Jeff Standridge:
Hey guys, welcome to another episode of the Innovation Junkies Podcast. I’m Jeff Standridge.
Jeff Amerine:
Hey, Jeff Amerine here. How are you, Jeff?
Jeff Standridge:
Man, I’m great. I’m great. Hey, last last episode, we talked about financing your business for growth. We talked about debt financing. We talked about equity financing. We talked about the different types of equity financing. And what I’d like to talk about today, and we talked about some deal structures and what have you. What I’d like to talk about today is maybe some consideration. So the last time was more of the financial technical conversation.
Now let’s have the business conversation about financing your business and whether it’s debt financing or capital equity financing or what have you. What do you think about that? All right. So I’m a business owner. I’ve been in my business for several years. We’re a growing company, but we’re just having a difficult time growing at the rate because we can’t hire ahead of the curve.
Jeff Amerine:
That sounds good.
Jeff Standridge:
We’ve been bootstrapping our business from this point forward. You know, what are some signals as I, as a founder, need to think about to help me consider this concept of raising capital?
Jeff Amerine:
Well, I think, I think some of the signals are if you feel like you’re going to miss out on a growth opportunity, if you don’t, you know, if you’ve been kind of stable, your, your, your, your top line is flat. You can’t, you can’t necessarily get the people or the capital equipment you need in order to be able to grow. There’s technology purchases you need to make. The market is moving quicker than you can move to keep up with it. I mean, all those things are signals and considerations that would potentially lead you to believe we got to do something with capital, whether it’s debt or equity, we need capital in order to be able to continue to be successful.
Jeff Standridge:
Yep. Yeah. Another one. And you said, I think you mentioned this kind of roundabout, but I’m going to home in on it. Going to miss an opportunity. You know, there could be a fragmented market and there are two or three, potential acquisitions out there on the, on the horizon that if you could orchestrate a roll-up and you become the surviving entity of that roll-up, it could be a situation where the sum of the parts is much greater than the whole.
Jeff Amerine:
Exactly. And in most industry segments at some point or another, we’ll go through consolidation. A lot of times, almost in any kind of business, it’ll be fairly fragmented. And in order to get to the kind of scale and offer the kind of service, get to the size you want to get to, ROBLOX can be a very appropriate way to do that, for sure.
Jeff Standridge:
Yeah. Yeah. And so then we have to start thinking about, okay, what kind of capital are we going to raise? And we talked about, we talked about some of those, concepts in the last episode, but, you know, let’s think, let’s think about actually looking for investors and some of your experiences there in what do you look for when you’re, when you’re actually beginning to source potential investors for your ramp?
Jeff Amerine:
Yeah. So, so let’s just, we’ll take the instance where you’re going to go after equity, whether it’s, angel investors or whether it’s a venture firm, you want there to be a cultural alignment. You want there to be an alignment of interest. So I think you want to look for groups that are going to be a creative or additive. They’re going to build the bit. They’re going to bring strategic value to the business beyond just writing the check. And they’re going to be people that you’re going to want to have engaged in all likelihood on a board or either as board observers or board members. If you’re raising a fair amount of capital, they’re likely going to want a board seat. And so that cultural alignment, that work potential future working relationship, you want to be really good and you got to look for that. You really want them to know something about the industry segment you’re in as well. So they can add strategic value.
Jeff Standridge:
For sure. Yeah. You know, and, and as we mentioned last, last episode, we, we managed Cadran capital partners, you and I and Brett do, and, and, and we see a lot of deals and we tend to stay away from those deals that we don’t think that we can bring something other than a check. you know, and so, yeah, we’re going to bring a check, but we also feel like, that we can help them either through our expertise or the expertise of our limited partner Cadre, so to speak or we can help them with introductions to potential enterprise clients, enterprise partners, either through the network of the three of us as general partners or through the network of our limited partners as well.
Jeff Amerine:
Yeah, we’ve grown into the Warren Buffett rule. If we don’t understand the business, we don’t think we can add value. We’re probably not going to invest in it. And I think that’s, that’s kind of a smart play on both sides. You really want to make sure you put your money into things where you can help influence the outcome in a positive way.
Jeff Standridge:
For sure. And so let’s talk about the pitch, right? What’s the best way for an entrepreneur or a business leader who’s looking to go start raising capital? What’s the best way to put together their pitch? Where do they, you know, how do they go about that?
Jeff Amerine:
Yeah. And so this is a, it’s actually a number of different deliverables, if you will. You got to be pretty good at that 30-second, 60-second, two minute elevator pitch. Cause you never know when you’re in a capital raise mode, when you might find a key person from a firm or an angel and you want to be able to pitch them on the business, but they don’t have 30 minutes or an hour. You got to be able to capture their interest pretty quickly.
And so having a well-refined elevator pitch that gets right to the point of why they should care, why it matters, why it’s a good market opportunity, why you’re the team that can win in just a few minutes. And then the, and then the call to action of, Hey, if you’d like to find out more, let’s set up a meeting. I think you’ve got to have that down pretty well. It’s super helpful if you do. And then beyond that, you need the 10 to 20 slides, a PowerPoint, Canva, Google slide deck that takes the story from start to finish, talks about the key aspects of the problem you’re solving, the solution, the market opportunity, the financial possibilities, the ask, all that needs to be in there. You’ve got to be ready with that. Most private equity ventures, angel investors are not looking for a 50-page business plan that they really don’t want to read and don’t read. They’re looking for a really slick executive summary and a good deck. You need to also have a really nice financial model as part of that. But in terms of the presentation, that’s what you got to be ready for. The elevator pitch and then the extended presentation. Beyond that is they get into Q &A and a lot of times these things are one in Q &A that shows the depth of your understanding of your business and of the market. Having a really well-organized appendix, sometimes with a hyperlink slide that leads to all the frequently asked questions will make that Q &A go really smoothly. So you’ve got this sort of box of parts on your presentation that you can mix and match depending upon the kind of investor you’re talking to. And then you practice it a lot. You practice it to the extent that it doesn’t feel scripted. It’s one or two key messages per slide. And it’s conversational in a way that you exude the fact that you really know what the heck you’re talking about.
Jeff Standridge:
Yeah. So Guy Kawasaki has the, well, I believe it’s called “the only 10 slides you’ll ever need” pitch deck. You can probably Google that and find him, but his 10, 20, 30 rule says 10 slides, 20 prepare or plan for 20 minutes, and a 30-point font, right? No, no smaller than a 30-point font. When I teach my entrepreneurial finance class, I have a, this says Jeff Standridge adaptation of the Guy Kawasaki 10, 20, 30 rule is 12 slides, 20 minutes and be reasonable on font size and use as many graphs and charts as possible. You know.
Jeff Amerine:
Yeah, that’s why I always say be visual and a lot of times I’ll tell them it’ll be rare when you get 20 minutes. You might get eight or 10 minutes for the actual choreography of the pitch and the rest of the time it will be with Q &A.
Jeff Standridge:
You know, that’s right. That’s right. And, and so I have some things here that I want to run through and just comment on them and have you, have you add color when I, when I’m teaching an entrepreneur or talking to an entrepreneur about pitching, potentially pitching to an investor. Number one, are you ready to raise capital? Are you investable? And do you have the street cred to be able to go sit in front of a very savvy investor? And that’s kind of part and parcel to question number, question number one, are you, are you ready? Right.
The second one is, does your funding strategy match your operating strategy? In other words, can you articulate how you’re going to use those funds and does the fundraising strategy actually match that strategy that you have for growing your business?
Jeff Amerine:
And Jeff, a key point there is it’s good to have a functional use of proceeds. In other words, how you’re going to functionally divide that money up. But most investors are really interested in what are the big milestones you’re going to achieve. What are those three or four really important things that are going to add value and reduce risk that you’re going to achieve with that money?
Jeff Standridge:
What am I buying with my investment in terms of outcome? Yep. What kind of capital is best suited for you at this particular time? So that’s deal structures at equities, at debt, convertible notes, safe or what have you. What are the strings that go along with this investment? In other words, the terms, right? What are your investors going to expect? And you said this a few moments ago. If you’re going to do a recap of the company, they’re probably going to expect a board seat or two, right? They’re going to accept, they’re going to probably expect controlling interest at that level. They may, you know, expect, you know, if it’s not controlling interest, some kind of a preferred position for liquidation.
Who is the best partner for you? And so this would be just like seeking your ideal client profile. Who is your ideal investor profile? What do they look like? Investors that have invested in companies like yours. Maybe you’ve generated a list of potential prospects. You’ve researched their portfolios. You’ve called some of those portfolio companies. And you’ve, you’ve narrowed that list down to a group of folks that not only invest in your industry, but look and feel like someone who are culturally, culturally aligned with your organization as well.
If it’s debt servicing, can you service the debt with your cash flow and, and what’s going to be the implications of taking on that debt? If it’s not a convertible note where you actually have principal and interest payments, what’s that going to do to your cash flow? And does it actually help you or does it hurt you?
Ideally, you know, if you’re, if you’re using debt, then, then there’s, there’s going to be a payback calculation, beyond just an ROI analysis, some kind of a payback calculation. And either you’re using that debt to purchase a new piece of equipment, equipment that will help you grow or that will help you reduce existing manpower or expense or what have you. And then what’s, what’s the exit strategy? You know, particularly in the VC space, we make our money on the exit as a, as a venture investor.
And if the entrepreneur or the founder hasn’t thought about how we’re going to make money, that’s concerning to me as an investor. I want to know that they’ve thought about not just how they’re going to get my investment out of my pocket into their pocket, but how are they going to, have they thought about how I’m going to make money in the process?
Jeff Amerine:
That’s that alignment of interest, you know, that alignment of interest, you know, it’s, you’ll hear that mismatch sometimes where somebody will get in front of a group of traditional kind of venture equity investors and they’ll be like, well, we’ll give you a payback of, you know, a 20% return after two years or whatever. And a lot of times the venture investors are like, I think in VC math, I’m looking for 10 times my return in maybe five to 12 years. I’m not a lender. I’m looking for a big pop and if it’s not a possibility of that, it’s probably not a fit.
Jeff Standridge:
Let’s talk a little bit about some of the, things we’ve observed that caused us to go, Hmm. With some, some of the pitches we’ve seen.
One I will throw out there and then give you a shot is it’s, if, if you are the technical founder of the organization, you may or may not be the right person to pitch your deal to a group of investors. You may, there may be someone else on your team or you need to bring someone else on your team who can not only pitch investors, but can go toe to toe with them in the Q and A.
Jeff Amerine:
Yeah, I would agree with that. I mean, it’s a rare bird that can do both. And in the converse of that, the other side of that is if you’re building a technology business and you don’t have a technical co-founder, that’s a knockout, right? You’re probably not going to raise any investment because nobody’s going to invest in a technology-based firm that doesn’t have technologists in the firm building it ultimately.
Jeff Standridge:
The second thing that I would say is a pitch deck gets reviewed for potential update in prior to every pitch. And what I mean by that is, you know, it’s, it’s difficult to raise money in an operating company because you’re trying to chase investors and customers at the same time. And invariably you will lose a little bit of focus on both.
And so it’s not likely you’re going to pitch three times, get all the funding you need in a three-week period. It’s going to take four, six, nine months or what have you. And if your pro forma was created in month one and you get to month seven of your raise as an investor, I’m going to ask you, where are you against the pro forma? And if you are behind, I’m going to ask why you didn’t update your deck, right?
Jeff Amerine:
Right. We’ve seen that. We’ve seen that more than a few times. Right. It’s like, where are you on that forecast? It’s like, well, hell, we’re not, we’re probably not going to make that we’re behind. It took longer to raise the money. You know, it goes back to a mentor I had many years ago when we, when I was doing a capital raise, when I was a young entrepreneur said, and it was a similar type of question. He said, if I don’t have confidence that you can get the small things, right. How am I supposed to have confidence you’re going to get the big things right? And those sorts of attention-to-detail items end up being red flags as they accumulate, for sure.
Jeff Standridge:
That’s right. Credibility. It is all about credibility. Every interaction you have with a potential investor, there’s never a status quo situation in your credibility. You either built it a little bit or you’ve eroded it a little bit. And another example, one is by having outdated financials in your deck. Another one is once you do the pitch and we say, okay, we want to go to due diligence, here’s our list of due diligence items that we need. Put them on a Google Drive, put them on a secure Dropbox folder or something and get those to us. If it takes them 14 days, they weren’t ready to raise money, right?
Jeff Amerine:
Yeah. They got to have that data room together. I mean, that’s kind of a table-stakes item. If you’re out there raising, have the data room together, have all the stuff handy that you know you’re going to get asked.
Jeff Standridge:
Because if it takes me 14 days and multiple emails to get you to populate everything that was on the list that we asked you for in the first place, I’m probably not going to take the next steps of spending much time with your data room.
Jeff Amerine:
And it’s, it’s, it’s a related issue and it all gets to integrity and truthfulness and responsiveness, but a related issue is no progressive disclosure. What I mean by that is if there’s some material fact that wasn’t that you knew as the founder and the business owner that you didn’t disclose, we’re kind of like CSI Investigator. We’re going to find out one way or another. And if we find out late into the process that the representations you made were not exactly right, or there’s some material fact that you withheld that’s going to be a knockout. We’ve had instances where we got into something with somebody, everybody looked good. We got down the road a little bit and then lo and behold, they had a cease and desist letter on against some of their intellectual property. Well, that kills the deal at that point. That erodes all possibility of trust.
Jeff Standridge:
Yeah. Immediately.
Or better yet, I have gotten down to the last slide of a pitch deck, and my picture in name was on it as a member of their board of advisors. And, and actually, and one, and, and that was, that was separate than the one we had recently where I was listed on their website as a board of directors member, which is a fiduciary. Right. I had on the one where they had me listed as a board of advisors, I had met with them a time or two, but nowhere had we formalized a relationship such that I was a member of their board of advisors, but they had no problems characterizing me that way. And I think they just forgot that they were getting ready to pitch to a group that I was in. And I’m sure you’ve had the same thing happen, right?
Jeff Amerine:
Yeah. Well, yeah, it’s, it’s another one of those things where there was this sort of really poisonous mythology that came out of Silicon Valley. A fake it before you make it. And that is disastrous. That is, I mean, that is not something you should ever do. And that means you don’t put advisors on there that are not really advisors. You don’t make representations that are not truthful. It’s just, it’s no kind of way to run a business. Just be candid.
Jeff Standridge:
Well, candid and honest. I mean, there, we also, a lot of times we’ll have investors who overstate relationships or name drop and overstate things. And here, here in Arkansas, particularly, but even in the, in the venture world, it’s a, it’s a pretty small, it’s a pretty small world. And if someone says that, yeah, they overstate and drop someone’s name, we’re probably, if we don’t have direct connections to them between the three of us, we probably have a secondary connection to them. We’ll go ask them, right? And it doesn’t bode well when we find out that it was overstated.
Jeff Amerine:
Yeah, it was overstated. That’s right. So no puffery. Puffery is a walkout. That’s for sure.
Jeff Standridge:
What are some other things that you’ve observed that leads to some advice you would give?
Jeff Amerine:
I mean, I think those are kind of the material thing. Being ready with a robust financial model that you understand. If you’re a technical founder and you’re not immensely financial, you’re going to have to learn it, right? Or you’re going to have to have somebody on the team that understands the assumptions that drive revenues and costs. Somebody’s got to be conversant in that area. It’s good to have a scenario where you’ve run sensitivity analysis, best case, worst case, realistic case.
And that way we can, we’re going to do our own assessment. We’re going to be able to look at that and say, is this really realistic? I think it’s important also to have kind of an encyclopedic knowledge of your positioning within the market. You need to know your customers and your business. You also need to understand some of what the competition is doing so that we can understand there’s a possibility for you to create a mode around what you’re doing or to win on, you know, on service or on excellence in serving the customer or whatever the case may be.
Jeff Standridge:
Yeah, for sure. For sure. Today we’re talking about raising capital and considerations in raising capital for your business. Previous episode, if you’re just joining us now, the previous episode was on financing your business for growth. So we encourage you to take a listen to that episode as well. Jeff, anything else you would leave with as a parting shot?
Jeff Amerine:
Raising capital is hard, it takes a long time, but it’s worth it if you get the right partners and if you’re prepared.
Jeff Standridge:
For sure, for sure. Appreciate you guys for joining us. This has been another episode of the Innovation Junkies Podcast. Take care.
Jeff Amerine:
See you next time.