Bootstrapping vs. taking Venture Capital (FounderU) Ask An Angel with Zach Coelius | E1260

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code twist and Odoo is a fully customizable and fully integrated suite of business apps that lets you build and scale your stack as you build and scale your business your first app is free forever and right now odoo is offering one thousand dollars off your first implementation pack at odoo.com twist that's odo.com twist today i want to cover Bootstrap startups versus funded startups now we need to set some ground rules here and some basic understanding of what we're talking about bootstrapping comes from the term pulling one up by their own bootstraps which is a physical

impossibility i think bootstraps are little straps on the back of your boots that help you put your Boots on okay we get it bootstrapping is like you can pull yourself over the fence with your bootstrap it doesn't exactly make sense but the term basically means you're able to create a company off of either sweat equity or uh revenue that you immediately start generating so what are examples of that a consulting business where you say i'm willing to charge you a hundred dollars for Every hour for me to be a consultant to you well immediately if

you sell 10 hours a week the company's got revenue on day one it is really easy to bootstrap and it all it requires is if you're going to be in one of these venture capital categories all it requires is that you are a designer a developer or somehow a business a sales person A marketer one of those skills and you kind of need to have all three of those to be totally honest to get most of these companies off the ground that's why a lot of accelerators like y combinator or others insist on having a

developer on the founding team if it's a technology company that's high growth how are you gonna have a technology come with high growth if you don't have a developer You're not in all likelihood and if it's an outsourced uh development shop that's a red flag why can't you get a developer on your core team uh why can't you be a developer and so there is a bias against people who are idea people there's a bias against marketers there is a bias against idea people or quote unquote business people in fact i've heard many venture capitals

say Business person means no skill that you have no skill that you're just an mba with an idea maybe you can build a model etc now you do need to have leaders to hire everybody and bring the band together so i don't necessarily feel that way but i think a lot of people in silicon valley think in order to be successful that management team those co-founders at the start need to Be developer ux designer product designer product manager there's a lot of different names for basically the person who architects conceptually the product product manager pm

ux ui designer user experience user interface those are the terms that and the titles that people get excited about when they see a team so if your team was an idea person like i am let's be honest i'm kind of an Idea person and a marketer uh business guy that's fine but you need to have a collaborator and i did brian alvey was my cto and my collaborator on weblogsync and that made me go a long way and had mark jeffrey as my cto when i did mahalo and then moved on to inside so having

and i was also product guy so having a product person a you know designer product person sometimes those Are two different skills by the way you have a designer who just makes things beautiful and a ux person who works on the user interface and how the product flows but you do need to have that in order to bootstrap because the worst case scenario is you give money to a startup they hire an outsourced dev firm the dev firm says okay you stopped paying us this month you've been paying us for 10 Months the product's out

and then the product doesn't work there's no developers to work on it and the company goes backwards so um one other caveat here is something called friends and family money friends and family money is when you are not qualified to get venture capital and you go to your friends and your family uh your associates maybe people you've Worked with and say hey i'm passing the hat i'm trying to raise money and then i'm going to take that money i'm going to hire people and maybe you can with that friends and family money kickstart the project

to get enough traction to get into an accelerator or to get venture capital pretty hard to do uh not everybody's got the rich uncle or rich aunt who are willing to throw 100 grand or 250 grand at a Project but some people do some people will keep their day job there's another bootstrapping technique keep your day job and build on the weekends and nights or go to your boss and say hey i'm willing to stay on for two days a week and i would like this consulting fee and then the other three days a week

you work on your startup or you know three days at your current company two days on your startup a lot Of people will start the flywheel going that way do their user interviews understand customers do their research build their mvp you want to have your landing ready before you take off is basically how i would describe this so if you're going to take off and go out over the ocean you better have the landing in mind and you better have enough fuel Fuel in this case would be your personal runway personal runway would be okay

you've got five thousand dollars a month in bills and payments and rent and whatever okay it's going to take you 18 months to build this company out to the point at which you get venture capital do you personally have 18 times five do you have a hundred grand 90 grand 100 110 grand with a buffer in your bank account to keep you Solvent while you spend a year and a half of your life trying to get this startup off the ground and i did that a lot of my startups i was working as a consultant

or i had a little bit of cash from the previous project in my bank account or i went into debt which is very dangerous uh you know and not for everybody but there is risk you're not entitled to be a startup Founder or get venture capital you must understand this when you come to the table and decide you want to work in this space so we talked a little bit about bootstrapping versus vc if you bootstrap the longer you bootstrap then the less dilution you will have to your cap table so let's pause on that

for a second if you raise money from that friends and family round and you raise 250k You might get a two and a half two and a half million dollar valuation you've given away 10 of your company for that 250. now if you find a co-founder who's a developer and you're a designer ux person you don't need the 250 because you're not going to give it to an outside firm so the two of you just build it on the weekends or nights now you have no dilution now you get the product to a prototype phase

and you Go to a seed fund or an accelerator and you raise a hundred k for six percent of your company at an accelerator or you get a seed fund to put 250 500k and let's say at a 5 million valuation well now you got to the product done and you got 500k and you diluted 10 as opposed to in the previous scenario you would have spent the 250 gotten the product to launch and then Taken another 500k from a seed fund and deluded another 10 in other words you would have given away over 20

percent of your business you would have less than 80 percent and you would have raised 750. the longer you can push out the funding and the more you can accomplish with less the less funding you have to do we call this a pegasus or i came up with the term pegasus so there's unicorns Companies worth over a billion dollars but a pegasus for me as a company that flies over through the wings of bootstrapping they fly over funding rounds and they skip funding rounds and i encourage you to think about how can i grow this

business so strong that i can skip my next round of funding it's very out of favor right now everybody loves to raise funding it's such a hot market in 2021 Valuations are high why wouldn't you take money off the table that's true and that is a true statement money is sloshing around everywhere people are raising money at very high valuations i don't blame them for doing that a lot of advice is situational right so i'm giving you this advice based on a certain situation which should be a normal market in a hot market yeah if

you can raise money at a High price you know the same example i just gave if you were raising that first 250 at a 10 million valuation it's only two and a half percent dilution who cares right uh so that would be a de minimis amount of dilution you can go for it but some companies like web flow bubble com.com notion have skipped rounds of funding and we were involved in com.com and we Watched them skip two rounds of funding three rounds of funding and that meant our percentage ownership along with the founders was very

high because we didn't dilute and then as the company came worth and worth more and more we didn't have to put up a bunch of uh pro rata we didn't have to keep investing to keep our percentage ownership and that was amazing for everybody every Startup needs business insurance and you should look no further than a broker if you don't have insurance you fail one of the first steps in broker technology saves you time and money prices are up to 20 lower with better coverage than the incumbents you can go from sign up to quote

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point you can bootstrap And then qualify for funding so what are the signals that people will see in there what are the signals do you think that will get an investor excited about a bootstrap company very simple if you have built a modest team of people who are really motivated and who are operating at a high level we love looking at the team members and who's Running the company so you built a team of three people you got enough revenue to make 30 000 a month you are giving that 30 000 or chopping it up

7 500 each with your three first employees or your co-founder and two first employees whatever it is in the mix you got four people you got to 30 000 in revenue and you haven't raised any money do you realize how attractive that is to an Investor you're able to hire your first two employees without raising money off of your own revenue and that's where this art of bootstrapping and getting a couple of customers into your product early and paying you which is completely possible for a sas product or a software product marketplace is a little

bit harder but still possible uh you can bootstrap a Marketplace i.e you could create airbnb and just source 20 high-end castles you know and beautiful you know unique homes in spain and make the airbnb of spain and then just book with people you know want to book in spain and manage those and take the profit from them that would be a perfect way to bootstrap uh airbnb in fact i think they did that they were using their own couch As the test of it uh when they started so uh you can get a team together

that builds credibility building the product and finishing the product that builds credibility third having a customer who will not shut up about you and pays you either in time and effort or with money hopefully both if they're using your product and they're paying for it oh my lord Check box check box check box great team great product and really delighted customers now you're ready to get funding but so many people who are coming to silicon valley or coming to the tech industry think it's about a business plan they think it's about networking i think it's

about who you know not what you know it's not about who you know or what you know it's about what you've built It's not about who you know it's not about what you know we don't care who you know we don't care what you know here in silicon valley we care about what you've built what have you built the team the customer base and the product are all things you manifested in the world you built and people have concerns about silicon valley is it a meritocracy is it fair oh my god you know representation isn't

great Uh there's bias of course there is bias everywhere there are problems with representation in all different markets but when you look at silicon valley one of the things people um don't understand is that if you are capable of building a product and a team and getting customers if you can build any of those three two of the three or even one of the three you are going to get meetings if you can build a great product build a Great team or get customers any combination of those you will go from being a bootstrapped company

to a company that's a fundable company don't waste your time on the debt don't waste your time on the pitch don't waste your time on networking until you have a great mvp minimum viable product a prototype don't waste your time on trying to get meetings and coffee Meetings with people until you've got a member or two of your team and don't try to get the meeting with all the partners until you have a couple of customers these meetings will take up all your time trying to get them to burn all your time and you could

have put that into bootstrapping and actually building the mvp of your product now if your product is not bootstrappable Like you want to build a car company well you might need to start with a business before building a car company because you're if you have no credibility you have no track record you don't get to be trusted with the 50 million dollars it might take to get a car out the door or the 150 million it takes to do drug discovery And or get a medical device out there you might need to work on a

software business before that or you might need to work for somebody else's car company or somebody else's biotech company so again about this being fair if you're a nobody with no track record put yourself in the capital allocator shoes would you give them 10 million or 100 million dollars i hope not i hope you wouldn't do that that would Not be wise you need to have people who have experience who've done it before if you want to do those big big projects and if you think about it and tesla elon funded with his own money

that he made building a software company zip2 so you should know the history of these things it's really hard to do the hardware projects direct consumer or consumer packaged goods When you look at those they tend to not have high margins uh unless they're direct to consumers and they are uh easy to 2x or 10x those businesses but can you 100x them they're a little bit harder so you don't see too many businesses in direct to consumer or consumer packaged goods getting funding from venture capitals we had a little bit of a direct consumer boom

For sure with casper eight sleep and other companies but it's really hard the product needs to be super differentiated has to be a very unique product like the peloton maybe or the eight sleep bed any of those kind of direct-to-consumer hardware businesses physical products there are really hard to make work tonal it's just really expensive and you have to install it That's why they have to charge subscription fees so some businesses are just not easy to do and now there's crowdfunding just a little exception here that's worth noting some people will if they're building a

hardware product be able to put it on kickstarter be able to put it on indiegogo and get the flywheel going with people ordering in advance because It's such a visionary company the only thing i'll say is many of those projects fail because they under charge they think they should charge the people who are the early adopters less when in fact they should charge them more they should charge them extra for letting them be part of the excitement of building a new product not charge them less and then under price themselves and get into debt and

not be able to deliver the Product so bootstrapping means you have to have some skills if you don't have skills well you know how to get them just go to youtube take a ux class take a no code class learn how to use the no code uh platforms out there web flow bubble there's a ton of them out there you can start building your own mvps in no code now this doesn't work for every company you think about a drug Discovery company somebody's trying to find the cure for cancer or a medical device where they're

doing some deep tech we're building rocket ships some things are massively capital intensive now bootstrapping versus fundraising and at what point bootstrapping companies can then become funded now it's important if you understand that venture capital is not a right Everybody doesn't get to raise venture capital venture capital funds a very small percentage of businesses in the world and venture capital is in patient capital venture capital is looking for unrealistic growth some might even argue unnatural growth growth in the 20 percent a month range if you're growing 20 a month that means your business is doubling

every three or Four months where do you find businesses that grow this fast well you only find them in the early stages and you only find them in truly breakout companies so why does venture capital even exist well it exists because every 20 30 40 companies in silicon valley some company actually achieves this unrealistic goal and they pay For all the other mistakes and i'm using air quotes in here or failed experiments in a portfolio so that's the dynamic of how venture capitalists look at it venture capital is not the only source of fundraising in

the world so take a pause and understand number one you do not get to have a right to venture capital you have no right to get venture capital it is a Competition and the people who judge this competition are capital allocators known as venture capitalists who have to find those big winners in order to keep their jobs that's the crazy insane silicon valley methodology i have no idea why this exists or exactly how we got here i'll be totally honest but it exists in the world it is a very strange part of capitalism That this

crazy venture capital even exists in the world as a category we used to have bank loans maybe people raised friends and family but you know somebody had a rich uncle or an aunt or got an inheritance and that's how businesses were built or people inherited businesses or inherited wealth and now you have this weird practice of venture capital now many founders ask me to invest in their Company when they have an idea we don't do that why don't we do that we don't have to there's so many people out there who've bootstrapped their company and

come to us with ten thousand dollars a month in revenue or a thousand dollars a month in revenue or fifty thousand a month in revenue and they have a couple of customers and they have a product that we can use and look at the uh how well it was built And we can look at the customers we can look at the growth we can look at the churn rate how customers leave the product how they acquire customers so you as a founder are in a competition so let that sink in this is not socialism it's

not communism everybody doesn't get a loaf of bread or you know a certain percentage of venture capital it is a dogged competition it is a crazy competition It's an unfair competition just accept that as the table stakes and then you will be free to understand how you can qualify and how you can actually win that competition once you have that realization that it is unfair that it is a dogged crazy uh fight to get that venture capital money then you will be free to start thinking about what are the precursors to getting venture capital And

maybe even do you want it because venture capital is jet fuel you put jet fuel on a skateboard or a bicycle or a car it's just going to explode into a fiery mess and everybody dies jet fuel is for rocket ships and you have to ask yourself is this business in fact a rocket ship or is it a slow growth or a normal growth business Remember venture capital impatient capital realistic growth is not what they're looking for venture capital is looking for unrealistic and perhaps even unhealthy growth growth that is going so crazy and so

fast that maybe you know the tires come flying off or things are messy mistakes are made but growth at all costs Is really what venture capital is about now people will argue that there's conscientious capital or people are looking for you to grow slow and steady wins the race people might say that but i think it's platitudes i think in reality venture capitalists want absurdly high growth companies in the double digit percentage month over month and most businesses probably grow double digits year over year so this is a whole Different pace this is like sprinting

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twist to check it out that's odo.com twist what type of businesses should see venture capital well if you're looking at venture capital it's very few companies you really get those and you know very few companies qualify for venture capital and that's why many times people will Say hey your bootstrap business is a lifestyle business this is not a negative term although it's perceived as a negative term we will say hey i think you're just a lifestyle business that we're just you're just a lifestyle business a little derogatory but what we mean in our industry when

we throw around the term lifestyle businesses this is going to be a great lifestyle for you the founder And owner of the company but it's not going to provide returns for venture capital firms that would please their lps who are big endowments or retirement funds or high net worth individuals it's a lifestyle for you you might make a million dollars a year from this lifestyle business you might make 10 million dollars a year from this lifetime business and rock on that's unbelievable and if You have a business that's throwing off a million dollars in free

cash flow a year and you're pocketing that every year and every year it's growing 20 well the best thing for you to do might be actually to pocket the million dollars 10 from years from now it's growing at 20 a year that means it's doubling you know every four or five years uh you know three or four years you're probably Doubling and if you're doubling over three or four years then maybe you're taking out two million dollars after four years and then after another couple years taking out four million dollars you get the idea and

you still own 100 of the business why would you ever sell it but it's not fast growth so it's not going to ipo or get bought by one of the bigger companies which Is typically how venture capitalists get their money out they buy in they have an ipo they buy in microsoft google facebook whoever buys the company those are the two big outcomes for venture capitalists so lifestyle lifestyle businesses which means businesses that are growing single digits per month not double digits per month And that are growing you know less than two or three x

year over year that's a lifestyle business in the minds of venture capitalists they're not going to fund a lifestyle business because it doesn't have venture scale venture scale another term that we use in the industry what is venture scale really mean venture scale means that this business can get to In 2021 terms 100 million a year in revenue 250 million dollars a year in revenue you start thinking about those numbers you know a million dollars a you know a hundred million dollars a year in revenue is 250 350 000 a day in revenue ten thousand

dollars an hour it is possible to build these businesses it's just hard to build them and so why do they need to have Businesses that can reach that level of scale well those are the businesses that start to get the attention of the big companies to buy them a lot of big companies they're not interested in buying any company with under 500 million or a billion dollars in revenue you know take microsoft or take google you know when you're printing up as much money as they are to move the needle on an acquisition It's very

hard you need to have a business that really is making some large amount of revenue and that can grow from that point forward hopefully with that motherships you know reach and uh dexterity and expertise that's for an acquisition and then for an ipo well the public markets are not going to care about a company with 50 million in revenue generally speaking they're going to want companies that Have hundreds of millions of dollars in revenue if not billions of dollars in revenue as we've seen over the last couple of years when we've had a boom in

spax and ipos and yeah and the spax do bring the benchmark down a little bit you could have companies that are pre-revenue go public et cetera so venture scale businesses it just means you're gonna grow Three four five x year over year ten twenty thirty forty percent month over month at certain points and times in the business and you're going to get to 100 to 250 million a year in business which means the investor has a chance to turn one dollar into a hundred dollars not a hundred percent growth we should be doubling your money

we're not talking about percentages here we're talking about x One dollar goes a hundred x a hundred times one dollar turns into a hundred that's kind of what venture capital is looking for so um you have to ask yourself does my business really qualify for this insane race is it an outlying company is it a software company great software companies can grow that fast why can software companies grow that fast The reason a software company rather festivals is no cost of goods you write the software once i write the game angry birds and if 10

people play angry birds and they pay a dollar each i make 10 if 10 million do it and i me and i charge them a dollar i make 10 million dollars the cost of angry birds remains the same the five developers who developed it instagram maybe they had a dozen people Working on that when they sold it for a billion dollars and you really don't need more than that building a world-class app today even on ios is a dozen people uh for android and ios like literally 12 people can build a world-class app so you

have to ask yourself is it a software business or a marketplace what's a marketplace ebay airbnb uber these were all marketplaces one side Puts up uh supply another side is the demand i'm demanding i need a place to stay when i'm in paris and you're the supply i have an extra flat in paris that i can rent you for 300 euro a night that's a marketplace marketplaces scale because as the number of participants increase and the frequency of transactions Increase oh my lord the 5 or 10 or 20 percent of each transaction they get can

add up pretty quick ubereats doordash also marketplaces between drivers restaurants and consumers so it's really like a three-sided marketplace when you think about it those are the type of businesses that investors typically want to invest in because We've seen over and over again their high margin and their high scale high margin they don't have a high cost of goods high scale because you know the 100th person coming in doesn't require any handholding the 10 000 user of you know a marketplace like doordash or airbnb doesn't cost you anything to onboard them and neither does the

millionth or the 10 Millionth they just can come in and use the marketplace because it's already set up there and it's vibrant and they get to just jump in and benefit from all that velocity in the marketplace so those are examples of very high skill business what's a business that's not high scale and low margin selling ethernet cables so selling chargers for your phone it's a race to the bottom It's hardware anybody can make it you don't have any ip there's nobody cares about the brand i mean i might care about anchor i love that

brand but most people don't care so hardware is hard and it tends to not have any reoccurring revenue you sell it once you're done one transaction at low margin services business consulting businesses consulting businesses your cost of goods Is how little you can pay somebody and your top line revenue is how much you can charge for that person and you just live in that tight little margin between we're charging 200 an hour for this developer and we're paying them 125 and we get that 75 and everybody hates you because the developer wants to make more

money the customer wants to pay less and your margins constantly getting Crushed it doesn't scale gracefully it's a waste of time for in most people's minds and that's why sas software as a service cloud computing consumer subscriptions all of these things are software-based businesses that scale very gracefully when you are going into venture capital you also are gonna in all likelihood be giving away a large swath of your company think ten to twenty percent of your company Three four five times in the life of the company which means typically two founders will get down to

ten percent each and ownership of their startup by the time there's an exit and if it's a single founder maybe they have 15 to 25 ownership but you're gonna get diluted massively and you will often lose control of your company in that you have taken on three or four venture firms three or Four ten you know 1 million to 25 million checks over a five or six year period they are on the board they can oust the founder sometimes founders have protection uh and provisions in there but other times they can be ousted uh and

removed from their own company doesn't happen as much these days but you get the idea so keep this in mind When you're building a business that if you do go the venture out you're going to go really fast you're going to give away a lot of your company and it's going to be with a high risk of failure because venture capitalists only care about outlier success if you're going to be an average success they're really not interested so they're going to disengage from your business they're not going to want to be Involved in it if

you only grow it 50 year-over-year they're only going to be interested and they're only going to get excited when you're doubling and tripling revenue year over year consistently so why would you do that well the reason you do it is because you could have an outlier success that's why people sign up for it is they might have the chance to be an outlier success why would somebody opt Out of it well because the chances of success are like one in 10 or 1 in 20 or 2 in 15 who knows it's a very small chance

of success but if you do win you get outlier success and most people candidly don't understand what venture capital is they think that everybody's entitled to it they don't understand how competitive it is and they don't understand how narrow the Lens of businesses are that are venture fundable in the current model other people have tried to make slower growth models where they do slow growth companies and just as a little bit of an aside you're really not trying to build a business uh with the acquisition in mind going in saying i think we can sell

this company to microsoft in five years for 50 million Dollars that's not what venture capitalists are looking for so keep that in mind they want the outlier success it turns out venture capitalists and venture capital firms are typically defined by one success maybe two each fund and that means a venture capitalist over the course of their career they might be involved in five six funds if they're involved in five Funds and there's one or two hits each fund there might be a dozen hits over those five funds maybe ten of those ten the top two

or three will be the majority of the returns the top ten will be 95 of their returns and that means each partner might work on one of those so in other words a career in silicon valley a venture capital career is made With one outlier investment over a decade or two of working in venture capital sometimes you get people who hit two or three i've hit three or four really big ones and they they kind of define your career robin hood com uber these things are career defining i've gotten very lucky to hit you know

three plus in a decade you know there'll be more uh you know down the road but these this is The nature of the other person on the side of the table who might fund your startup is that they are going to place 20 30 bets in their career and one is going to define their career and the one that does is the crazy outlier the crazy outlier this is but five percent of funding of companies or less is from venture capital it's a very small mix of The investment in companies so again if you're going

to do this you really want to be doing it in a growing market and you're going to want to have to go fast and you're going to want to have other people involved if you don't want other people involved if you don't want to be collaborative with investors and hear their opinion if you are not swinging for the fences and trying to grow really Fast don't take venture capital don't even consider it you can just have a bootstrap company get to profitability and just sweep the cash off every year make it an llc instead of

a corporation with shares and just focus on distributions year after year so building to sell is really a dangerous idea you don't want to do that you're building to build a large sustainable Enterprise and the second option is you sold to somebody now bootstrapping versus funding companies i hope that this candid candidate advice is helpful for you as you start your journey remember you got to have great skills you got to be able to build these products yourself you've got to be able to build a team and you got to be able to uh have

great customers product team Customers product team customers those are the three pillars of building great companies the market is out there for so many products you know and all you need to do is build a great team and build a great product and put it in front of customers and let the magic happen it's that easy folks no it's really hard but you have to have skills if you have no skills ask yourself what Am i ready to be a founder maybe i need to get some skills you might get lucky and just be an

idea person who can manifest a bunch of investment and talk people into it i've seen it happen it's just happening less and less these days the people who are getting funded more often than not are able to build their prototypes mvp and get something in front of investors with zero dollars with only Sweat equity as bootstrappers and those are the best most fundable founders according to what vc say around the poker table or when they're having dinner or they're being candid with each other oh that person can bootstrap a company and get a couple of

customers they're capital efficient that's who i want to place my bet on the person who actually knows how to build Great products and teams so keep that in mind and i hope this has been helpful okay every startup needs to ensure they own their intellectual property or ip for short and that starts with filing your trademark i have been filing trademarks for 30 years and i know what i'm talking about it's one of those things that people forget to do or they put at the bottom of their List and i understand that it's a pain

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just trying to suck a little less i'm trying there is a goal every day trying to just not suck it's less i still suck a lot it just wants a glass or you could say you want to incrementally get better yeah but it's two ways of saying the same thing it is humbling what we do as investors because we are constantly faced with making decisions and not knowing if we Made the right decision for somewhere between five and ten years how have you reconciled this you know challenge to keeping a scoreboard yeah um well i

mean my default is i just assume i'm an idiot so um that just like it goes with the territory yeah but um you know i like to i really think about it in terms of like the day-to-day tactical execution of the Businesses that i'm involved with and it's you know i try to be in there figuring out what's going on and trying to be helpful and watching and if they're moving the ball forward i'm super happy because at the end of the day this business is a business where you can get incredible rocket ship growth

in really unexpected ways at unexpected times and as long as you're on the field and You're moving things forward you're in a position to be ready to catch that like so for instance today they announced that um uh co-two put one point or 120 million into one of the businesses that invested in mercury um mercury that's the bank right the bank yeah like a it's like a billion and a half dollar business now congratulations when they first started that oh man they Were it was it was not easy and i mean watching them yeah building

a bank like not easy i'm shocked starting a bank is not easy yes yes i just summarize your two points i think if you think about what we do as our day jobs and what founders do you cannot um absolutely guarantee any outcome you have very little control over the outcome But what you do have a lot of control over is what you do today your process yeah and the process of being an entrepreneur from what i'm hearing from you is to be on the field and to keep improving and to be of action to

be getting stuff done so that if you do catch lightning in a bottle if you do happen to catch that wave man you can have a great surf you have a great ride And just be ready for that as an investor we just have to be as helpful as we can and see as many meet as many great founders as we can that is the process is it not yeah i mean for for me and my day job i think about it like am i helping my companies adding value so that they let me keep

investing in their businesses as they grow And am i talking to new folks and being helpful to them helping them see around corners and helping them meet other great investors or meet customers or partners so that when the time comes that they raise money they let me join um it's for me it's like the more value that i add in a leveraged way in the ecosystem the more goodness comes back and that's My every day that i can do something useful to the ecosystem whether it's my existing companies or companies that i'm involved with or

companies that i just like i'm excited about i feel like i'm i'm moving the ball forward i'm happy or being here on ask jason and zach or reoccurring answering of questions and commiserating over how absolutely we have impostor syndrome Every day i mean when you think about it you work really hard as an entrepreneur you and i both got our asses kicked and kicked a little ass as entrepreneurs and then you get lucky enough to be a capital allocator where you get to you know pick who gets money to pursue their dreams it's pretty humbling

and it's super random i too today had a great day robin hood went public yeah that's awesome yeah i mean it's the third biggest win Of my career uh after uber and calm which are now tied actually wow um well you know we owned uh you know just basis points in uber but we own five or six percent of com so that shows you when you own five percent of something worth two or three billion you know and you own 10 basis points or 20 base points or whatever of something that's you know 100 billion

you can have slightly Similar outcomes and owning a larger percent now is part of my goal what is the average check size just as we start the show off here before we get into the questions average check size for you today how many deals are you doing a month a quarter a year whatever number you want to pick yeah yeah so uh check size is growing um i've got a new fund and um it's bigger but average check now it's probably in The sort of 500 to million range for early stage and that's growing so

probably a little bit bigger in the next six months um and i try to do in a given year you know five or six new companies um and then i'll try to find and then i'll invest in my existing businesses so we a good year i deploy maybe 15 to 20 million dollars if i'm doing my job correctly and you know things are Happening right low gp yes as a sole gpu yeah you and i are the same both solo gps with teams around us you have a team built out no no no no no

i have teams i don't even have an assistant whereas you have like this squad of uber assassins on your side so i have a squad yes well you know the uh the advertising on the show has helped me build a team it's literally the truth for the last Couple years the the profits from this week in startups pay for the investment team although we're now awesome with the new fund we have a little bit more mat for the first time some uh some fees to to hire some folks so we're getting there slowly correct let's

get into these questions here first question via emails from francis he asks what is your number one piece of advice for newer angel investors i'm Part of the syndicate and would love to up my game okay we got a new angel investor fresh in the game what's your best advice there zach in 2021 for a new investor yeah i always say take your time and plan on this being a really long game both in terms of the outcomes but also in terms of the deployment like if i look back over the last five Years you

know i've i've written about 80 checks and the first check i wrote i was in a very different place in terms of my capabilities and my education and my experience and if i had you know blown my wad early and wrote a bunch of checks at the beginning and then hoped they would all work i think i would be i'd be happy because that year ended up being a great year for me but I wouldn't i would be in i wouldn't be in as good a place as i am now so just expect it to

take a long time and then you're going to have to write a lot of checks i always like to use the analogy of learning poker you would not want to sit down at a high stakes game when you don't know which is a better hand a flush or a straight uh and literally when i started playing poker i was in games where people were Like i i win i got a straight and the first like well i gotta flush and he said well straight's better than the fly and people don't even know like literally somebody

at the table had to keep the card of the winning hands like what was you know is three three of a kind better than two pair yeah okay great i want to play in that game that sounds like it's pretty funny um i mean this is literally but it was it was a 20 buying game i think They were paying playing 25 cents 50 cents a game so like people would bring roles or quarters to the game it was quite fun uh and so i do think you want to take your time uh and in

terms of thinking long term you are playing a long game and you're playing a reputation game and you're also playing a long game against the cycles so here we are in a tech super cycle that started in 2009 which is exactly when i started investing and you started investing similar time frame right in 2015 2015 okay you came five years after me so you started investing uh halfway into the super cycle or maybe a third of the way in and so it was starting to climb up when i started it was on the floor i

mean i couldn't get but five or six angel investors to show up to meet four or five companies at open Angel forum and at that time angel list was called venture contracts venture hacks and it was an email newsletter there was no angel list there were no syndicates it was just people shooting emails around which actually you did as well so take your time making those first couple bets there's no rush and don't feel pressure uh be disciplined the other thing i'll say is you know maybe the first 10 bets you Make could be in

product and companies with products in market and some traction so that you're not making these bets before the products even launched uh you can actually use the product okay we got a live question from gatsby uh no indication if he's great or not uh the question is what are typical mistakes you see founders make in their first meeting with you they should avoid okay this is a great question what are Silly stupid things that founders do uh or you've seen that are just a mistake when you're meeting with investors i mean the number one is

lying like you know a lot of these founders are just they really want to get the deal done and they've they feel pressure to basically put their best foot forward and it's Pretty easy to sort of stretch from exaggerating to lying and you know when you're on the other side of the table and you just watch these folks all day long come to the door you get a really good pattern recognition of when they're lying and you know there's a lot of ways to trip somebody up and i mean i'm constantly basically trying to figure

out Are they really a truthful person because it's that's one of the biggest things that is like a red flag for me is people that i can trust when times are bad and things are not working right to be truthful and honest and open and transparent about what's going on because otherwise i just it's really hard to work with people and um That's the biggest one and i see it over and over and over again and it makes me sad because it's like there's just great entrepreneurs who i love to invest in but they're just

liars and i'm like i can't do this you know and there's lying and then they're stretching the truth there's exaggerating there's a whole spectrum here and i think what's important in what you're saying is As an investor we know imposter syndrome we know that you don't think you're adequate we know that you're concerned you only have three paying customers and one of them doesn't actually use the product and the other one's your friend from college and you really at the end of the day only have one paying customer and we are okay with that because

we've invested in companies over and over Again and watched this collection of ragtag misfits and pirates create something of massive value from nothing we understand that so there is no actual need to exaggerate to us and you're so correct because it always comes out i always find it out because i do math in my head and i say how many customers you have they say 100 i say what does the product cost and they say it cost a hundred dollars a month and i Go 100 times 100 you get 10 000 in revenue a month

and they say i say okay you're doing ten thousand reviews yeah and it's like oh we're doing zero dollars and i'm like revenue you just said you have 100 customers like oh well that we plan on charging a hundred those hundred people are in beta uh and they're not paying and i'm like okay great so you have users in an unpaid trial great if you had Presented it as users in an unpaid trial i'd be like oh that's great tell me about the top ten how are they using the product whatever your attraction is however

modest it is it's something and it's better than lying okay next question and this is from the dude um and so you know when the dude has a question it's going to be a good one it's coming hot what do you think about white labeling tech to help build or finance your core Product it's a great question coming in hot dude what do you got zach i mean i always say that anything you can do to get to sort of like sarah table has a great saying where she's like the red-hot center of your business

and whatever you can do to like make the other parts easier and faster to get to that spot Um the better and so white labeling technology whatever you have to do totally totally fine now at the end of the day you still have to basically be able to tell a compelling story about how how you really are a technology business and how there is a moat around your technology and how your technology enables you to grow really rapidly and it you won't Become commodified so if you're using the same technology that everybody else has access

to that's going to be challenging when it comes time for the competition to show up and they're always going to show up and if you don't have the ability to protect yourself you know investors are going to look at you very differently than if you've you know built your own proprietary stuff But getting to that sort of core proof point to validate the idea of the business and the value that you deliver to a customer and then building out from there is a great idea uh yeah and uh by the way sarah taval a general

partner over at benchmark was on uh angel season four episode four back in february great guest Uh she's pretty great i think it was one of my final guests in the studio before kovitz started wow that's crazy to think about um if you're doing white labeling as well and you sort of mention here dude the dude sorry i didn't mean to be a casual there with you dude i thought dude sorry mr dude um it's a great way for you to keep the lights up and some people are very precious about Like oh you know

just raise money and stay focused but the truth is you may not be able to clear market with investors you may be an outsider or whatever if you get three people to take a white label version of your product and you own all the code and they're giving you 5 000 a month each or 15 000 a year each and that keeps the lights on great keep the lights on and then you Can launch the web-based product that is not white label for everybody else based on what you learned on their nickel i'm not precious

about it whatever it takes to get to product market fit to get that burning ember at the core of your product not a problem now if you do have a consumer-based product and you're like should i have a white label and a consumer those are kind of two Businesses yeah it's kind of hard to run both in the same company isn't it zach yeah absolutely i that's another to go back to the first question we have like what's a you know red flag whenever you have two different things going on that have different focuses and

different like areas of attention that are required and you have to make different Decisions for those two things it's a huge red flag for me like because at the end of the day when you actually find product market fit what happens is that the things that used to be really hard revenue customers traction actually becomes really easy because all these people see this value and they just come running for what you have and you start growing really rapidly but What happens is all the things that used to be easy managing your company scaling keeping up

with growth becomes really hard because you're growing really rapidly and when that happens entrepreneurs need to be really really focused on basically growth and they need to they need to go from basically putting their energies against making Things work to putting their energies towards simplifying and making things simple so that it can keep up with that growth and what i find is that if you're distracted doing multiple things you get totally crushed during that period and also it's a really good indication that you actually haven't found product market fit because every entrepreneur i know who

once they find it They get that idea really rapidly and they start discarding everything that gets in their way of the one thing that is 10x it is growing like crazy and um so yeah i mean the most famous example was um uh groupon and uh the founder had started groupon inside of another company that was doing like petitions and lobbying kind of you know like uh this petition website and then people Started using the petition website to petition to get two for one meals yeah yeah yeah yeah he was like wait a second there's

a restaurant downstairs let's see if we can petition them to do this and it was like okay it's a petition they're like you know what who cares about this petition to get you know buffy the vampire slayer back on tv or whatever You know or the stupid comedy central thing back on let's just focus on lot you know creating customers through deals and they created an entire category and as andrew uh the founder of um uh a groupon tomy it wasn't even his choice the entire company didn't want to work on what was slow growth

they all just moved to the side of the ship where all the fish were coming in and everybody just stuck their fishing rods And went to the other side of the of the of the ship to go fishing on the other side okay we'll see you all next time bye bye