these are ones we're having a discussion with. It costs nothing, nothing to be a little more clear. And then second, you know,

okay, you didn't update your team page. Well, if it was one out of 10 people, that's one thing. But if it's three out of five, okay, now it's something radically different. You know, 60% versus 10%. And is it, you know, the CFO and the chief product officer and the chief marketing officer are no longer at the company? Or is it an intern is no longer the company? It's a very big swing, right?

And so I think if you are saying, I project that we're going to 10x the number of customers, and here's the technique we're going to use, it's very clear. It's a projection. You put that word in there. If you're talking about reality, just be super clear. And what I always tell them is

the opportunity to invest in this company at this valuation, which is a lower valuation, is because you have not solved these problems yet. You don't have a CFO yet. You don't have a lighthouse customer. You only have seven paying customers. You know, that's why the valuation's five or 15 million.

If you had 70 customers, evaluation might be 40 million. So just own it. And I really beg of founders to never, ever do anything other than tell the truth and be as candid and as honest as possible because investors understand the reality of performance versus valuation in a matrix. The more performance there is, if you're investing in Netflix in year 15, that's very different than investing in Netflix in week 15 or month 15.

or quarter 15, as it were, all of those are going to be different profiles of performance and just own it. But I would say I have, I would say one out of five when I am looking to invest, I would say maybe half of them, actually, when I have yet to invest, I feel are massaging or outright not being upfront about the reality. and I have to tease it out of them and then what I train them in my accelerator or when reading their monthly updates is to just be super clear. I'll give you an example. Somebody was doing their

using annual reoccurring revenue, ARR, but they weren't a subscription service. They were a one-time service. So I said, well, you really can't take December's revenue and times it by 12. And they're like, well, that would be my annual run rate. And I was like, okay,

then say, and explicitly say annual run rate, I've times each month by 12, instead of making it look like your, they were making it look like their $10,000 month was $120,000 a month because they put December $120,000. You know, there are like little moments like that that can be explained away,

but what I tell people is the second you have to explain something, you failed in your mission as the CEO to be 100% clear. Absolutely. And I think as a founder, the temptation is there when you watch like the We Work documentary and you see these success stories that these companies are raising based on being very generous with their projection and facts and data. But I think the lawyer in me, the litmus test is this. If you present an information that is in any way not completely accurate and an investor

may make a decision whether or not to invest based on that information, better make sure that that information is very factual. Otherwise, it may come back and bite you in the biggest way, but also this industry or tech is about integrity. And I think anyone optimizing for short-term round or whatever else it may be is not looking at things perhaps correctly, looking at life correctly. I will say is a superpower of your platform and other platforms, including my own, is when you,

you have 100 or 250 or 10,000 people investing in a company. Now you've got 100 pair of eyes, 250,000 or 10,000 pairs of eyes on it. It's under much more scrutiny. One of the problems with thereinosis, you had a very small number of very rich individuals investing in that company. They weren't even Silicon Valley venture capital firms. There was no Silicon Valley venture firm on there. I think Tim Draper was personally on there. But it wasn't like Draper Fisher-Jervinson was on the board, made a $10 million bet.

And so a larger number of people putting more light on it. And because crowdfunding has to do audits and make this stuff public, it actually is safer in my mind. And I do see this. When I syndicate a deal, I'll frequently have somebody say, did you know about this? Did you know that this person left the company? Did you know that they had this action against them or whatever? And I'll say, actually, we didn't know about that. And we have to go then to the founder.

That's probably happened a handful of times where we've been made aware of stuff that we didn't know. or after we've made the investment, they don't send an update for three months. And then I don't have to send an email to the founder saying, hey, can we get an update? I've got, you know, 250 investors in that company, and seven of them read the monthly updates. And they're like, you missed January, February, and March.

The last one I have is December. It's now April. When am I going to get an update? And they CC me. So this many handsmaking for light work and this public nature of it, I would argue, makes this, you know, a little bit safer in terms of,

information than a private investing where you could have it you, although you have sophisticated people, you could have a Theranos like situation or even Bernie Madoff's a perfect example. Fraud exists in the world. So let's not pretend that fraud's not going to happen. Bernie Madoff had the most sophisticated, richest clients in the world and he was able to do a three or four decade-long Ponzi scheme. Like fraud happens and real businesses can be turned into frauds. Frauds can be turned into real businesses and any combination of those.

So buyer beware, never let one investment be the majority of your net worth, only invest what you can afford to learn, and go slow in the beginning and get diversified as quick as possible. I think we share a lot of these concepts in common, yeah. And Jason, because of the available information is so robust compared to private investing, it's an excellent learning experience as well. For $10, and you learn how to analyze a balance. which 90% of people. I certainly didn't learn how to do that again until after law school, right? So it can be...

People spent 250K going to business school. If you took that 250K and you took, but 20% of it, 50,000 invested in $2,000 in 25 deals, I think you're going to learn as much as the MBA. Or just $20, or just $20 and then follow in the analysis of it, yes.

All right, Ken, continued success. Thank you for doing the hard work and being a tireless supporter of founders. It's good to know you. Thanks so much for having me, Jason. My pleasure. And for people who want the best chance of passing scrutiny, I think you accept about one or two percent of companies.

What makes for a company as we end here, worthy of being on the Republic platform, as it were? A lot of integrity shows promise that people looking at it believing that you're going to succeed or already has built a strong community of people who believe in you and you want to bring that community to Republic and engage them and turn them into investors.

So those are typically the two forms that we look for in bringing a company onto Republic.com. Awesome. Continued success and we'll see you all next time on this week in startups. Bye-bye.