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Telling the stories of startup founders and creators and their unique journey. Each episode features actionable tips, practical advice and inspirational insight.
Welcome to the Founders Journey podcast. Inspiration education for founders by founders welcome back to the Founders Journey podcast. Curation for this week. Topic this week is really around funding, and we've had a lot of guests recently that have gotten what you would expect that we've talked about this quite a bit recently and decides to do a deep dive on it. Peter?
Yeah, and we actually have a venture capitalist with us today. He didn't start out doing that, but he ended up doing that, which is pretty normal, actually. It's a way of giving back to the community is helping, and good vcs are people that are operators, like Greg, he's a great example of that. And Ira, they kind of go in and they really help you build your business. So that's one thing I'll add. That's the bonus track. Get a VC that actually is an operator or was an operator and they can help you all out. But first we'll talk about funding. So when we're talking about funding, Greg, where does the VC fit in the funding environment?
I mean, it's going to be a different place for different companies, right? I think the biggest thing that really you've got to look at as a founder is if VC is the right move for you, right? There's a lot of different ways that you can develop your business. The reality around VC, and I think a lot of founders don't quite understand the role that a VC plays or actually, more importantly, how a VC makes money. Venture capital firms are businesses, right? Like any other, they've got a business model. And the reality is the percentage of companies that should get VC funding is very small. And I don't mean that those businesses that are not really great candidates for VC funding are not going to be great businesses. They can make their founders really wealthy, they can make their teams really wealthy.
We're going to hear from one of our guests talking about that a little bit later in this curation. But it just means that the other paths might be a better fit because those companies may not have the right growth profile for a VC where they can go from one round and really see that kind of exponential type growth that really makes them a great candidate for ultimately, like a public offering or strategic sale or something like that. And that's how vcs make money.
So what company should be funded by a VC, you think?
It depends a lot. Obviously, SAS technology companies are great candidates for this because they can get that exponential scale. I think the thing is you've got to be able to really be able to show two things right. You've got to be able to show that you can get exponential growth and that's somewhere at the early stage, minimum around 300%. As you grow, that's going to probably come down to 100% as you kind of get up to the three 5 million mark and it will fall, but it's still pretty exponential growth. The other thing you've got to be able to prove is that you can get strong gross margins, and that's why so many SaaS companies are great candidates for VC funding, because they can show those 80% kind of gross margins.
What that means is that after they pay for the product that they're delivering, there's a large amount of money that they can continue to reinvest back in the growth of the business. I mean, that's really what is from an industry standpoint, it can be all over the place. We're actually going to hear from somebody in this curation later that invests around blockchain and crypto. You see a lot of that kind of leverage there as well. But you've got to have that financial leverage and that comes from high growth and high gross margins.
And that all fits a financial model that's supporting that investment. Right. I mean, that's a unique thing you really have to think about. It's a financial model that has to work and your business has to be able to support that. That's the pressure you're going to feel.
When you have funding, VC financing. VC funding is huge trade off. Right? A huge trade off. You just hit it on the head. I mean, you're going to feel that kind of pressure. Right. You're going to feel this intense pressure to grow, this intense pressure to optimize the business around efficiency and things like that. That's not for everybody. That may just not be what you want to deal with in your business. You may be good with slower growth and a better lifestyle, and that is not a judgment. I'll tell you, it makes a lot of sense for most founders.
Yeah, my company is not funded and I love it. It's doing very well. So first, let's say you kind of fit that profile and it's really early days. How do you start? How do you start that first step?
Yeah, you've got to be able to develop your network, right? You've got to be able to really start to develop the network around you. And even if you're starting from scratch, you have a network. And I think Jen Openshaw, who's one of our guests, Jen is the CEO of girls with impact probably said it better than I'm going to be able to say it in this clip.
People who are financially successful, and by that I mean over a million dollars in net worth, not including your house, they leverage their immediate networks more than people who are not wealthy. So if you are looking to raise money or do a business deal or something else, most people are like, I don't know anybody. Who am I going to go to? Rather than thinking about who's right around them, who's my neighbor, who's in my spiritual center, who's at whatever down the street, who's at my gym. There are people really in your backyard who can make a huge difference.
That was great, what Jen brought up. One of the cool things that happens sometimes if someone doesn't say yes is that they actually introduce you to someone new. So that's another thing that could happen from just reaching out to those people around you, as Jed mentioned. So once you start that process and you're talking to people and you're pitching them, how do you get prepared? What do you need to do?
You've got it just as you take a business to market, right? What do you need, when you think about going out and selling your product, right? What do you need? You need collateral, you need your story, you need your messaging. You need to be able to tell that story. You need to have the details dialed in. So when somebody asks you a question, you can really answer that question. Right. I think we had Max Walker on this is going back a little bit. I think we had Max back over the summer or something. But great guest who talked about kind of design theory in being able to actually tell your story around fundraising.
I was talking to a VC this weekend and he was saying that he looks for two things. He looks for. Does it seem like the, because he invests precedes so very early, he's like, does it seem like this person has figured out something that other people have not figured out? Like, is he a little bit early to is he or she a little bit early to some idea or some angle on some idea? And then does their deck look really good? And it's funny because I've heard VC say the opposite, right. Their deck needs, you want the ugliest looking deck because that means they didn't spend any time on it and they just care about their business. But his pitch is building a startup is an exercise in design in all kinds of different ways.
And if you can't figure out how to do design, if you don't have the sense of what is good, then you will fail because you can't convince people that you're serious. You can't convince people. I think it's an interesting perspective. Obviously, he was a designer previously, so it makes sense. This is his angle.
All right, so he also mentioned something about having a unique value prop or market advantage. He's talking about, let's talk about market advantage and why that's important for funding.
To the, this goes to what we said when we first started talking here, Peter. If you're going to go out and raise venture, you've got to have the ability to grow at an exponential rate. You've got to be able to get financial leverage in the business to continue to fund that growth. Right. In order to do that, you've got to have true differentiation. Now, I know a lot of companies. And true innovation, I know a lot of companies, everybody, myself included. We all talk about how we're different, how we've got this unique spin on things. But when you're talking about getting growth profiles at the level for venture funding, you really need to have a sustainable market advantage. Sometimes you hear this called a moat around the business, right.
And what it really is about is being able to drive apply real innovation for competitive advantage that your clients can feel, because that ultimately what that does is it helps you maintain that growth rate. That's exactly what Ali Baraji talked about on a recent Ali is the partner in Blockchain Founders Fund. Super interesting. It's a great podcast, by the way, if you want to learn about blockchain, just in general. But he really summed it up well in this clip.
When I give advice to founders, you've got to be passionate about this. Right? You've got to find a problem you're passionate about and then figure out what solutions are required to help you get there and get a competitive advantage. And so if blockchain is not one of those, then obviously don't use it. Right? If AI is not one of those, don't use it. Right. But I think there's a lot of ways these days to apply these technologies and get a competitive advantage. That's the big thing that we're looking for when we look at those real world applications. It's does this technology give you a major competitive advantage versus the market?
So, Greg, today's market's a little different. What has changed and is impacting funding today?
Venture funding is the venture markets. The private markets in general are so cyclical to begin with. Right. But what we've seen over you look at 20 19 20 20 21. You could throw a rock and hit a unicorn, right? And you look at the way that's changed today, the market has really shifted later. 2020 2023 were really challenging years, particularly 23 really challenging year from a fundraising standpoint. Peter Walker is the head of data analytics for Carta. Did this interview a few weeks ago. Nobody knows more about the state of private equity and private markets and the funding market than Carta. And Peter is the guy who does all the data analytics for these guys. He talked about it really well when he talks about how this market is really bifurcating over the next year.
And you'll hear what Peter Walker has to say about it in this clip.
I do think that fundraising is going to get marginally easier or there's going to be more cash flowing into VC next year, at least invested into companies. And simultaneously there's going to be a lot of startups shutting down. And so it's going to feel like this very bifurcated market of you'll read about big AI rounds and then you'll read about all the startups going out of business and you maybe read them in the same TechCrunch article and it's just going to feel very all over the place.
I think that we actually had two clips from Peter in here and I think in this next clip what you're also going to hear Peter talk about is what I mentioned before. You see a lot of SaaS companies know, and it's not exclusively, but now the markets are starting to open up a little bit to non SaaS companies and non software companies in general, where there's markets actually forming for venture capital in other markets outside of technology.
Even though a lot of investing across these different sectors is down, it does seem that vcs are now more open to non software businesses. So atoms building in atoms instead of building in bits, hardware, biotech, energy, these places that could have real outsized impact on the general economy beyond just tech. I think that there's been a little bit of a turn back towards, well, if SaaS isn't going to return 30 x to us, then we might as well take a better look at some of these more capital intensive industries, which I think is just a net good for humanity overall. If we have young, ambitious founders who are building an energy hardware, biotech, nanotech, that kind of stuff, as opposed to just, hey, I'm going to make another wonderful sales tool.
So Greg, should you be like, what does that mean? Who should be funded? This is super important.
Yeah, look, we talked about the profile of some of those companies with high growth, high gross margins, high efficiency, things like that, real differentiation. In this clip we've talked about all those things, or in this curation, we've talked about all those things. I think a great place to end, though, is with Ben Wright. And this was a really popular podcast that we did not long ago. And I think the title of the podcast was bootstrapping to 100 million in revenue. And that's what Ben did, and he bootstrapped it. There wasn't until this last sale to private equity, there was never any real capital raised outside of maybe some friends and family or early stage angel or something.
The reason that we want to end on that is because if you're a founder, you've got to step back, take stock of if venture capital really works for you, does your business fit the profile? And more importantly, does it fit the life you want to lead? Because it's not for everybody. Ben talks about exactly that in this clip about really what bootstrapping has meant for himself and for the people within velocity global, which has turned into a huge global leader in talent management, stunning success. And he did it without raising venture capital. So really take a step back and think of that. And I think this is a great place to end this curation.
I get the siren song of having a bunch of cash in the account, but I don't think this is the right use case for it. And we're talking about different businesses. But there also were a lot of parallels, and I looked at the business that I was thinking of starting and know I think there's enough parallels here where I'm going to try for a while to see if I can do this without taking on outside capital.
Thanks for joining to another curation. Great. Thanks for having a vc here, Greg. He's always here, but now we got to interview him about the stuff he does every day. We'll catch you next time on the Founders journey podcast.