Project Wilbur Podcast Episode 1: Investor Mistakes

Title: Startup Mistakes with Investors

Description: Brian and John recount the many incidents where startups absolutely fumbled the bag with investors.

Show notes:

In today’s episode, Brian and John dive into the critical aspects of startup fundraising with insights on due diligence, legal compliance and investor relations. Learn from cautionary tales like We Work and Theranos to strike the right balance between optimism and realism in your financial storytelling. Discover the legal intricacies of working with finders and brokers and how to maintain a transparent and clean cap table. Gain strategies for building strong investor relationships, leveraging networks, and managing investor updates to support your startup’s growth.

This episode serves as a masterclass for startup founders on how to ethically and effectively raise capital. As we sail through the complexities of startup funding, the advice shared here can serve as a compass, leading to a prosperous and harmonious investment ecosystem. Remember, honesty is not just about the best policy, it’s the cornerstone of your startup’s future success.

In this episode, you will learn the following :

The importance of transparency and honesty in due diligence and risk mitigation.

Navigating the legal landscape surrounding finders, broker-dealers and investment bankers.

Building robust and transparent investor relationships for sustained growth.

Utilizing investor updates as a trust-building and engagement tool.

The “butterfly model” of investment ecosystem harmony and addressing potential issues proactively.

Social media pages or website to promote:

Website: Project Wilbur

Instagram: instagram.com/projectwilbur

Youtube: Project Wilbur

Facebook: facebook.com/projectwilbur

LinkedIn: linkedin.com/company/projectwilbur

TRANSCRIPT

00:00:00 Brian: We'll talk today about some of the issues we've seen, whether it's through our past experiences or others, where working with brokers or independent intermediaries or the connecting parties led to something drastically wrong happening with an investor. I've seen it on a couple of instances through friends. I've never personally experienced it myself because I personally choose to just be upfront. I'd rather tell you what's wrong with everything first. So I think this might be a good place to start, right?

00:00:43 Brian: This conversation where when I'm going to raise money, I almost am trying to, as much as I'm pitching the investor and telling them, you know, the good about what we're doing, because let's face it, if you're doing something, you know, you gotta believe in it and it's gotta be fixing a problem, but I'm almost even trying to talk them out of it. I will let them know every last detail on the issues we're facing to avoid that. We put everything in front of them so that way they can make the best decision.

00:01:15 Brian: And in the end, if they're going to choose us, they're going to choose us whether there's these massive hurdles or roadblocks or not. We either solve them together and they are solvable, or if they're not, then you don't have a business and you should just stop right there and pivot. So has there been any instances where you've seen someone that has been in a meeting and they're just going and they're actively telling stories and kind of–

00:01:49 John: Like flat out lying.

00:01:50 Brian: Let's just call it what it is. Right. They are flat out lying about what they're doing. Maybe they're inflating their numbers. You know, and how did that end up?

00:01:59 John: So every startup that's fundraising wants to paint a flowery story, right? It's always, they choose a metric that might not even be monetizable, but it's something that's increased, hopefully at a double digit, month over month, right? And sometimes quarterly, right? So in those scenarios, as someone that's, you know, that it deals and whatnot, it's always questionable. And that's why you have, due diligence is, to go through all of that. But I mean, realistically, they're all foolish. I mean, you look at.

00:02:37 Brian: Well, let me ask this. Let me interrupt you there, man. Because, you know, there’s, some pretty famous burnouts recently, right? There was WeWork. There was Theranos. How does somebody like Theranos get away with the outright, just blatant lies, right? And raise hundreds of millions of dollars for years. And then.

00:02:58 John: Yeah. So I mean, like I'm not an expert at Theranos, but I mean, I can tell you most likely what happened. When you're putting together data, it's not hard to tweak financials to meet the requirements that an investor or whatever KPI you set for yourself to attain. Right. I remember once, I was pitching somebody, there's an import export company, a billion dollar company. And we were working out a entrepreneurship model within their company that they would launch and then we would build for them. And we put together a spreadsheet.

00:03:38 John: Now the spreadsheet didn't accommodate for sales cycles, didn't accommodate for attrition, didn't accommodate for tariffs going up or down. Like there was a bunch of stuff it didn't accommodate for. It was just a broad general model, but it got up into the hundreds of millions like within two years. I always put a disclosure, this does not accommodate for these things, right? But not everybody does that, right? Then you have this hockey stick that is, you know, up into the right and you want them to be, and it's like this crazy steep curve.

00:04:13 John: Now, honestly, if the numbers were coming in for the first two quarters like that, you can extrapolate from that data and say, this is what it's going to be. And what the CEO of that company said to me, which I'll never forget. It was the best. He goes, I get all this, John, but you know, we can all do mental masturbation with spreadsheets all day long. What exactly do you think this will do?

00:04:37 John: So then I pulled up my other spreadsheet that had all of my guesstimations on those extrapolations. And he was like, all right, so this makes more sense. And I'm like, I know that's why I told you, this is what the map does. And this is what the map does with all of the different components. With fundraising in general, it's about mitigating risk and pitching that story, problem solution team, that whole thing, I say that all the time. The thing with Theranos, I would imagine, is they had a huge sprint on tech and then they had a huge sprint on the FOMO.

00:05:14 John: They had a FOMO curve where they kept doing these, they did very smart fundraising, which if I remember everything correctly, they would do these sprints. So every two months, they would go and fundraise a huge clip. And they would increase the valuation 10, 20, 30 million each time. Cause I saw the pitch deck like twice. I passed each time to still know anything about the space. But when you're looking at each one of those sprints, when they're raising every two to four months, sometimes it's FOMO and they've got some great KPIs. And sometimes it's because they finagled their numbers and they got a firm to sign off on that, right?

00:05:51 John: But the firm can only sign off on what they know. So they've only been given X number of data. They didn't do a full audit. Like this company wasn't going public, right? So like in those scenarios, it's only as clear as whatever the auditor has been given.

00:06:05 Brian: So I know with them, there was a bunch of the big players in the Bay Area that ended up passing on it, where they would ask for this specific data. And what they were doing back then was they would test, right? It was the blood testing kit that, you know, a single drop of blood can test and diagnose a wide range of health and medical treatments and then, you know, get your proper prescription. They had this whole system worked out, but what they found in the end and why they ended up getting busted was they found that all of their data was being fabricated, that they were actually using third-party testing materials, the test strips, or however they were testing it was not even their own product.

00:06:56 Brian: The product that they made and developed, those test numbers were trash. It was not working. And so they just used other people's gear and equipment to get their data and pass it off as their own. And so some of the investors were asking to see the data, which there was all kinds of red flags. The CEO there, she was holding back all the information from, she compartmentalized each different channel of the business. So that way only they only knew what they were working on and not everybody else. And she was the only one that had the whole picture type of a scenario.

00:07:36 Brian: And my question goes back to your point about due diligence, right? Where, you know, while a lot of the big players passed, there was, still a lot of big players that said yes, and maybe it was the FOMO. Maybe it wasn't. And these are people that have their internal in-house teams doing their diligence. Some of them sure have brokers involved. You know, I'm sure a lot of people lost their licenses and ended up in jail over this thing, you know, so for, for in the lane where we play, right. We, you know, was, let's call it, you know, 250,000 to 200 million, you know, type of a range, whether it's project financing or startups, you know, depending on where you're at and what you're trying to do, how do we help prevent that in our diligence?

00:08:26 John: So a couple of things. First, I would say we don't recommend that this should be invested in. We provide, Hey, this is interesting. So typical investor relations, if it's done correctly, it should be, this is exciting. You should check it out. We're not brokers, right? So, I mean, it comes down to, in these scenarios where you have a couple of bad actors, which can lead to bigger problems. So for us, let me answer your question. There's like three parts. So first part, with diligence, you're only able to dive into all of the information that's provided. Now you could put a disclaimer in like, hey, is this everything that you provided? If you haven't, we like to put a clawback clause into the investment docs, right?

00:09:17 John: Like if you withheld information that would be, like important to discovery, because you felt that it wasn't important or relevant, but it's somebody with like a, you know, a safe document for like a $2 million valuation and they put in a million dollars, right? Let's say you didn't disclose that. That dude owns 50% of the business, right? When it converts so, like, these things need to be disclosed. Because that's a dilution event that would be very impactful to all of the current investors. Starting investors often forget to ask for certain things. And then, also founders think that, well, I don't talk to that guy anymore, so his investment doesn't really count. That happens all the time.

00:10:01 John: So you want to have someone that knows how to do that. Now, we're talking due diligence. So we know how to ask all the right questions because we've been through it. You've done a bunch of startups. I've done a bunch of startups. John's been on a, John, our other partner's been on a bunch of startups. Abraham's been on a bunch of startups. So we all know, like all the different questions to ask. When you go through that whole diligence process, it's, you know, a bit of a painful experience. It could take time, but at the same time, if you've been keeping track of everything, even if it's just a simple document tracker, like just a Google folder on Google drive, like that could be good enough, right?

00:10:38 John: They're all your contracts in one place. That's what we do for us internally. Like we do that. Not that we would ever sell because we're consulting, but like that, that's the thing. All right.

00:10:48 Brian: And it makes your data room a lot easier at that point too, right? You're not spending, you know, $25,000 to have somebody come make your data room. You've got the base of it already.

00:10:58 John: Right. So that's on the diligence side, right? So with finders, broker dealers, investment bakers, et cetera. It's really good to make sure that they're compliant. So there are examples of this where it's really not legal for a finder to take a percentage of the rents. So on a company that's doing well, nobody cares. It doesn't go to court. However, when a company starts doing well and then craps the bed and collapses, then everybody starts looking at who to blame.

00:11:37 Brian: Well, it's like any law, right? No laws ever made until somebody dies, unfortunately. And then they make a lot to prevent that from happening in the future.

00:11:45 John: That's right. So, I mean, combination of laws, licenses, 1933 Securities Exchange Act, the Series 7, I think it's 2463, like a bunch of different licenses from the SEC. They're all meant to mitigate that risk. Right. So there's like basically a couple of buckets, right? It's kind of like real estate. You can't get a percentage of the sale unless you're licensed to do so. Now with us, we do investor relations, right? So we help facilitate meetings. We give people data. We inform them of what's going on. And then those investors can make their own decision or talk to the CEO themselves and get a sale that way.

00:12:30 John: But I think it's good to go back just to, how to get a percentage of a raise, right? So there's really like three ways, right? One, there could be a scout. So a scout for any investment group will get a cut, right? So they'll get like, you know, maybe a flat fee of like 20, 40, 50K for bringing an opportunity to a venture capitalist, right? I've done that, it's a thing. It is definitely worth talking to those scouts, right? Cause they, some of them, it's their full-time job, most of them it's not. It's a side hustle and they do it and they get, you know, maybe a hundred K a year out of it, which is great. So that's one. And that's the non-licensed path.

00:13:11 John: There is, as a startup, you can hire someone as a W-2 and pay them a percentage of rates without having any licensing issues, cannot have them as a 1099, so that's the other way. And then the third way is, hire them as an investment banker. So, or hire an investment banker or broker dealer and they can take a percentage because they have a series of stuff. That's pretty much it. So anybody getting a percentage has to fall into those three buckets.

00:13:38 Brian: So as the business, is there a better path to take? Whether it… are you able to cut corners if you use the finders or the scouts? Or is it better for a business? Let me ask this question. What stage of the business is it best to go with a full on BD, the broker dealer.

00:14:05 John: I would say, I mean it varies, right? So there are broker dealers that focus on business raises for like, you know, five million and up, and they will gladly take a deal that's that small, right? Most of them, because it's like two to 5%, but usually they won't take anything under 10 million. And most of them like to take stuff that's 20, 30, 40, 50 million. I know, right? But I would say the minimum to talk to any investment banker where they would even consider it would be five, which means that you're talking seed stage or later and only big seeds. This is like you've got IP, you've got a million ARR, you have, like levels of traction that would validate or justify all this trouble, justify an investment of that size. And with the investment conditions as they have been in 2024 and 2023, I would say that that would be, huge seed [wrap].

00:15:05 Brian: Yeah, huge. Even some of the banks that, you know, I speak with frequently, those, the bare minimum, the low, the smallest thing they will look at is that 20 million, if you're raising 20 million, they'll start to look at it. But even then, they don't really want to touch it. You know, 50 million and above. Now you're talking, you need that, the banker that comes in to really put it together, whether you're going debt and equity, all equity, all debt, let them structure it the way that it needs to be done. I think the 10 million, 15 million, even 20 million range is not necessarily an investment banker, but more of the broker dealer to your point.

00:15:54 Brian: Independent guy, maybe it's a smaller boutique, a firm that can get this size of a deal done as opposed to the larger wealth managers and asset managers of the world. But I come across some times where you see the startups and they're talking about getting their legal team involved and all this stuff. And I kind of just smile and nod my head, but I haven't seen many startups that are raising $250,000 that can afford a full legal team. Typically it's their uncle or their cousin who has some knowledge on how to read a contract.

00:16:38 John: And just to build off of what you just said, there's a bunch of websites out there. Y Combinator has downloadable safe documents pre and post money. Actually, I think they only do the post money now. They have… there's operating agreements, convertible notes. There's a hundred different things that you can just download that are out there as, like boilerplate template documents, which is awesome. The thing that's most important, though, is pre-seed, seed, friends and family round, all of that, they shouldn't be comprehensive like a priced round security exchange document with a 409A, et cetera.

00:17:16 John: What you should be doing is raising either a safe document or a convertible note. Basically, it's a debt document that converts to equity usually within two years or certain milestones. And that's how you should raise. Now, the thing with those is that that priced rounds are very regulated because you're buying a thing, right? Loans are less regulated, but still regulated. And when you're doing a convertible note, or bridge round, or safe document, or safe round, or I don't even know what other terms you're using, but those are like the main ones. If you take money from or finder is not like, if you're using, if you fail to disclose an unlicensed broker as a finder, right, the investors can actually get their money back.

00:18:08 Brian: Yeah, and so this is, you know, one of the things that I wanted to talk about today. So you know, we help a lot of the pre-seed, seed round in that middle ground in between seed and series A right. What are some of the best practices to help that stage of a company avoid those pitfalls, right? Are there things they shouldn't say? Are there things they need to say? What needs to be given to the investor and what shouldn't be given to the investor to prevent the investor later down the line coming back saying, you guys violated this, you lied to me, and now you're in legal trouble.

00:18:48 John: So if you're not using a broker dealer that is licensed, right, you should make sure that like, your agreement doesn't have a percentage of rates. That's number one and most important. So there's Reg D fundraising, there's Reg CF, there's Reg A+, and each one has a different set of requirements. Nevada has its own certified investor called NCI, Nevada Certified Investor, which is like a hybrid where you can invest in a business in Nevada. If you're a Nevada resident, if you're making 100k or more, and/or if you own a business that makes 200k or more profit. Like these are–

00:19:29 Brian: Which side note, if you didn't know about that and you want to learn more, reach out to us. We got you.

00:19:34 John: There's actually a blog on our site kind of going through that. But like the baseline is, if you fundraise and you have a finder and the finder wasn't disclosed, a really common sanction to the SEC against issuers utilizing unregistered finders is to bar the issuer from conducting Reg D fundraising. So if you were to raise a pre-seed or seed round from someone that's not accredited and that person was defined as a unlicensed finder who brought you that person and they've got a percentage, you might have to give that money back before you can actually do a Reg D fundraise, which is usually series A or later.

00:20:17 Brian: Yeah. Now, does that affect the friends and family round? Say I go and, you know, we have company A, they call their brother and say, hey, this is what I'm doing. The brother says, I love you, bro. I'm all in. Mortgages their house, drops 100K on them.

00:20:35 John: So in that scenario, that would be fine, because it's friends and family, unless the friends and family was… there was a percentage paid to somebody.

00:20:45 Brian: Percentage paid, not a finder's fee, a flat fee, but it's the percentage?

00:20:50 John: Depends. Right. So the way that it's structured, like if you're saying, Hey, I get 10% of whatever you raise. Yeah, that's no good. If you say, Hey, out of every 100K, I get 10,000. It's, more gray area, but still probably not good. It's still 10%. Right. So like, it's just better like on a friends and family round to like, stay as true as possible because giving all that money back, like you would have to, let's say you raise 300K to get your company started. And you hired a finder, you made 5% of every 100,000.

00:21:27 John: So again, I'm just doing a whole scenario, right? So that would be 15k to that person. And you go to raise your next round, but you've killed it, right? So now you're raising a $5 million Series A, because you're like, killing it. You're just amazing. Right? So the first thing that would happen is your lead investor most likely would buy out all the previous investors. Now this happens normally in general, because people want to buy out. They want exits.

00:21:51 Brian: Yeah.

00:21:51 John: Right. Some people, like they go through divorce. They, their car going to crash, their house burning down, like whatever the reason the previous investors might need some cash. Right. So that is a normal happenstance, but there's also this, like toxic investment where there's just this issue, where someone has invested and you will not be able to raise without them being bought out, right? So now you've gone through this scenario. This person might want to stay in, that wants to be there, but the VC sees that you have this weird debt scenario. And you have to, and they always ask for the cap table, by the way. So you always have to have that ready.

00:22:28 Brian: Yeah.

00:22:30 John: But like that, that can tank your entire round. So just like–

00:22:34 Brian: I’ve seen like a couple of times as well, right? We go, there and they asked to look at the cap table and it's a nightmare. And then the questions rise. And the other thing you see too is where the, “advisors are plastered all over the cap table,” you know, 5% here, 8% there, before you know it, there's, you know, 25% of your company that's owned by advisors, and the VCs or any investor comes along and sees them and says, well, how much did they put in? They say, oh, they're an advisor. Well, how much did they put in? They gave us their time and they helped advise us. Don't do that. Don't give advisors…

00:23:17 Brian: If you're going to give an advisor any equity, make sure that they are at least contributing a small amount of capital or that it vests a very small amount. We're talking basis points, not full percentages, right? Give them 0.25% of something that vests over the next two years just to give you their time and advice because there's plenty of people out there that can pick up a phone and make connections and tell you what you should do with your business. You don't have to give away your company for that.

00:23:49 John: Right. So like just to build off of what you just said, and this is pretty important. When you have an advisor, you shouldn't just give them the shares. Number one, it's a taxable event, right? So most advisors don't really realize that because they're going through that whole process with, sometimes for the first time, so they don't know the questions to ask. So what is really important is when you go through that advisor conversation, one, make sure it's someone that adds value, right? Make sure that they're advising, they're coming in, their shares are options, maybe founders level options, but they have to buy them. Right. And that's point number one, right? Don't just give them shares, give them options, that ESOP program, that like, maybe you haven't put together, but you could say this is the price. Cause as founders, you should have bought your own shares also. So that's number one.

00:24:44 John: Number two, probably most importantly, when you guys go through this fundraising journey and you have an advisor and you put them all over your deck, they have to add value. So business strategy, expert in your space, knows how to do one of the major verticals that you're weak in. You don't want six advisors that are expert in sales in the B2B space and you're launching a B2B SaaS company. That's a fail. If you're not an expert in something, you need to find an advisor that is or a co-founder that is. The goal here is to find people to complement. Brian's totally right. If you're doing a company and you're fundraising and you give somebody 5%, you only have 100 points. Giving an advisor 5% is crazy.

00:25:34 John: I advise seven companies right now. I've invested in a few of them. Others I have options. That is basically me investing if I want to exercise them. But I have anywhere from, I think I have 35 basis points on the low end and 2.5% on the high end. And I actually won't take more than 2.5%.

00:25:56 Brian: Because you're being responsible. It's, right? It's the right thing to do, right? I've seen it wreck too many rounds, so I refuse to do it. And to your point, I'm in with two companies right now. If you have a company and you think it's worthwhile, I am looking for more, so reach out. But always looking for the good ones. That's my daily life, right? But… So let's get back to the topic that we were talking about. You as the company don't wanna screw up your future. You don't wanna have to give money back. You don't wanna face lawsuits, right? There are certain things that you should not say. We've covered some of the finders versus the brokers versus an investment relations firm, like what we do and the benefit to that, right?

00:26:47 Brian: Where the conduit, the amplifiers, we get your message out there, we connect you, put you in front of investors, help you behind the scenes to close whatever deals you want, but we're actually not there closing the deals or speaking on your behalf. That's one route to go. So as the founder that doesn't have hundreds of thousands of dollars to spend on brokers or the legal team or to go that full route. I mean, their business isn't ready yet. What do they need to avoid? Should they not be inflating numbers? The things that they should not be saying to investors and then how far do they go in telling their truths to investors? Not to be cliche. But putting lipstick on the pig is only good for so much, right? Before it's that legal line.

00:27:45 John: I was a co-founder of somebody once and we were going through an acquisition and we were being acquired. And I was like, we have to disclose these three things. And he's like, no, no, let's do that further down through diligence. Like, let's get them fully hooked first. And I said, dude–

00:28:03 Brian: The first hit's always free.

00:28:05 John: Yeah. Right. So like, I'm like, it's better just to be transparent right now. And tell them that we have a plan to overcome this issue that we have.

00:28:13 Brian: Yeah.

00:28:13 John: Right. Not like, hit them with a curveball, especially since we had three of them and hit them with a curveball, like a month into due diligence.

00:28:22 Brian: Oh, by the way, we forgot to mention, I don't think they're going to appreciate that. Tell them a friend and let them know what's going on. Get it out there.

00:28:31 John: Right. Right. So quite frankly, that happens all the time where one of the founders doesn't want to disclose everything. Right. They want to make sure that people are interested first. And I get that to a certain degree, like in the first week while you're dating, you're kind of figuring that out. But once you get in the due diligence, you should be like, look, here's the hair on the deal. Right. Because once they're hooked and they like it, sure. But like not a month later. Right. Like when they're, like halfway through. Because one, it gave me a bad taste on, mouth from my co-founder. Right. Then number two, like what you're doing is you're creating a bad reputation for yourself, right? Like silence is compliance. So if you're saying that, okay, that's a, that's an issue, right? Cause if you're not saying it and you knew about it and you're omitting it, like omission is bad. So yeah.

00:29:25 Brian: And on the opposite end, I had a, he was a politician turned businessman. I don't fully agree with his style of doing things. But one thing that really stood out to me and he absolutely stuck to this. If he says something in a phone conversation, and you do not refute that fact right there on the spot, and you go, the conversation and you hang up, you say your buys, then it becomes inserted as fact into your relationship. If there is something that is said, you have to address it. This is my personal belief in life in general. Right. And I use this in all relationships.

00:30:06 Brian: I have no problem speaking my mind. I will put the ball in your court. Then it's up to you to do with it what you will. I will give you all the information, all the facts. Like I wear my heart on my sleeve. You're going to get it for me. And then it's up to you, right. To take it from there. And I view business and capital raising the same way where, you know, 20, 30, 40 years ago, it was a little more cutthroat than it is now. Society has changed. People are a lot more tolerant of the issues. There's so much data out there. I don't know if there's situations that haven't been seen before. Things happen. People know that. It's, how do you address those things that have happened?

00:30:50 Brian: And that's one of the things I try to tell the founders that I work with is just show that you have the plan. Hey, you know what? We're going through this right now. Here's how we're addressing it. They're not gonna care. They care, because everything matters, but in the end of the day, they're not gonna care as long as we get through it together, right?

00:31:10 John: Well, and the other piece is, the more transparency a startup founder provides, the more likely they're going to instill trust in that investor, which means that that investor will then open their network to said startup, right? So one of the biggest problems I've found, now I've been a part of 10 different startups. I've helped fundraisers like nine of them, and I've been an executive team for all of them. And like the thing that I found is three of the startups actually utilize their investors, right? The rest of them kind of like we need new blood, right? And I agree, you always need new blood. Share the burden, right? The family office we work with, they are constantly the only investor. So we are always brought in to, like, help them find other investors.

00:31:58 John: The issue is, when you're not giving updates to your investors, you are doing a disservice not to them, kind of, but to yourself because you're going to hit props. They're an investor, so they have a skill set that led them to a point where they can't invest. Even if they inherited the money, they have not blundered and squandered away the money. You have a group of people that are successful, that go to a country club, that like are members of different organizations, most likely in fundraising and other philanthropy like activity, they are going to know, hey, these six people would probably be good fits for my company that I invested in.

00:32:44 Brian: And nobody wants to be the only one, right? It's pretty lonely. The number one is the most lonely thing. One is none, two is one, and three, now we're together.

00:32:55 John: Right. One of the companies I advise, he told me that was like a month ago, he mentioned to me like, why give updates to people that said no? And I said, well, you give updates to people that said no, because they're in the right space, maybe it's a no because you're too early. Maybe it's no because you don't have enough traction. Maybe it's no because you were a single co-founder, now you're not. Maybe you're looking to solve XYZ problem. But every time that you have a new piece of data, your value goes up, right? If you hit another KPI, your values gone up. And maybe they don't want to invest in a company that's at $10 million, but 20 is where they start looking. Maybe they only invest in a woman executive team.

00:33:34 John: So when you hire a female CEO or COO or whatever and add a woman to your team, now they're interested. Maybe they're focused on a double digit growth quarterly revenue space. When you have those things happening, what is really important is that you start looking at your... So there's two types of newsletters you send out. One for your current investors. And that usually has the ask for help. Right? Here's where I'm struggling and I need help. The other is, here's all the good stuff that's happening. There's other stuff, but you don't get to see that unless you're an investor. Right? And like all the proprietary stuff, contracts that are about to be signed, things like that go to the current investor. All the things that are on the horizon, closed revenue numbers, things that you're willing to disclose that wouldn't fall under NDA status, go to your prospective investors.

00:34:29 John: So when you have an ongoing newsletter that you're just sending out, like that's really important. That's investor relations, right? That's how you get more people to say yes when you raise your next round.

00:34:41 Brian: Yeah. Which is a lot different than, you know, the investor that you talk to that says, I don't like you. I don't trust you. Not for me. Right? There's… there are, just to throw a caveat out there, there are certain no’s where respect the no, don't reach out to them. Because you have to, some of the worst investments that I've seen has and we do this for both the business and the investor side, right. So as an investor, I don't come across a business and if I say no, just be there. It's not happening. I don't want them to try to keep closing me.

00:35:18 Brian: It's like the girl that you're trying to date or the guy that you're trying to date. If they are not into you and you have to go, close them into being into you, it's not gonna end well. I've seen it where there's a specific case where that happened, the investor was just total no, right? Right off the bat. They did not like the founding team. And this was a software play some years ago. They did not like the founding team.

00:35:44 Brian: And fast forward six months, they had worked not the original person that they had talked to at the firm, but it was a different person at the firm that they got connected with and started talking to, which caused friction at the firm. They ended up coming in a small amount, but it was the worst investment ever. Now all of a sudden they are writing, you as the business. They want the board seat. They want the world and to control what you're doing as the business because they don't trust you. They don't know why they're in this company at this point.

00:36:16 Brian: So it's that fine line, right? Where, and this is partly where we come in as the IR firm, we keep the notes, we keep your whole log and your database for you to show, hey, we talked to this person at this time, this is what they said, and we keep that record. And you as the founder, you should be keeping that record too, don't leave it all on somebody else, but understand each one of your investors, their wants, their needs. Treat them like they're a member of your family. So that way, if they're a real no, don't go back and try to close them into being a yes.

00:36:54 Brian: But the ones that are like, hey, I get this, this makes all the sense in the world, just not a good fit for us right now. For all the reasons that you said, maybe their fund was already spent and they're raising their second fund or their third fund or fourth fund or whatever the number is, and now they're ready to come in, keep those people on your list, absolutely.

00:37:16 John: Right. Yeah. The ones that like are like, no, dude, I don't get this space. I'm totally not going to invest.

00:37:23 Brian: Yeah.

00:37:24 John: Yeah, they're out. But even if they're out, right, your answer or your response to that question and any no’s or maybe's should be, okay, would you like me to keep you on my update list? I send out a monthly newsletter. And if the worst thing they're going to say is no, I just told you no.

00:37:43 Brian: Yeah.

00:37:45 John: Cool. Hey, just want to make sure. Wish you all the best. Move on.

00:37:48 Brian: Yeah.

00:37:48 John: Right. Like this is a numbers game. Right. You reach out to a hundred people, 10 people will take a meeting. Maybe, best case scenario. And then of those 10 people, maybe one will give you a term sheet. Right. Like, and that's, I'm just too, we're simple. It might be a thousand and it might be a hundred and it might be one. Right. It's not a consistent 10% open rate sort of scenario. This is actually, I'll break it down really simply. When you're reaching out, there's angel investors, there's high net worth individuals that are also angel investors, but part of a family office. And then there's venture capitalists. And there's angel funds.

00:38:28 John: Angel funds kind of have to deploy their capital, venture capitalists have to deploy their capital. Family offices do not have to deploy their capital, and high net worth individuals do not have to deploy their capital. So if you're doing a time crunch thing, VCs are the ones that have to deploy their capital. Angel networks like Sand Hill Angels and like all the other ones that are out there, their whole thing is apply and we'll get together and have a lunch and talk about your business or maybe having pitches. But it's more of, like, a networking group.

00:38:58 Brian: Yes.

00:38:58 John: Right. Where people have to, I think it–

00:39:01 Brian: You have to buy in usually like five grand or something and you have to commit to a certain amount of investment per quarter and the group together. You get the founders in front of the group and you pitch the room full of 50 people and all, some of them are mandated, all 50 have to agree. Some of them is three quarters and yeah, the whole.

00:39:21 John: And some of them have, like nominal fees, like 50 bucks, 200 bucks, maybe 500 bucks to pitch. And that's to, like, cover their costs. But it's also to weed out people that are like, hey, I wanna start a food truck. And like it's not a scalable venture business. It's a… My dad loaned me 50K to do this. And I'm going to go do this. Right.

00:39:44 Brian: So let me ask this question. You bring up a good point there. ‘Cause as the founder, I didn't have problems getting in front of people. We were with some of the biggest of the big, you know, venture groups, pitching them day in, day out. So when we did and, you know, come across some of these angel groups that you named by name and they asked us for money to go pitch them, I politely said, thank you, but no. You know, at what point is it worthwhile for a company to pay to pitch?

00:40:18 John: So I have strong opinions about paying to pitch. So I don't think you should ever have to pay, but I also have raised mainly from VCs and high net worth individuals. So like, that's different because I have a network. If you don't have a network, providing a well polished pitch deck, going through the motions, think of it like paying for your education. But I never would pay more than like three, 400 bucks. Right. And I would only pay that to like a group. Like I think Tech Coast, Tech Coast Angels is like a great group. I've pitched them, I think three different companies, never invested, but it was a good experience each time. Always full of like, I'd say between 30 and 50 actual investors, which is great.

00:41:03 John: Like, I mean, that's much better than most pitch groups. Right. And I think they were 300 bucks. And it was like, $50 or $100 for the application. And then to actually go through the full thing was like another 200, I think. Don't quote me, I don't remember. But it's like three, four years ago is the last time I did that. But the point I'm trying to make is I paid 300 bucks to go to a conference, right? So that makes sense. There's some out there that are between four and 10K.

00:41:38 Brian: Yeah.

00:41:38 John: Okay. I would vote no, but some of them actually do like, do get people to invest.

00:41:44 Brian: Yeah.

00:41:45 John: The groups of doctors, I'm not going to say the name of the entities, but their groups of doctors, they have to deploy at least 50K a year in some of these groups, at least two 25K investments. So it's kind of like a VC where they have to deploy capital, but it's a bench. It's a… not all of them, but some of them are like a franchise. So the person that's putting the group together is getting paid off of what you give them. So there's like four groups, they pay anywhere from like, you know, collectively, I'd say 20 to 50K to pitch. And I'd rather find the right investor by doing my research.

00:42:21 Brian: But those pitches also come with, you know, a cruise and a trip to beautiful sunny Puerto Rico or somewhere tropical, right? And go live the life. So I'm being facetious, I know. Yeah, I know I'm with you, man. I just, I could never personally, for my businesses, I was never able to pay to pitch, it just didn't make sense to me. And to your point, right? I… I'm great at networking, I have a system that gets me in front of investors. If I believe in a business, I will kick down doors and you know, people listen because it makes sense to me that I feel like this world is very common sensical. If that's a word, you know. I always said in America, if there is any time in the world where a third political party could grow, now is the time. And it would be the common sense party. Makes a lot of sense to me. But same thing with investment.

00:43:19 John: Very Ben Franklin of you.

00:43:20 Brian: Yeah. Thanks, man. I got to wear some bifocals next time. But I will do it. If it makes sense to me, I feel like it'll make sense to an investor. And I think that's why a lot of the investors that I do work with, they trust, right? They know I'm not going to bring them crap. I'm not going to just spam them. Everything that comes across my desk, I vet, I research. I ask questions. I look at it from the business standpoint and I look at it from the shoes of an investor, because, you know, as an entrepreneur, we've all invested in something, whether it's ourselves, our own businesses, other businesses. So it's kind of my approach to the whole investor relation side, right?

00:44:02 Brian: I look at us as, I call it the butterfly model, right? We have the companies on one side, you know, that's one wing, we have investors on the other side, that's the other wing, and we're the body in the middle. And when that whole ecosystem comes together is when the beautiful, beautiful butterfly comes out of the cocoon and takes flight. So absolutely there. I got to find a… analogy for a pig sometime, a pig that flies.

00:44:28 John: You know the, back to the whole investor thing. I don't know if I said this before about finders, but it is super important to understand two things. One, the finder is more of a problem than a solution. And what I mean by that is like, there have been times where if a company is not doing well and they were brought on by an unofficial finder, like an unlicensed finder, they can demand by law, that you pay back that money that they invested in whole. And if that happens, that could crush your business. This isn't like something that would just be, I feel like I might've… gave the wrong impression. This isn't something that would just be, if the next round happens or, hey, you're a profitable company and now you wanna buy out the investor and you wanna buy them out at less than what they invested. They can hit you with this stuff.

00:45:22 Brian: This is a today thing. Drain your bank account. And if you're in the middle of another round, it probably, let's face it, right? If you're in an early stage, you've got what, maybe two, three months of runway and you're pretty stressed over where the next dollar is coming from. And you already know you're gonna have to pull out credit cards or mortgage your house or do whatever you need to do as a founder to keep it going. And now you've got your investor that came in saying, give us our 200k back.

00:45:52 John: Right. So I mean, that tends to happen whenever a company is going south.

00:45:58 Brian: Yeah. Find the reason to find somebody to blame. Let's get out of this thing. Yeah.

00:46:04 John: Right. Right. And there's like a misnomer about the space, right? Like, oh, I could just pay this person a percentage on finding, right? You can, you can't really do that. You can't do that in the US. You probably get away with that in some other countries, but as a US company, it could be pointed out that this was a non-licensed US finder. I mean, I'm not a lawyer, so I don't know exactly, but why have the risk? Like if you think your company is going to be a billion dollar company, why mess up the first 300K that you get?

00:46:36 Brian: Exactly.

00:46:38 John: Like that's the moral of the point of what I brought up earlier. That's really what it is. Cause it's just not worth it. Right. I mean, there's a, I can't really use a name, but there’s a company that I worked with who was raising capital and we engaged with an IR firm, like 10 years ago. All they had to do was set up meetings. When they were setting up meetings, they charged us a fee monthly. It wasn't very much, but they set up terrible meetings. That happens. It was good practice for us. But upon that and I was consulting with that company at the time. I was just helping them get their stuff together so they could fundraise.

00:47:22 John: While we were going through it, they made some money, they got the money, so they were investable. But as we were diving into the history, they were one company that pivoted to another company, but the other company wasn't shut down. So the $3 million investment or $4 million investment was rolled into, as debt into the new company, which already had $2 million of investment. So now you've got this company that has like $6 million of debt, right? Trying to raise a million dollars. Like nobody's gonna put money into that.

00:47:55 Brian: Yeah.

00:47:56 John: And I didn't know that until the end, but like the bottom line was that was disclosed. This is about transparency, by the way. That was disclosed two months into the conversation with the finder and they were able to still get some meetings, but it was more with partners than it was with investors.

00:48:13 Brian: They probably just called some of their friends and said, Hey, just jump on with these people real quick and talk to them.

00:48:19 John: Yeah, probably.

00:48:20 Brian: Yeah.

00:48:21 John: But like, that's just a horror story. Right. And it goes back to transparency. Even people that you work with, if they're helping you raise money, they need to know everything. They need to know that like your first partner, like mismanaged the money, you raised a million dollars, 200k was spent on his friend who does marketing, and they completely messed up. Right.

00:48:42 Brian: That's one of the best questions that I love asking any of the companies that are at a certain stage, right? I mean, it's typically the ones that are looking to go public, right? We have certain connections. We take companies public. First question out of my mouth. What are your skeletons? And you could tell right away the ones that you're going to work with or not from that one question, because if they're just open and say, hey, you know, we're engaging, we're getting into bed together. You're going to help us. Here you go.

00:49:12 Brian: And then there's the ones that dodge the, quite, Oh, no, there's, no, everything is good. There's no skeleton. Okay. Okay. Every company has a skeleton. It's okay. How do you address them? Right. But look, you know, we're coming up on a full hour here. Yes, went by quick, right? When you're having fun with friends. Is there any last thoughts that you have on some of the topics we've been talking about today, whether it's, you know, avoiding pitfalls for both investors and the businesses, you know, when is the right time to use broker dealer versus a finder versus IR firm? Any last thoughts you want to throw out there?

00:49:52 John: Not really. I mean, just transparency. I would say each and every time that you go to raise money, being as honest as possible is probably the number one policy. And then making sure that you are updating everybody ongoing because if you have an investor and you don't talk to him for six months and then you ask them, hey, we're going to shut down in a month. Right. They would have been able to help you most likely.

00:50:17 Brian: Or not invested in the first place and everybody would be happy. Well, you wouldn't be. But, you know, what, I'm going, Common Sense, man. Common Sense, 2024. I'm going to like, make banners. I'm going to make T-shirts. I'm going to make some campaign materials, which, by the way, if you're in the market for that, kind of a thing, we've got a great merchandise company, hit us up anytime. But just having a little fun there. Definitely gonna make the 2024 Common Sense shirt though, for sure, you'll see me wearing that on the next one of these that we do.

00:50:51 John: Awesome.

00:50:52 Brian: Cool, right on. It was good talking with you, John. Let's go get lunch, I'm hungry.

00:50:58 John: All right, dude, see you later.