Getting Funded Sucks
In this episode, DeCoursey and Watson took a deep dive into the murky waters of raising capital for business ideas and what goes behind the scenes.
All about Angel Investing
DeCoursey and Watson discussed what an angel investor is and what is involved in angel investing.
- According to Matt Watson, joining different angel investment groups such as those he’s affiliated in Kansas City (Angel Capital Group and Mid-America Angels) are great from an investor perspective since these groups filter all ideas done to the best ones.
- If you’re trying to raise capital for your idea, you can go to these groups. If you win them over, your chances of raising more money will be higher, instead of chasing after several people for funding.
- Angel investing is extremely high-risk so one needs to consider a few things before funding someone’s business idea such as – do I understand the industry? Is it something I care about? Is it something I’m passionate about?
What is an angel investor?
- An angel investor is an individual investor who contributes capital to the business. It’s not a Venture Capital (VC) fund.
- A business definition of an angel investor is any high-net-worth individual that has a belief in an idea and is willing to finance that idea. High net-worth individuals are people with a huge amount of cash.
- According to Google, to be an accredited investor, your net worth should be at least a million dollars. This doesn’t include equity from your home. You must have at least an income of $200,000 for the last 2 years.
- The reason why these accredited investors exist is that when you want to sell the equity in your company, you’re not allowed to exchange securities without the process the Security Exchange Commission goes through to issue the stock.
For investors, should you invest in a company or not?
- Investing in someone’s business idea is all about people and having a deep understanding of who you’re investing in.
- There’s going to be a lot of adversity in any startup. Do you believe that these people can figure out how to make it happen?
- You have to also understand the business. Be passionate about the problem that’s being solved.
- For small-time investors that believe in these little gizmos that are about get launched, they might be willing to put in a hundred bucks such as those on Kickstarter.
- It’s different for angel investors. You’ll be chipping in $100,000 or more. Of course, this is relative to somebody who’s rich. So, that $100,000 is the same as $100 backing on Kickstarter.
- One of the issues that the Matts discussed is that there are people that come up to them to try to raise money but don’t even have a landing page for their business, or an email address set up to the domain they’re trying to pitch on.
- If you’re on a seed stage or concept business, you only have a minute to get an angel investor’s attention. It’s the same with speed dating.
- If you can’t convey your message with whatever it is you’re trying to pitch, then it’s probably too complex. You need to simplify and dumb it down.
- For people that control and make decisions about investments, they don’t have time to read a 45-page business plan.
On starting your own company
- If you want to start your own software company, you have three options: You have to figure out how to write software, find a tool that helps create software, or find a technical co-founder that can create the software.
- You have to start at some point, even if it’s terrible. If you’re trying to start a software business, you don’t actually need to have the software to sell it. What you can do is create mock-ups by using Photoshop or some other tool that’ll help you design what your software should look like and the functionality it should do. Mockup what you think the software should do, then potentially meet your customers, and get their feedback.
- When starting projects, there should be a healthy dose of obsession. If you’re not passionate about your business, it will show and investors can tell if you’re not passionate about your idea.
- It’s going to be a tough road ahead, and you are going to sacrifice so much while you’re hustling. There will be times where you’re going to be away from friends and family. It’s a trade-off that you get for your hustle that you put in. If you’re not willing to do that, you might quit soon.
- Building products are complicated. They’re expensive. It’s not like a service business. It takes a lot of time, energy, and money to build them.
- One of the things to consider, too, is if your idea isn’t unique or it doesn’t fill a specific need or solve a problem, you’re going to have a hard time convincing investors to invest into it.
- Some of the things your business idea should bank on is your experience, passion, and its specific advantages in the marketplace. Why are you different?
- If you’re raising money in a seed stage, it’s risky on the investor’s part because they don’t even know if you will be able to come out with a product.
- If you want to latch on to trends, say about artificial intelligence, machine learning, blockchain or some of these types of things that are really big trends these days, you potentially could have some success because there are lots of investors and VCs that are willing to throw money since it’s the hottest thing right now.
- Part of starting a company is understanding the environment you’re in and what the hot trends are. But if your idea is just to compete with Amazon and put them out of business, that’s probably a bad idea.
- You can still compete with Amazon, but make sure to find your segment of the market and your niche. Amazon sells everything, and they’re awesome at that. However, you can also find lots of other websites that sell stuff, too. There are websites that specialize in selling outdoor furniture or whatever it is.
- Always have a list of all the different ways that your platform or product can generate revenue. For example, expanding outside of your specific country.
Are there markets that aren’t worth chasing?
- One of the problems is trying to figure out what you can build and how many people will buy what you build.
- Know if your market is big enough and how big that market is.
- Understand how high your ceiling is because you might hit that ceiling, which means that your business will never be worth more than half a million dollars.
On Raising Money
- Problems that entrepreneurs have: Do you chase funding or do you chase customers?
- How good are you at being told, “no”? If investors say no, you might as well end the conversation at that point because they’re not going to give you money if they don’t understand what you do.
- Matt Watson mentioned that the chances of a startup getting funded by a VC specifically, not friends and family, was one in 2,000.
- The vast majority of all money that MOST startups raise is actually from friends and family than by angel investors, VCs, private equities, or all of it combined. Probably because they’re small businesses that don’t need a lot of capital.
- You can also raise money by gathering all of your friend’s and family’s credit cards together. That’s how Matt DeCoursey did it with his first business.
- Can you get a loan with Small Business Administration (SBA)? You can get an SBA loan but only for a certain type of business, especially not for startups. It’s not for companies with no history. Even SBA wants to see that your business has some kind of track record.
- If you want to get an SBA loan to pay for a McDonald’s franchise, McDonald’s won’t give you that franchise if you need to get a loan for that. They want you to already have 4 million dollar liquid.
- The whole process of raising money can be infuriating but oftentimes rewarding for those who are diligent enough to keep fighting the good fight.
- Don’t ever ask investors to sign an NDA. That just goes to show you have no idea what you’re doing.
- Investors are willing to look at funding a company that already has traction, who had industry experience, who probably had raised some money and is well on their way to growth.
- It’s hard to raise money at an early seed stage. VCs don’t usually invest there unless it’s a disruptive technology.
- If you decide to accept an investment at a seed round, you will be selling your shares cheap.
- There are investors that would like you to fail quickly so they can write it off and move on.
- One of the biggest fears of investors is the feeling of getting stuck. These investors think that they’re not only having to put money in it but now I’m having to spend effort and time and keep the investment successful.
- There are startup entrepreneurs with horror stories of when they took a VC or some type of investment and let them have a majority stake in the company. In return, they gave up control and sometimes these VCs do some crazy things and lose their company to them.
- There are a lot of people that say, “Oh, I’ll never take investment money”. In that case, you’re not that smart if you turn it down.
- Not raising money now to hire more people to help grow your company might present a high level of opportunity cost that’s not worth it.
- In the long run, you’re better as the business owner that owns 50% of this well-capitalized hyper growth machine that has just been formed than owning 90% of your poorly-funded startup that doesn’t see growth very quickly, losing market share to your competitors’ business.
- Familiarize how investment deals are structured. The ways that investors put money into your company and how they expect to either gain shares or different forms of ownership based on different criteria. Make sure to provide all information about your business–how much control they have, and a guarantee that they will get their money back, even if you don’t.
Different Types of Funding
- Make sure you understand what you’re getting yourself into before you take that check because by not doing so, it might lead to certain situations where you can rapidly lose control of your entire company. For example, if you don’t have control of your own board of directors, those people have the ability to shove you out the door.
- A lot of startup investments will actually take all of the equity away from the founder and invest it back to them so that the investor is protected in case the founder decides to just leave.
On Convertible Notes
- A convertible note is a debt instrument that your investor can later convert into shares of your business based on specific time frames or criteria occurring. Matt DeCoursey doesn’t like this type of investment instrument because they put you in a scenario of debt. Basically, you put a lien on your company, say, after 24 months. Hence, you have to ensure that you can meet the criteria. They’re oftentimes driven by time or other rounds of funding coming in. They’re based on the idea that they’re going to convert. People usually use them because they’re working towards a series A or whatever types of funding or they don’t know the valuation.
- The problem is, you could sell what you think is roughly 20% of your company for a certain amount. When this timeframe expires, or you don’t get another round of funding–depending on how it’s written–you could be in a position of liability of losing your company.
- One of the things attached to convertible notes is charging interest. Matt DeCoursey is not a big fan of that because he thinks that if you’re his investor, then you’re his partner. And that means that you’re not running juice.
- SAFE stands for Simple Agreement for Future Equity.
- It came out of Y Combinator. It works like startup school. They have created an instrument called SAFE, which accomplishes a lot of the same things that a convertible note does, such as may be establishing what that equity is valued at later. However, it doesn’t put the company or the startup founder in a position of debt.
- So, it’s not a note. It’s not a debt instrument. It’s only an instrument to participate in the round.
- And it will say when money comes in later, we’re now in a better position to establish what the shares and equity of this company are worth. It still converts into ownership elements.
- It can also be the other way. If the valuation ends up being a lot lower, it’ll often have a discount attached to it, which means you can now get that lower valuation minus 15% more.
- SAFE and convertible notes are two of the things that people need to know about raising investments. But, most of the time when they’re getting investment from friends and family, or a local angel investor, they’re not using any of those.
- Establishing ownership with a company is easier if the terms are simple and least complicated, such as investments coming from friends, family or a local angel investor. It’s not usually the case for a more sophisticated or complex investment strategy that comes from someone like a venture capitalist.
- If you need someone to guide you to startup success, we suggest you reach out to experts who have already done it. Matt DeCoursey and Matt Watson are the dynamic duo behind Full Scale, a hyper-growth offshore web development company based in Kansas City, USA.Contact them to get your free consultation today.
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- Scroll down to get the complete this episode’s transcript.
Here is the transcript from Episode 2 of the Startup Hustle Podcast:
|Matt DeCoursey:||Hello and welcome to episode two of Startup Hustle. I’m your host, Matt DeCoursey, here with my co-host.|
|Matt Watson:||Am I the host or the co-host?|
|Matt DeCoursey:||Let’s do a Rochambeau real quick to see who wins. Ready? Paper beats rock, looks like DeCoursey is the host of this episode.|
|Matt Watson:||So Matt is the host and Matt is the co-host, is that what you’re saying?|
|Matt DeCoursey:||So, Matt is definitely-`|
|Matt Watson:||So, this is Matt Watson.|
|Matt DeCoursey:||And this is Matt DeCoursey.|
|Matt Watson:||And if you can figure out who’s who, congratulations.|
|Matt DeCoursey:||Yes, good luck with that. I wanna point out as well that Matt Watson wants to, what did you wanna name the podcast?|
|Matt Watson:||Oh, man. Trying to figure out if you wanna fund your extra bedroom?|
|Matt Watson:||What do we call this?|
|Matt DeCoursey:||Well, I think-|
|Matt Watson:||What are we gonna talk about today?|
|Matt DeCoursey:||We’re gonna talk about how a business raises money.|
|Matt Watson:||Okay. Or shouldn’t raise money.|
|Matt DeCoursey:||Or if it even can.|
|Matt Watson:||That’s a good point.|
|Matt DeCoursey:||So, recently I’ve done a couple presentations for Global Entrepreneur Week here in Kansas City and that’s what really drove the topic of today’s episode because so many people that were down there were seeking funding for their business.|
|Matt Watson:||Why did they let you present?|
|Matt DeCoursey:||That’s a really good question and I’m not sure.|
|Matt Watson:||Have you ever raised funding?|
|Matt DeCoursey:||I wasn’t presenting on raising funding.|
|Matt Watson:||Why in the world were they listening to you?|
|Matt DeCoursey:||Because I think they wanted to start a business and own it and-|
|Matt Watson:||Did you write a book about this?|
|Matt DeCoursey:||I did.|
|Matt Watson:||You did write a book about this.|
|Matt DeCoursey:||Yeah, you’re in it.|
|Matt Watson:||I am in your book.|
|Matt Watson:||That’s sort of what we’re talking about today. It’s, the name of your book is The Million Dollar Bedroom.|
|Matt DeCoursey:||It is.|
|Matt Watson:||And part of what we’re talking about today, I think is the goal of the conversation today is to talk about how to go from your bedroom to the next step.|
|Matt Watson:||Or not to the next step, or building a bigger bedroom. I don’t know what the next step is, but that’s what we need to talk about, right?|
|Matt DeCoursey:||Yeah, and I think that the reason that we need to talk about it is simply because it seems like everybody’s looking for funding.|
|Matt Watson:||They are.|
|Matt Watson:||Everybody deserves it.|
|Matt DeCoursey:||Yeah, and the problem is there’s not enough of it to go around, based on that criteria. So, I think that it’s really important for us to start by getting into some of reality of funding and your chances of getting funded, and what a reasonable expectation of the amount of funds you could possibly raise, where they could come from, how that could be structured, it really goes on and on, and including all the way down to how you’re going to present your idea to the people that you wanna collect money from.|
|Matt Watson:||So, where do we start?|
|Matt DeCoursey:||I think we should start with giving a little time to what makes an idea or a company fundable.|
|Matt DeCoursey:||You’re somewhat active in our local startup scene as an investor. What are the things that make you believe that a company or its founders are fundable?|
|Matt Watson:||So, I’ve done a few angel investments. I’m not necessarily looking for more of them, so please don’t contact me later. But, if you’re listening to this necessarily. But, some of them I’ve done through angel groups. So, where we’re at in Kansas City there’s Angel Capital Group, there’s Mid-America Angels, there’s some other different groups like that which are great from an investor perspective to work through those because they help filter all the ideas down to the best ideas. And then as a entrepreneur that’s trying to raise capital, those groups are very helpful as well, because you can go to one group and if you can win them over, you can potentially get a bigger check instead of chasing a whole bunch of people around.|
|But, all that said, several of the investments I’ve done have been just one on one. They’ve been local people who I’ve met through other introductions or whatever. And a lot of times, they’re just simple coffee, right. It’s like you meet somebody for coffee, and it’s like so and so told me about your idea, I just wanna learn about it. And there’s a few things I’m always looking for in those moments. The first thing is do I understand what their business idea is? Do I understand the industry? Is it something I care about? Is it something I’m passionate about? For me as an investor, I think that’s part of it because I know that angel investing is extremely high-risk. I know that startup investing is extremely high-risk.|
|Matt DeCoursey:||Now, wait a minute, let me stop you there for a second, you’re investing in angels?|
|Matt Watson:||Oh, no, no, no. I’m an angel investor.|
|Matt DeCoursey:||Oh, we should probably define what that is.|
|Matt Watson:||Well, I don’t know what the dictionary definition of that means, but I know the working definition I have, which is basically a single person that’s an investor that is contributing cash to the business, right? So, usually, it’s not a VC fund, it’s not that type of corporate or VC fund, it’s an individual.|
|Matt DeCoursey:||There is actually a very strict definition.|
|Matt Watson:||Okay, what is the definition?|
|Matt DeCoursey:||An angel investor, well, it’s a high net worth individual, and as we progress through this episode, I think it’s probably important to let everybody know that you and I aren’t licensed financial professionals. And we’re gonna give you information based on our own experience and you have to make the decision what you do with that information. So, with that, the definition of, I have two definitions for an angel investor. And I’m actually gonna start with the simplest one, because I think your angel network is the people around you.|
|The angels are the people you care about. It could be your mom. It could be the guy nextdoor. It could be your sister. It could be anybody that has a belief in you or your idea and is willing to do something that adds any kind of finance to your business. Now, when the government looks at it, or the IRS, they’re gonna look at what they call accredited angels, and these are people that have a high net worth, for example, you’re looking at people who have made X amount of cash.|
|Matt Watson:||So, on Google it says to be an accredited investor, you have to have a net worth of a million dollars-|
|Matt DeCoursey:||And that cannot include equity from your home.|
|Matt Watson:||Or, have an income of at least $200,000 for the last two years.|
|Matt Watson:||So, I think with the new stuff around the Jobs Act, and crowdsourcing, some of those things are in flux and may be changing, but traditionally those have been your angel investors, right. They’ve been high net worth individuals.|
|Matt DeCoursey:||Now, the reason that these accredited investors and that status exists is because when you’re selling equity in your company, you’re not allowed to exchange what are known as securities without going through the process that the Security Exchange Commission goes through to let you issue stock. So, they don’t want, now I’m just assuming that they assume, they meaning the government, that if you have accumulated enough wealth or you’re making that much money that you may be savvy enough with that money. They’re trying to protect the everyday citizen who might not understand that from buying stock in a company or something that they don’t know anything about.|
|Matt Watson:||So, if we go back to where we were at, though, we were talking about, I meet with these people, and I’m potentially their angel investor, right?|
|Matt Watson:||And I’m trying to figure out do I wanna invest in this company or not, and to me it’s about the people, it’s understanding who I’m investing in, and it’s the jockey on the horse, right? Do I believe that these people will figure this out? There’s gonna be a lot of adversity in any startup when you do business. Do I believe that these people can make it happen, they can figure out how to make it happen.|
|But the other thing I was touching on is I really feel like you’ve gotta understand the business. You potentially have to be a little passionate about the problem that’s trying to be solved because I know that this investment there’s an extremely high rate of failure, but if it’s a problem I think needs to be solved and it’s an idea that I’m kind of passionate about, it’s sort of like Kickstarter, right? Sometimes you back something on Kickstarter, and you’re like oh, this little gizmo thing that will help my kids as a parent is awesome. Maybe they never figure it out, but I’m willing to put in the hundred bucks or whatever it is, right.|
|Now that’s a lot different if you’re an angel investor and you’re chipping in $10,000, $50,000, $100,000, but it’s all relevant, right, to somebody who’s extremely rich, that $100,000 is the same as $100. But you’ve gotta care about what you’re investing in. You know it’s extremely high-risk, and you’re betting on the people and you potentially think that the problem they’re trying to solve is important and needs to be solved. For example, one of the companies I invested in was doing things around content marketing. Content marketing is something I understand. It’s something I have experience with, and so when I was talking to them it was very clear what they were trying to do. I understood the market. I was a user of the product. I’m like, I get it. After a 30 minute conversation, I’m like, I’m in, right?|
|But then I meet other people that have all kinds of ideas and I’m like, man, I don’t understand this at all. You were at Global Entrepreneurship Week. What kind of weird business plans did you see? What was your reaction to those?|
|M att DeCoursey:||Well, you know, I saw a few, and it was more so in people just wanted to discuss their idea with me. And we hit on this the last episode, but even just today, I had someone come up to me and say, I’ve got a great idea, but I can’t tell you about it. And I literally told the guy, I said cool, let me know when that changes. Because I don’t have time to discuss this right now.|
|Matt Watson:||That’s a great way to get funding, isn’t it?|
|Matt DeCoursey:||Yeah, it’s great.|
|Matt Watson:||That is the best-|
|Matt DeCoursey:||I don’t even know what he wanted because I actually didn’t continue the conversation.|
|Matt Watson:||If you wanna get funding, that’s how you do it. I have the best idea in the world, give me all of your money, I am not telling you about it.|
|Matt DeCoursey:||I think I tell a lot of people that wanted to pitch me on an idea and they didn’t have anything written down. They didn’t have any idea or plan and they definitely did not have any experience. And that’s one thing I think is pretty important. So what makes a business fundable? And you mentioned the jockey versus the horse. Alright, so, and let’s define that because if you’re betting on the jockey, you’re betting on the people that are associated with the project being able to steer that horse towards a first, second, or third place finish. And the other way around, you’re more entranced in believing in the product itself and hoping that the people on the horse will be able to just make it run straight enough to get to the finish line.|
|Now, hopefully you get a little bit of both. And hopefully you have a little bit of both. But I think that the thing that really blew me away was how many people that had no … so, last night I did a presentation about startups for non-tech founders. And I had literally a room full of people that wanted to start technology companies that had no experience at all with technology. And some of them were trying to raise as much as $650,000 for a seed idea. Let’s actually stop there for a second, because if you have no product and you have nothing but an idea and a piece of paper, you’re a steed stage business. So, we wanted to discuss when, how, and what makes a company fundable, well, you’re gonna have a, and I told my group this last night. You’re gonna have a much easier time if you have anything.|
|Matt Watson:||Right. Traction, customers, a product.|
|Matt DeCoursey:||Anything. I mean like, you’re trying to raise money and you don’t even have a simple landing page for your website. That doesn’t make any sense.|
|Matt Watson:||An email address. A business card.|
|Matt DeCoursey:||You know that’s a hot button for me as well is, when people give me a business plan and they don’t even have an email address setup at the domain that they’re trying to pitch me on.|
|Matt Watson:||Well, but, so how much effort should they put in to it, though? Should they spend all of their time writing a 50 page business plan or is that too much?|
|Matt DeCoursey:||That drives me crazy, too. If you’re a seed stage or a concept business and you’re trying to get my attention, you have like one minute.|
|Matt Watson:||I agree. So, when I do angel investments, I go to these group meetings, or I meet with individuals that are local. Yeah, it’s a couple minutes. What’s the pitch?|
|Matt DeCoursey:||It’s like speed dating.|
|Matt Watson:||I mean, either I get it or I nod, and I’m gonna make that decision really fast. Now, if I make the decision of I’m interested, then I’m gonna dig in more, right?|
|Matt Watson:||But, I decide I’m interested or not interested probably in that first minute. I mean, it’s dating, like you said.|
|Matt DeCoursey:||And if you can’t make your point and you can’t convey the message for whatever it is that you’re selling on the front, not even the front and the back, the front of one piece of paper, then it’s too complex. You need to simplify. You need to dumb it down.|
|Matt Watson:||I’m not gonna read that.|
|Matt Watson:||As an investor, I don’t need to read all that stuff.|
|Matt DeCoursey:||And that’s another thing too, is that when you deal with a lot of people that control and make decisions about investment, they’re type A people, they’re not gonna read your 45 page plan.|
|Matt Watson:||No. Ain’t nobody got time for that.|
|Matt DeCoursey:||And that’s true.|
|Matt DeCoursey:||That’s true. So, there’s certain things that you can do to pretty much put yourself out of the game as soon as possible.|
|Matt Watson:||But one of the things you mentioned that I think is really important is these people that they have an idea and they wanna start a company and the thing I see all the time that drives me crazy is people that have an idea for a software company and they wanna start a software company, but they know nothing about creating software at all, right? And it would be no different from me wanting to start a law practice. What do I know about being a lawyer? I know nothing. Why would I start a law practice, right? Now-|
|Matt DeCoursey:||But didn’t you hear that you make a lot of money doing that?|
|Matt Watson:||Yeah, well, I’m gonna disrupt the whole industry too. The whole thing, I’m gonna turn it upside down. That’s my goal. And I know everything there is to do that.|
|Matt DeCoursey:||You’re gonna-|
|Matt Watson:||I know nothing.|
|Matt DeCoursey:||Rewriting law.|
|Matt Watson:||I know nothing. It would be the worst idea of my life to start a law practice, right? Well there’s all these people that think they wanna start a software company. And if you don’t know anything about software, you’ve really got two, I guess you’ve got three options. You gotta figure out how to write software, or maybe you can find a tool that help you create software. There’s a lot of these kind of low code tools now that you can can sort of use if it’s a really simple thing. But odds are, you’re gonna have to find a co-founder. You’re gonna have to find a technical co-founder that can create the software.|
|Your last option is to have a whole lot of money. Right? You’re gonna have to have a lot of capital to go hire software developers. And software developers are crazy expensive unless you hire some developers that are off-shore somewhere, which is a more affordable option, but that causes harder communication problems because they’re not in the same room with you. So, Matt, the other Matt, you have a software company, you’re not a software developer, so how did you get to have a software company. I mean, I think, as somebody who has made that leap, how did you get there?|
|Matt DeCoursey:||Well, fortunately for the way that GigaBook was started, I had other businesses that had utilized programmers.|
|Matt Watson:||They were not high tech companies, but you had developers that kind of helped you with the business.|
|Matt DeCoursey:||And we had developed a number of different, you know we were just building our own proprietary tools. And recently, you and I-|
|Matt Watson:||You weren’t selling software.|
|Matt Watson:||You were creating it for your internal use.|
|Matt DeCoursey:||Well, we couldn’t find what we needed to do things to do things the way we needed to do it and they weren’t that difficult to build, so we built them. And with that as things progressed, we didn’t have as much of a need for these programmers, however I was in this scenario where I couldn’t not have them, but if I did have them, in order to keep them I had to give them full-time jobs because adults that support families and wives and have house payments typically don’t want a part-time gig, at least not the good people.|
|So, I had what I referred to as excess capacity and I was able to start retooling and repurposing some of the things that we had built. We had built calendars for keeping track of our marketing and we had done reminders to remind us when to ship.|
|Matt Watson:||You were trying to solve your own problems, right?|
|Matt DeCoursey:||Right. Well, we tried to take the Legos and put them back together and build something different. So, I had a history with that, but I had to teach myself a really, really large amount of things along the way. Just to be able to communicate with it and understand, and I’ve been very reliant on having other people build the technology, write the code, and stuff like that. Now, with that, I’m not just passively sitting there and watching them do it. I’m able to do what I like to do the best, which is things like sales and marketing, and get the message out there and talk to people about what we do.|
|And that’s where I’m best served working for the company and I’ve told you before, I’d make a horrible programmer, because I’d smash my computer.|
|Matt Watson:||So, when I started my first company, I was the opposite side of this, right? So, I was the technical person. The way that my first company got started was who became my non-technical co-founder was looking for a technical co-founder. That’s how I actually started the business. It wasn’t my idea at all to start the company. The other guy was looking to solve some problems. He was going around to people he knew and said hey, do you know a software developer that could help me. And ultimately that’s how him and I got connected together and started a business. I was that technical co-founder.|
|So, point being, there are multiple ways to start a company. And especially if you’re starting a software company, you know, I as the technologist didn’t have the business idea. But somebody else did, and by them seeking me out, was the two of us together were able to make it happen, right? And so, back to where I started with this conversation. If you have a great business idea, but you don’t know anything about creating software, you’ve got a few different options. You took one option. You were able to build some stuff in-house from a different business and spun that out and learned the whole software business over time.|
|And then you gotta go find a technical co-founder is one of the other big options. And that’s how I got found. I was not the entrepreneur, I was just the technical co-founder and at the time I was 22 and had no idea what I was doing in any way, shape, or forms.|
|Matt DeCoursey:||And where were you working at the time when that occurred?|
|Matt Watson:||Well, so, I was actually working in a medical laboratory writing software, is where I was working when I started my first business. But, yeah, you just gotta get started.|
|Matt DeCoursey:||And I think that’s something that I said about five times last night during the presentation, is, and I think Matt really hit good point there. You have to start, even if it’s terrible. You have to start at some point, and we’re gonna probably have to get back into that at another point, but you’re doing yourself a huge favor if you just get anything started, because trying to get people involved in projects that aren’t even started is very difficult.|
|Matt Watson:||Well, and one thing you can do if you’re trying to start a software business is you don’t actually have to have the software to sell it. I know that sounds crazy, but you don’t. What you can do is create mock-ups of it, right. Open up Photoshop or some tool that’ll let you create what the software should look like and the functionality it should do, and there’s really cool tools that exist to do this stuff right now. And mock-up what you think the software should do, and then potentially go meet with your customers and validate the idea and get feedback.|
|And potentially one of them would even fund it, say yeah, I’ll give you the $100,000 to build this product if you can build it. Go figure it out. Now, all of a sudden you’ve got somebody that’s willing to pay for it, which makes it even easier to raise capital as well. So, sometimes it’s back to the hustle, right? That’s kind of our whole mantra. It’s that hustle of, if you can’t create this software, the next step is designing it. What is it supposed to look like? Validating it. Take the next step.|
|Matt DeCoursey:||I think a healthy dose of obsession is good for these projects as well, because we keep keying in on the term passion. If you’re not passionate about it, it’s gonna show. I’m gonna know. I can tell. I can tell if you’re not passionate about your idea. I can almost just look in your eyes and know. I can say, wow, this guy’s legitimately excited about it, this girl’s legitimately excited about it and she really seems to know what’s up.|
|Matt Watson:||But wait a second. So, you’re saying some of these people you meet, you feel like they’re starting a startup because it’s creating a job for them? It’s just a job?|
|Matt DeCoursey:||In some regards, yeah. Yeah, I do. And the thing is though, is it’s such a tough road, and there’s so much that you’re gonna sacrifice and give up while you’re hustling. There’s times where you’re gonna be away from your friends or your family and that’s the trade-off that you get for the hustle that you’ve gotta put in. And if you’re not willing to do that, you’re gonna quit. And therefore that passion, if I’m investing in something, or getting involved in something as an advisor or whatever I’m doing, that’s important to me. I wanna know that you’re gonna be able to get past the rough points.|
|For me, I’m always talking about the path to revenue. That’s a big thing for me. If your idea is gonna take three years to bring a dollar in, that freaks me out, because I know, I’ve learned how expensive, and you know, I told you I spent a quarter of a million dollars on GigaBook before it brought in a dollar. And maybe close to another amount similar before it had brought in a thousand dollars. One of the mistakes that people-|
|Matt Watson:||It takes time to build a machine.|
|Matt DeCoursey:||It does.|
|Matt Watson:||That’s the thing that people don’t understand about a software business. You’re building a machine. It’s like your software’s sort of like a factory, you’re building that machine. Products are complicated. They’re expensive. It’s not like a service business, you know. And it takes a lot of time, energy, and money to build that and it can take months or years. I don’t think a lot of founders or entrepreneur understand the complexity that goes in to that. The statements you just made, right? I’m a developer, so I understand it. But, my current business, it took us a couple years before we got to first revenue because the product was just so complex, the problem that we were trying to solve. But we knew what we were doing. We knew there was a market for it. It just took time.|
|Matt DeCoursey:||Let’s talk about a couple of the other things that investors like in general and then I think we can get into a little bit of the different stages and types of funding. One of the things is, if your idea isn’t unique or it doesn’t fill a specific need, or niche, or solve a problem, like we had talked about in episode one, you’re gonna have a very hard time getting people interested in putting money into it. I hear, it’s really crowded in here, there’s a lot of people doing this. So, some of the things that your idea should have are your experience, your passion, but what is your specific advantage in a marketplace. Why are you different?|
|And, I had someone tell me last night that they had an idea that over time it was gonna evolve to where they were just gonna be able to take on Amazon and eBay.|
|Matt Watson:||Okay. Oh yeah, that sounds like a, yeah …|
|Matt DeCoursey:||I literally-|
|Matt Watson:||I would invest in that.|
|Matt DeCoursey:||I literally said to this guy, no you’re not.|
|Matt Watson:||You said good luck.|
|Matt DeCoursey:||No, I said no, you’re not. He said what do you mean? I said you’re never gonna take on Amazon and eBay. That doesn’t even make any sense. But that’s par for the course-|
|Matt Watson:||Was his name Elon Musk?|
|Matt Watson:||If it was Elon, I would’ve went with it.|
|Matt DeCoursey:||I find most of my day is spent trying to get Elon Musk to quit asking for me money.|
|Matt DeCoursey:||It’s just part of my life and I’m getting used to that. Now, with that some of the things that you’re gonna have to consider as you’re raising money for your company is, you know we talked about what stage you’re in. So, if you’re in a seed stage of business, you’re literally that, you’re a seed that is going into raw dirt that’s gonna be watered and you’re hoping something grows.|
|Matt Watson:||It could be manure.|
|Matt DeCoursey:||And it usually is. And so with that, if you’re raising money in a seed stage, that is the riskiest part that an investor’s gonna have in your process, because they don’t even know if you’re gonna be able to come out with a product.|
|Matt Watson:||Well, so, you talk about being different in a marketplace, the other thing though is sometimes you can latch on to trends in a market, right? So, maybe it’s a busy market, but if you can latch on to one of those trends. So, for example, today everything’s about artificial intelligence and machine learning or block chain or some of these types of things that are really big trends these days. And maybe those are complicated markets that have a lot of players, but you potentially could have some success because there’s just a lot of investors and VCs that are willing to throw money at that because it’s the hot thing. Like back to the dotcom bubble at the end of the 90s. Like anybody who wanted to sell anything online, we’re gonna sell diapers online and that’s our big business idea and they’re like, yeah, let’s do it. That was the market at the time.|
|And so part of it is understanding the environment you’re in and what the hot trends are. But absolutely, if you’re like our idea is just to compete with Amazon and we’re gonna put them out of business, and yeah, that’s probably a really bad idea. Now, if were trying to say that when Amazon first got started, that might’ve been the trend at the time in a market. But, I think the other thing, I think we touched on this in the last episode, but potentially you can compete with Amazon, but you gotta compete in a certain way on a certain thing. Amazon sells everything, and they’re awesome at selling everything, but there are lots of other websites that sell stuff, right? There’s websites you go to and they specialize in selling outdoor furniture or whatever it is.|
|So, you can still compete, but you gotta find your segment of the market and your niche, right? How do you do that with GigaBook? You have competitors.|
|Matt DeCoursey:||I’ve got a lot.|
|Matt Watson:||How do you compete?|
|Matt DeCoursey:||Well, we first looked at something, I think it’s an easy mistake to make in the beginning, because you say wow, there 25 million businesses we can market this to. That’s actually the worst way to look at it, because now all of a sudden we’ve got 25 million businesses to market to, where do we start, and it was really broad. So, for us, we immediately gave up on a few things. Like we don’t do food, or medical, and we really don’t specialize in things like salons. And that’s the number one thing when people say, they hear about GigaBook and they say, oh that’d be great for my friend’s hair salon, yeah, it really won’t be. Why? Because I’ve got big, big box competitors that specialize in just that.|
|So, the way we differentiate ourselves-|
|Matt Watson:||You let them have the market. You give them that one.|
|Matt DeCoursey:||We immediately surrendered. And like with food, we didn’t wanna compete with OpenTable.|
|Matt Watson:||Right. Yep. That makes total sense.|
|Matt DeCoursey:||Who was purchased for a billion dollars. They won. Give up on that. We then looked at this really long tail. Meaning like, these really niche type businesses that were probably never gonna have a booking platform that was gonna meet their needs. So, we decided to become highly customizable. And we service the places that can’t get what they need from industry-specific booking platforms. Now, with that, our strength is our weakness. As you’re well aware, there’s a lot of things in GigaBook, and sometimes that freaks people out. But with that, there are a ton of people and a ton of businesses that find that we’re the only people that will allow them to make specific customization or do things because our other competitors who are so niche and focused, in order to keep their customers in the lane they need to be in, they can’t let them, they have to save themselves from themselves.|
|Matt Watson:||They dumb their product down to that one thing, right? So, at VenSolutions, my last company, we provided CRM for car dealers, and yeah, you could’ve used salesforce.com, or any of these other CRM products at a car dealership, but they weren’t designed for a car dealership, they were designed for any random thing. And really all we did is made a product that was totally focused on car dealers. We didn’t sell to anybody that wasn’t a car dealer. And that’s what then allowed us to own that market is that specialization. And so, I think part of our advice here is, you can compete in a space, like CRM is an example, or booking, or whatever it is, but you gotta find your segment of it.|
|And another segment, I think, that people never really think of is, potentially it could be in another country. Like, maybe you have 50 competitors in the United States, but you do some research and you realize well, none of them work in Spanish. Why don’t we re-write the software in Spanish, we’ll sell it to all of South America, and Mexico, and Spain, and all these other places. And that’s our market and nobody else is focused on that market, right?|
|Matt DeCoursey:||It’s funny that you mentioned that because it brings me to something that, I tell people you should try to always have a list of all the different ways that your platform or product can generate revenue. And you talk about expanding outside of your specific country. Well, not having a plan to do that can do things like, for example GigaBook at first would only take nine digit phone numbers. And it was immediately a problem everywhere but places that did nine digit phone numbers. So, there were so many places that phone numbers could go in and format, it was actually a really big undertaking for us to be compatible to be used in Dublin, or wherever.|
|Matt Watson:||And then, I’m gonna guess that you made it so that your software allowed other phone numbers. And then all your customers in the United States hated it.|
|Matt DeCoursey:||Well, yeah, because we also-|
|Matt Watson:||They had to type to phone numbers in weird ways that American aren’t used to doing it.|
|Matt DeCoursey:||Like putting a one in front of things.|
|Matt DeCoursey:||Yes, that’s exactly, that triggered an immediate rollback and me turning red and steam coming out of my ears, partially because I was mad at myself. But, I think we should talk about the ceiling and what you can get out of a marketplace. We keep talking about niche, and servicing specific things, but are there markets that just aren’t big enough to even chase?|
|Matt Watson:||Man, so I was talking to a guy yesterday who wanted to, he owned a software development company, he just created custom software for whoever paid him to do it. There’s lots of people that do that. But he wanted to have his own product. He wanted to make that leap, like us, we own a software company that sells a product. He wanted to do that. But, he was trying to figure out how he was gonna do that and that’s why we were talking. So, I asked him, how are you gonna do this? What is the product gonna be? And he was like, I’m gonna sell my company and I’m gonna go build this, and I’m gonna do this.|
|so, I was like, you’re gonna write all the software yourself. So, how complicated of a product can you actually build without raising a bunch of capital and hiring a bunch of developers. Are you gonna build something you can sell for 50 bucks a month or something, what is it you’re gonna build? And I think that gets into your question, right, is the complexity and how much, you know, the size of the market, the size of the product, and can you build that and fulfill it. And that was his problem is trying to figure out what can I build, because obviously there’s things you can build and it’s like, how many people will buy this thing, right?|
|You mentioned GigaBook, there’s like millions of potential customers. My product, Stackify, our whole audience is millions of customers and we have customers in 50 different countries. But for some things, and that’s your point, what is, oh I wanna build a booking system, but I only wanna do cigar shops for people who come in and they wanna come try cigars. That may be, there’s three people that wanna do that, right? You gotta figure out what your total addressable market is, and I’m not saying the next time you meet with an investor you want be like, well it’s a three trillion dollar business opportunity. Don’t do that either, because that makes you sound stupid. But you gotta understand the market and know that there’s enough of a need and enough of a market out there.|
|We have that problem with Stackify. Our customers are usually small, medium size business. They’re deploying their applications to the cloud. How many people is that? Is that a thousand companies? Is it 10 thousand companies? Sometimes it’s really hard to know, but one problem that you can have is say you create the best software in the world that solves a problem and let’s say there’s only a thousand people. Well, let’s say that you create the product and you find all one thousand of them, and they all say no. Then what do you do. You’ve already went through your total addressable market. You literally can’t sell your product to any other additional person. You have to figure out if the market is big enough and how big the market is, and-|
|Matt DeCoursey:||And those are the kinds of things that outside investors are really gonna diagnose.|
|Matt Watson:||They wanna know.|
|Matt DeCoursey:||They wanna know.|
|Matt Watson:||They wanna know.|
|Matt DeCoursey:||And that’s why I said, well, how high is the ceiling in here because you might hit that ceiling, which means that your business is never gonna be worth more than half a million dollars.|
|Matt Watson:||So, with both of our businesses, we don’t even know how big the market is, because it’s impossible to get a name of every potential customer. Now, you take VenSolutions for example, our customers were car dealers. It’s pretty easy to get a list of car dealers. How many Ford dealers are there? How many GM dealers are there?|
|Matt DeCoursey:||You could the end of that list.|
|Matt Watson:||We knew exactly. There was 22,000 franchise dealers, and maybe the bottom half of them were in rural markets or something and we wouldn’t focus on them, but the point is we knew exactly who our customer base was. And we knew how big it was.|
|Matt DeCoursey:||That can also work to your advantage when trying to explain how effective your business has been at capturing market share. You can actually say, hey, there’s a definable amount. I would have to have a million GigaBook users to say we have 4% of the small businesses. Let’s be realistic, that’s not gonna happen. So, alright, so how do you feel about raising money?|
|Matt Watson:||Oh, man. Well, let me put it this way. So, I got off the phone with a guy today. He was talking about, he basically has a startup. He’s got a website. He’s got a product. It’s ready to sell. He’s got a few customers, and he’s trying to figure out how to get to the next level. And he told me, Matt, I’m wearing 15 hats. I’m the CEO, I’m the founder, the owner, I’m writing the code, I’m doing the sales, I’m doing marketing. I was like, have you raised any capital yet, and he’s like, well, I’ve thought about it, but I haven’t done it yet.|
|And I’m like well, if you’re gonna do it, you’re probably gonna have to take off 14 of those hats that you’re wearing, because it’s a full-time job. And for him, is his time better spent getting customers so that he doesn’t need funding, or is it chasing funding. That’s the problem that entrepreneurs have. Do you chase the funding or do you chase the customers? Which way do you go?|
|Matt DeCoursey:||Let me make it really basic. Raising money sucks.|
|Matt Watson:||It does suck. How good are you at being told no? And it’s sort of like dating, right? How many times do get told no in a row and you keep getting up to bat?|
|Matt DeCoursey:||I don’t think it’s the no part, it’s the part that I don’t think I like to sit there and have to sell myself over and over and over and who we are and what we do and sometimes I’m like, god, that’s a really dumb question. And I really wanna respond with that, saying that’s a really dumb question. It has to do with the no, but I think some of it is that not everybody’s gonna understand your business and your idea the way that you do. And if they don’t, you might as well end the conversation at that point because they’re not gonna give you money if they don’t understand what you do.|
|And the thing is, too, you have to, now, I’m a salesperson at heart, so I’m a lot more resilient to the word no then a lot of people. It doesn’t offend me. I don’t take it personally. I think the thing that is challenging for me when it comes to raising money or conversations I’ve had in the past is that when someone wants to buy 50% of my business for 5% of what I really want for it. And some of that and I feel like I’m wasting my time, or just really I’d like to be doing things to build my business, not to pass out pitch decks and one pagers and take phone calls and do all this stuff. Now, I feel fortunate that I’ve gotten enough street cred that I can have conversations with people fairly easily but if you don’t have that, you have an even harder battle to fight.|
|Matt Watson:||Well, before we decided to talk about this topic today, I’ve done a little research around-|
|Matt DeCoursey:||What are my chances?|
|Matt Watson:||How many people raise money?|
|Matt DeCoursey:||Am I gonna get funded?|
|Matt Watson:||Where do they raise money from? And all these things and one of the stats I saw on some website, and this was from me randomly Googling stuff, and the numbers are probably completely wrong, I’ll give you the disclosure. But it said that the chances of a startup getting funded by a VC specifically, a VC, not an angel, not friends and family, but a VC was one in 2,000.|
|Matt DeCoursey:||And we had discussed what even put you in that group.|
|Matt Watson:||I mean, the guy I mentioned-|
|Matt DeCoursey:||You’ve probably already raised money at an angel or seed level or built something to even be in that group that can’t be in the one percent.|
|Matt Watson:||You’re several steps ahead. You’re not the person with the business plan and no business card.|
|Matt DeCoursey:||Why is that, Matt?|
|Matt Watson:||Well, the other thing I really saw that really stood out to me was the vast majority of all money, that every startup ever raises is actually friends and family money. More money was raised by friends and family than by angels and VCs, private equity, all of it combined. Probably because a lot of it is, they’re small businesses that don’t need a lot of capital. Like the guy I talked to today. If he had a hundred grand, or a couple hundred grand, that might give him just enough of the runway he needs to break even. That’s what he told me on the phone. We’re just trying to get to break even. Well, how much money do you need to do that, is it a hundred grand, is it two hundred grand-|
|Matt DeCoursey:||Hold on, you mean people don’t like to invest money in businesses that are losing money?|
|Matt Watson:||They don’t like to, but they gotta see how they get there. That’s why if you’ve got a rich uncle or a grandma or somebody you can raise some money from, but you know how I did it at my first company VenSolutions? We had a VC. We had a Visa card.|
|Matt DeCoursey:||Yeah, and my company was the same way. If you read Million Dollar Bedroom, my first funding method was getting all of my friend’s and family’s credit cards together. I said hey, do you wanna earn some free points? And I leverage all of that and that was a very risky move because if that went south on me I was gonna really piss off a lot of people.|
|Matt Watson:||I had two or three credit cards that were maxed out and I think I had 40 or $50,000 in credit card debt. And I don’t know if that counts towards the friends and family round, but it’s basically it’s your own money, it’s your friends money, it’s your uncle’s money, it’s whoever that’s got some money. And those are the people that are going to be willing to bet on you, right?|
|Matt DeCoursey:||Wait, can’t I go to the bank and get a loan?|
|Matt Watson:||You might be able to get a SBA loan or something like that, but only for certain types of business, right?|
|Matt DeCoursey:||Probably not. Not for a startup. Not for something that has no history, even the SBA wants to see that your business has some kind of track record. Look, if your plan for funding your business is you think you’re going to the bank to get a loan, you’re not. Banks don’t give loans to new businesses.|
|Matt Watson:||Not even if I’m gonna open a McDonald’s franchise or something like that?|
|Matt DeCoursey:||That would be a different scenario because that’s not a startup as we have defined it. That is a business, and by the way, McDonald’s isn’t gonna give you the franchise if you have to go get a loan to get it. They want you to have 4 million dollars liquid.|
|Matt Watson:||Right. You’ve gotta be somewhat of an accredited investor or whatever yourself, right?|
|Matt DeCoursey:||So, it’s a two-way street. So, look, the whole process of raising money can be infuriating and it oftentimes can reward those that are diligent enough to keep fighting the good fight. Let me shed a little light on this and why 2,000 companies and maybe one of them will get something. These people that control these funds and work in these firms are literally overwhelmed. They’re getting a hundred, two hundred, five hundred, who knows, a huge amount, of business plans, and that’s why you can’t send a 45 page document. The guy that got a hundred of those today isn’t gonna read it.|
|Matt Watson:||And that’s why they won’t sign an NDA, by the way. Don’t ever ask them to sign an NDA. That just goes to show you have no idea what you’re doing.|
|Matt DeCoursey:||They’re gonna steal my idea.|
|Matt Watson:||No, they’re looking at 300 ideas a day.|
|Matt DeCoursey:||Oh yeah, that’s right. So, with that you have to consider some of this stuff. So, if you’re seeing a hundred to three hundred pitches a day, you’re gonna have to narrow it down to the stuff that looks really good and looks really good now.|
|Matt Watson:||So, it’s somebody who has traction, who had industry experience, who probably had already raised some money, who is well on their way, right? Most of the people who are getting funding are the people who are past a lot of these hurdles. They’re looking for fuel on the fire. That’s where Stackify’s at. We just raised a small round of funding and it was really for growth. We are past all those initial hurdles, and it’s growth. Where it’s really hard to raise money is the very, very, very early seed stage, which usually is not VCs. VCs don’t usually invest there unless it’s some really disruptive technology.|
|Matt DeCoursey:||Well, if you’re actually gonna accept an investment at a seed round, you’re gonna be selling your shares cheap.|
|Matt Watson:||Yeah. You’re gonna be giving up-|
|Matt DeCoursey:||Really cheap. You’re gonna be giving up a lot.|
|Matt Watson:||You’re gonna be giving up a big part of your company, too.|
|Matt DeCoursey:||And those type of investors are assuming that they’re gonna buy ten companies and nine of them are gonna fail, and they’re gonna hit a big enough home run on the one that doesn’t-|
|Matt Watson:||And they don’t care if the other nine blow up.|
|Matt DeCoursey:||They don’t.|
|Matt Watson:||They don’t care at all.|
|Matt DeCoursey:||They’d actually prefer that you’d fail very quickly so they can write it off and move on and not, the biggest fear that I’ve uncovered as I’ve talked to some of these people is getting stuck. They’re like now I’m not only having to put money it, but now I’m having to spend effort and time and keep up with this.|
|Matt Watson:||And I know people who have been through these horror stories of, they took a VC or some type of investor and let them have a majority stake in the company and gave up control and sometimes they do really crazy things and you’ll lose it.|
|Matt DeCoursey:||Let’s talk about that. Let’s talk about what some of the different, alright so let’s just say that you do have a good idea, and you do have a company that has some traction, and you’re now at the point, and I like to use the term hyper growth. You’re raising money because what you’ve done is shown to be repeatable and it is just not possible for you to grow and accumulate money fast enough to really light the torch on that and put you into this hyper speed growth pattern.|
|And I hear a lot of people say, oh I’ll never take investment money, well, you’re not that smart if you’re turning it down at that point.|
|Matt Watson:||I have a great example of this. So, there’s a local company here that I’m talking to about potentially investing in and I’m mostly investing because I know the founders, I’ve worked with them before. But they’re at that stage. They have a phenomenal product. They know if they hire a salesperson that that salesperson can sign up five new accounts a month. And the problem is they can’t afford to hire more salespeople. They don’t have the excess capital.|
|Matt DeCoursey:||It’s that initial three to six months that will sink them if they can’t get through and that’s what the investor’s there to help you do.|
|Matt Watson:||Yeah. So, for them, they wanna raise money because they wanna go hire five salespeople today, otherwise they might hire one now, maybe one in six months, and one in a year.|
|Matt DeCoursey:||And not doing it now presents such a high level of opportunity cost that it’s just really not worth it.|
|Matt Watson:||They can grow faster.|
|Matt DeCoursey:||You’re better as the person that owns 50% of this well-capitalized hyper growth machine that is just formed, you’re way better in the long-run there than owning 90% of your poorly funded, not growing very quickly, losing market share to your competitor business. So, here I am and I’ve now, I’m getting calls back and interest from VCs. So, I wanna talk a little bit about what some of the different types of funding and scenarios and setup are.|
|Matt Watson:||So, you’re saying there’s different types of investments. What does that mean exactly?|
|Matt DeCoursey:||Well, you’re gonna have to become very familiar with the way that deals are structured. The ways that investors put money into your company and how they expect to either gain shares or different forms of ownership based on different criteria.|
|Matt Watson:||Well, don’t they also expect different investor rights-|
|Matt Watson:||And information, and control, and they want to be guaranteed to get their money back even if you don’t. I mean, there’s a lot of those things, right?|
|Matt DeCoursey:||There sure is, and every deal is different and the best thing that you can do is have such firm grasp on how some of those things work. You have to really make sure you understand what you’re getting yourself into before you take that check. Before you take that deposit, because not doing things in a way that you understand are gonna lead to certain situations where you can rapidly lose control of your entire company. You can get thrown out of your own company. For example, if you don’t have control of your own board of directors, those people now have the ability to shove you out the door.|
|Matt Watson:||Well, and I’ll give you another good example of this. A lot of startup investments will actually take all of the equity away from the founder, all of it, and invest it back to them so that the investor is protected in case the founder decides to go nuts and leave. So, sometimes you give up everything and you’re basically earning it back. And so, yeah, you gotta watch out to what kind of deals you’re getting into there. So, what are some of the basic instruments, though, that people would understand?|
|Matt DeCoursey:||Well, I think the thing that’s probably the most common and is really my least favorite is the convertible note.|
|Matt Watson:||So, what does that mean? What’s a convertible note?|
|Matt DeCoursey:||A convertible note is a debt instrument that your investor can later convert into shares of your business based on specific time frames or criteria occurring.|
|Matt DeCoursey:||Do you wanna know why I don’t like those notes?|
|Matt Watson:||Why don’t you like them?|
|Matt DeCoursey:||They put you in a scenario of debt. You just put a lien on your company and these things oftentimes mature, say, after 24 months, and you better make sure that you can meet the criteria. They’re oftentimes driven by time, or other rounds of funding coming in.|
|Matt Watson:||Well, they’re usually based on the idea that they’re gonna convert, though. Usually people are using them because they’re working towards a series A or whatever it is, but they don’t know-|
|Matt DeCoursey:||But what happens if that doesn’t come?|
|Matt Watson:||Well, or, and I think people primarily use them because they don’t know the valuation. That’s the biggest problem. Oh, we think we’re gonna raise five million dollars or our company’s worth 20 million or whatever it is, but they’re doing a convertible note before that and the investors can get in on the note and basically know, okay, when they figure it all out and they eventually get the five million, I’ll be able to convert into that. But yeah, to that point, and that may never happen.|
|Matt DeCoursey:||Well, the problem is, you could sell what you think is roughly 20% of your company for a certain amount. Now this timeframe expires, or you don’t get another round of funding, and now depending on the way it’s written, you could be in a position of liability of literally losing your company. And that isn’t always commonplace, but there’s other things too, that oftentimes are attached to convertible notes like actually charging interest. And I’m not a big fan of that because if you’re my investor, you’re my partner. And that means that you’re not running juice.|
|Matt Watson:||Wait, I’m not your partner, I just wanna make money. I just wanna invest and make money, though.|
|Matt DeCoursey:||Then you’re not the right investor for me.|
|Matt Watson:||Okay, alright.|
|Matt DeCoursey:||So, with investors, you’ll often hear the term smart money. I want investors that are also, even if it’s not full-time, are somewhat active in helping my business, my idea, or anything I’m doing find a positive result. And that can be through the connections that they have with other people or companies or sometimes you might find investors that have investments in other products that benefit from yours and that other product now doing business with each other.|
|Matt Watson:||So what other kinds of instruments do they need to know? There’s convertible notes, isn’t there some new thing called SAFE?|
|Matt DeCoursey:||Yeah, well, what’s a safe?|
|Matt Watson:||That you put money in.|
|Matt DeCoursey:||Yeah, actually it stands for simple agreement for future equity.|
|Matt Watson:||So, it came out of Y Combinator, right?|
|Matt DeCoursey:||Yeah, and for those that aren’t familiar, Y Combinator is Google’s right? It’s Google’s startup school.|
|Matt Watson:||No, I don’t think it’s related to Google.|
|Matt DeCoursey:||It’s not?|
|Matt Watson:||No, it’s just-|
|Matt DeCoursey:||Then they helped fund it.|
|Matt Watson:||They were the original incubators.|
|Matt DeCoursey:||So, you can submit your idea to Y Combinator and it’s kind of like startup school. And they walk you through it, but with that they had created an instrument called the simple agreement for future equity, which accomplishes a lot of the same things that a convertible note does, such as maybe establishing what that equity is valued at later, but it doesn’t put the company or the startup founder in a position of debt.|
|Matt Watson:||So, it’s not a note.|
|Matt DeCoursey:||It is not a debt instrument.|
|Matt Watson:||It’s only an instrument to participate in the round.|
|Matt DeCoursey:||And it will say when money comes in later, we’re now in a better position to establish what the shares and equity of this company are worth and it does still convert into ownership elements. Now here’s the thing, it also can work the other way. If the valuation ends up being a lot lower, it’ll often have things like a discount attached to it, which means I can now get that lower valuation minus 15% more.|
|Matt Watson:||So, yeah, I think the SAFE and convertible note are definitely things that people need to know about, but a lot of times when they’re getting investment from friends and family, or a local angel investor, they’re potentially not using any of those, right? It’s like-|
|Matt DeCoursey:||No, it’s usually really simple.|
|Matt Watson:||Send me the money.|
|Matt DeCoursey:||You’re buying 10% of my company for X amount. And that is, without a doubt the least complicated, most straightforward, and often best way to establish ownership in your business, it’s just usually not what’s gonna happen from a more sophisticated or complex investment strategy that comes from someone like a venture capitalist.|
|Matt Watson:||Well, I think we’ve talked about a lot of good things on this episode, and from should you try and raise capital, some of the basics of what an angel investor is, some of the basic instruments of how investments are done, but I think more than anything, I think the key takeaway from this is raising money is a hell of a lot of work.|
|Matt DeCoursey:||It’s complicated.|
|Matt Watson:||It’s a full-time job.|
|Matt Watson:||So, should you chase customers or chase money, or maybe chase your uncle or aunt or grandma or somebody who’s got a little bit of money.|
|Matt DeCoursey:||Well, I told you I think raising money sucks so I’m gonna get back to work trying to build my business. And hopefully I don’t run out of money on the way to doing that.|
|Matt Watson:||Alright, let’s get back to work.|
|Matt DeCoursey:||See you, bud.|
|Matt Watson:||See you.|