I'm raising money

What's up, everyone? This is Alex, the host of Founders Journal. As you may know, I built Morning Brew from my senior year of college until we sold the business in 2020. And now I'm building a variety of businesses in different spaces and different stages. I'm basically averaging 1 to 2 new businesses per year. And because of that, I have had the opportunity to test a ton of different products and services, ultimately landing on a core software stack that serves as my business operating system whenever I start a new company. I have my go-to banking service. I have my go-to formation service. I have my go-to domain hosting service. But probably the most important of them all is my HR service, Gusto. If you're a longtime Founders Journal listener, you know how much I think about people in the context of business. A business is nothing without its people, which means a platform that helps me manage and take care of my people is invaluable. And that means I've tried every HR platform under the sun, always with the same exact goals in mind. First, I want a product that's intuitive and delightful to use. As a non-HR person, I find the intricacies of payroll, benefits, taxes, compliance, and expenses to be painful. So I just want something that makes my life easier. Second, I want it to be affordable. I'm a bootstrapper at heart. I started Morning Brew with $0 and I started StoryArc with $0 as well, which means I don't have infinite dollars to drop on SaaS products. And third, I want a platform that acts as my one-stop shop for all things people. I want it to handle payroll, benefits, hiring, onboarding, and taxes, all while integrating with all of the other tools in my business stack, whether it be QuickBooks, Slack, or Google Workspace. Well, Gusto hit the trifecta, which is why I am a customer and use it for every single one of my businesses. Yes, this is a paid sponsorship by the amazing team at Gusto, but I would sing their praises even if I wasn't being paid to do so. So if you're looking for a platform that takes the pain out of payroll, benefits, and HR, I highly recommend you check out Gusto. And if you sign up at gusto.com/alex, you will get your first 3 months free. Now onto the episode. What's up everyone?

This is Alex Lieberman, the host of Founder's Journal. On this episode, I am talking about raising money for one of my businesses, Distro, and the lessons and experiences that I've had over the last few weeks of going through this process. Let's hop into it. So just to give some quick background, one of my businesses in my holdco is called Distro. Distro today is an AI content strategist that interviews you as if you're talking to a real person, but it's AI. And through this interview, it asks you smart questions about whatever topic you want to talk about. It could be about your career journey, news happening in your industry, you know, an interesting meeting you had, whatever it may be. And after you have that interview, the transcript that came out of the conversation with Distro is turned into content that you can use online. Today, Distro is text only in the content that comes out of your conversation during a studio session. But the long-term view of Distro is we want to be Canva for content. We want to be the AI-powered end-to-end content platform that helps you with every step of the content journey. And our view is there are 5 steps of the journey. There is, uh, ideation. So thinking of a content idea, creation, which is creating your first draft, uh, refinement, which is editing your content to get it ready to post. The 4th is distribution, actually hitting publish. And the 5th is insights, which is learning how your content is performing, which then, you know, gets the cycle started over because the way you ideate your next post is based on understanding what performed well. So we're raising money for the business. You know, the first question that I got from people is like, why are you raising? And the short answer is my co-founder from Distro is working full time at a company right now. He's just been building Distro on nights and weekends. And in order for him to go full time on the business, he obviously needs to pay himself a salary. And so then we have 2 options. Obviously, one is to self-fund the business, which would involve either you know, him not taking a salary for a period of time, or me paying his salary. Or the second option is raising some money to get him working full-time on the business. And obviously, if he wants to work full-time, he wants to have a little bit of a core team around him to make the product as good as humanly possible. You know, as some of you may know, my general Lean for building businesses is bootstrapping, but the reason bootstrapping is so hard here is just basically understanding timing and kind of the economics of the business. I'm just going to use a random number, but let's just say as a round number, my co-founder wanted to take a $100,000 a year salary. Just picking a random number, and let's just say that distro is. I think right now it's $29 a month. So $29 a month. If we want to do $100,000, let's say we needed to do $100,000 in profit per year for him to be able to pay himself. So $100,000 in profit is $8,333 per month. Let's just say our margins are 0.4. So that means we need to do $20,000 a month in revenue to pay for his salary. Let's see how many users that is. So we need 718 paying customers for Distro in order to cover my co-founder's salary. So then you ask yourself the question, like, could my co-founder work on Distro part-time in order for us to get to 718 paying customers for him then to quit his job and go full-time on Distro? The answer is maybe, but it's a little bit of this chicken and the egg problem, right? Because What's going to cause 718 people to pay for this product? It's going to be a great product that solves a very real problem in a novel and delightful way. So the question then becomes, like, in, let's just say, 5 hours a week or whatever time my co-founder has to dedicate part-time to Distro, can he build a product experience that is delightful enough for 718 people to pay for? And my guess is the answer is probably yes. But then the question becomes, is it over the time horizon we want to? Like, If my co-founder wants to go all in on the business and they want to go all in soon, can we, let's just say in the next year of just part-time work, get to 718 paying customers for Distro? And I think it becomes less clear. Like, I think if the time horizon was 3 years, 5 years, maybe you could work on it part-time long enough to get to going full-time. But I don't think the time horizon works. And so when you have kind of like a a time horizon issue where the business hypothetically can self-fund you, but not in the time horizon that you want to go full-time in the business, that's when you need to start thinking about funding the business with capital not coming from the company. And so anyway, all of this to say, you know, we decided we wanted to raise some money for the business. We're raising $1.1 million for the company and That gets into kind of the first question, which is what is our goal with this money and who do we want to raise money from? And I think the way that I approach thinking about who we want to raise money from is thinking about what do we want to achieve with this money and kind of what are our highest priorities as a business, right? Our goal, like I said, is we want to be Canva for content. I think there's an opportunity to build a multibillion-dollar company that becomes the go-to content platform for all content creators, not just people you think of as content creators, which are like YouTubers or newsletter writers, but I would consider every professional a content creator, just like I would consider every professional a designer, meaning people who aren't professional designers using Canva. And when I think about what are my priorities as a business, um, Number one, and I've realized it through this process, is freedom. I love entrepreneurship because I have the freedom and my co-founder has the freedom to decide what our destiny is. No one forces us to do anything. And to me, if I was in a position as an entrepreneur where someone was dictating how I had to build my business, I'd just go get a corporate job. There's a reason I think I would be a horrible employee at a company, and it's because I am really bad at taking orders. I don't like being told what to do, and I like being kind of the captain of my own ship, kind of the creator of my own destiny. And so what's been interesting is, as we've been thinking about raising money, I would say my bias has been let's just raise capital from angels, meaning individual investors, whether it's wealthy people, whether it's startup founders who are looking to invest in other startups, whether it's, you know, let's say professional angels. And the reason I've generally thought that going the route of raising money from angels would be a better path is I think if you want to optimize for freedom and the freedom to choose your own path as a business, angels are going to be the least forceful of the way in which you need to run your company. Now, the one downside of raising money from angels is on average an angel investor's check size is smaller, right? So if we wanted to raise $1.1 million and let's just say the average angel was investing $25K, that means we need, let's see, I'm just doing the math on my computer. That means we need 44 angel investors to fill out our round. For context, we had 28 investors in Morning Brew's round, and that felt like a ton of work. Not just a ton of work, because again, if you get, let's say we have to get 44 angel investors. Obviously not every angel investor is saying yes. Let's say a third of them are saying yes. That means we need, uh, 132 investor conversations. That is a ton. There's also just like the logistical headache of— I remember when we raised for Morning Brew, getting paperwork organized from 28 investors was an absolute nightmare. And also it's 28 people with 28 different opinions, which means whenever you're thinking about selling your business or doing anything of consequence that has an impact on investors, I would say it's a sheer numbers game that you, you run the risk of kind of any sort of dissenting investors trying to kind of mess with your path. So all this to say, like, I have bias towards raising from angels for our round for Distro, but there is a very clear, like, work trade-off of how many investor conversations you need to have. And given I'm not full-time on Distro, my co-founder's not full-time on Distro, we are limited by time. And so that's why we started entertaining the idea of, Okay, what if we raise from one VC? They act as kind of the anchor check that maybe fills out, let's just say, like half of the round. So $500,000 to $600,000. And therefore we only need, let's call it like 20 angels to fill out the rest of the round. So we started having these conversations with VCs, and I would say my high-level thought, and again, I'm not suggesting there's one right or wrong way to go, but my feeling, given I am optimizing for freedom in my businesses is the process of talking to angels has reiterated my feeling that you should only raise VC money if you absolutely have to, if you are optimizing for the freedom to pick your path as a business long term. And the reason for that is simple. It's not because I think VCs are bad people. It's not because I don't think they want to see their entrepreneurs be successful. It is because I think there's only a certain type of entrepreneurial success that works for VCs in terms of the incentives of their business and the returns they need to give back to their LPs, their limited partners who invested in their fund. And so the very simple thing is every VC, generally when they're making investment, needs to feel some level of confidence that an investment they're making can return their whole fund, meaning that your business will get big enough to basically cover the entire size of their fund. So using an example, let's say I was talking to a VC who had a $100 million fund and they wrote a million-dollar check in Distro. For them to be happy, like, like feel like it was a big win investing in us, They would need to see a 100x from us. They need— they would need to see— so let's just say we raised our Distro's round at a $10 million valuation. They would need to see Distro be a billion-dollar company. They would need to see a 100x from Distro in order for them to feel satisfied with the returns that they would get from an investment.

What does that mean?

That means even if Distro, let's just say, became a really profitable, great business run really efficiently, and we sold for $200 million, they, by the incentives of their fund, would not want us to take the $200 million offer. They'd want us to keep building until we possibly reached the billion-dollar valuation, because for them, they either want a billion-dollar valuation or they don't necessarily care, like, They'd rather it become a zero versus us be a $200 million company. It's life-changing for the founders, but it doesn't do anything for the fund. And so I think, you know, something I would just share is as you think about fundraising, the most important thing is for you to basically decide what are your priorities as you fundraise. And based on those priorities, that will then dictate who you should raise money from. And I have 4 priorities and they run in the following order. Priority number one, and I'd say it's by a long shot, is I want the freedom to decide my path, which means if a year from now, after Distro has raised a round of funding and we're profitable, we have the ability to just run our business on the profits of the business and not have to raise another round of capital and get on the venture capital treadmill. That is incredibly important to me. Priority number 2 is speed of fundraise. I just want to get this round done, get it finished, have my co-founder go full-time, and then be able to build out the core team. Number 3, operational ease of fundraise, meaning I just want to minimize the amount of paperwork, the logistical headache of getting the round done. I just don't find it fun and I want it to be on the easier side. And the 4th, and I would argue the 4th priority for me will likely be the 1st or 2nd for most founders, is help, meaning VCs For a lot of people don't just mean money. They mean support, support with hiring, visibility, tactical advice, partnerships. The reason it's number 4 for me is I feel very grateful that with my distribution on the internet and my network of post-exit founders, I can access any support or kind of advantage a VC has without having a VC. But that likely would be a higher priority for other entrepreneurs. So all of this to say that I don't hate VCs. I try to organize my entrepreneurial path to prioritize for freedom. And I believe that just by the sheer incentive structure of venture capital as an industry, it is not in a VC's nature by way of incentives to allow me to be in total control and freedom of how I want to run my business, whether it means raising more money in the future, whether it means not raising more money, whether it means being profitable, whether it means not being profitable. And so my general, you know, approach to this round will be raising from one VC who's open to the idea of us being totally free to choose what our path is, then raising the rest of the round from angels. Um, but in general, freedom is my number one priority, and I'm going to continue to make decisions that optimize for that freedom. You need to decide what your priorities are and then optimize your fundraising journey in line with those priorities. That's it for today's Founder's Journal. As always, thank you so much. For joining the podcast, and I'll catch you next episode.