Start Up Fundraising Step by Step with Michael Orant

Welcome back everyone to another Mastering Tech Growth episode. Today we have Michael Orent with us, who's an entrepreneur, a fractional CTO, and get this, racing driver. So Michael has been around for 15 years and over in the technology sector, so he done all of it and seen all of it. Today we're talking about fundraising for startups. One, should you raise it? When should you raise it? How do you talk with VCs? What do you expect from them? What happens when you get the money? How you should spend them strategically? Welcome, Michael.

Thank you, Mike. Yes, thank you for having me. So yeah, obviously I've been quite— been around the block a little bit. Um, obviously started my sort of technical career really in development, um, but I think I quickly realized that I could get more done with getting the clever people to actually do the development work. And I moved more into sort of a leadership role. And since then, really, I've worked in a lot of industries across a lot of different industries. As you mentioned, now I'm more fractional CTO, so I will go into various businesses and work on a fractional basis with them, just giving them strategic technology advice and leadership insight and things like that. I think my first experience of fundraising was back in 2018, where we raised a Series A round with a small startup. And but since then I've been involved with other businesses that have raised, you know, slightly more than that, you know, and actually now are on the journey to exiting out of that, that round as well. So yeah, lots to discuss and looking forward to the conversation.

Thanks for this quick intro, Michael. So, so you've been— so let's maybe zoom into that fractional a little bit because we had many guests who actually, you know, chose a fractional role after some professional, you know, roles for many, many years. What was your decision matrix, if we can call it like that? How did you end up in Fractional?

Yeah, so it's a good question. So really, it came about when I left a full-time role as CTO, you know, after a fundraising round. And it was more a case of starting my own business a little bit. And then the first element of that was just actually bootstrapping my business with sort of consultancy work, if you like. And what I actually realized doing that is that I'd missed working with other organizations as I had done in the startup. And it just kind of opened that door, really, to sort of, actually, I've got a lot of knowledge and experience and I can work with other businesses. And some of these businesses as well wouldn't necessarily be able to afford or want a full-time CTO. So it just opened up the opportunities that I could, I could work in different industries, for example, or work with businesses that otherwise I wouldn't work with. So yeah, and actually I just love doing it now. It's amazing to be involved in so many different things and the experience has just gone off the charts since I started doing that. So yeah, it just keeps me out of trouble and it's all good fun.

That's a good sales pitch. So you're getting access to different industries. So, you know, you like, you don't have to continue the same industry, which is a big hiring point, by the way. Like if You know, if as a person you start, let's say, healthcare, and then you, you got like one technical healthcare gig and then second one inside, and suddenly you find yourself like a healthcare CTO or something like that. Like, yeah, when people hire, they love the fact that you've been in healthcare for like 10 years, you know, that will be a huge hiring plus. But with fractionals, you're basically getting different access to industries, you know, much, much quicker, right?

Absolutely. Yeah. And for example, I've worked in sort of education and manufacturing, which are two industries, completely opposite ends of the thing, but you can cross-pollinate between the two and you can take things from one industry and think, actually, if we bring that into a tech startup, how can we optimize internal efficiency and things like that? So it helps give you a different perspective on businesses as well.

That's quite nice. Right. That's not a topic of today's talk though, Michael. So sorry for drifting. Let's go back to that fundraising. All right. So you did that first time in 2018. Can you share some details about what the company was, what the product was, and just give us a flavor of what that business was about?

Yes. So the business at the time was a business called CityLogic, and they basically took mobile network data and produced insights off the back of that, predominantly around people movement. So it was highly anonymized. It was sort of mass data, but it would give you a really good feel for where people were moving to and from and at what times of day and things like that. So you get lots of transport insights and there was opportunities to blend that with other datasets such as pollution and various other things, even marketing datasets to get an idea of where's the best place to put advertising boards, for example, or what's the best route to change a bus route or change the timings of the day for different transport links and things. So yeah, when I went in, they were very much more consultancy doing sort of one-off bespoke projects, but they had They did have the niche in that. And the idea really from that was for me to come in to help fundraise and productize that and make it much more of a mass market appeal and give it a bigger market to play in.

Okay, so how you guys were making money? Like, why would I buy that product?

Yeah, so at the time it was predominantly through doing consultancy work for potentially local authorities, for example, or transport companies who wanted to know how a people moving about, you know, what, what time, what are the peak times, what zones are people moving to and from.

It's just about people, Michael. Like, it was like, you wouldn't know that it's a male, 50 years old, you know, who loves Teslas and he's moving. It would be just like, yeah.

So, so, so that, that was exactly that. So it's a mass sort of level, anonymized level. But where it gets interesting and where we were thinking at the time is actually if we can blend that with demographic data, for example. So we know that a bunch of people are moving from Zone A with this where it's generally this demographic and that's sort of a home location into zone B, which is a work location, you can gain a lot of insight from that. And that might be, that help might tailor some advertising or specific transport links. So a lot of the customers were sort of, yeah, local authorities, transport companies, bus companies, train companies, things like that, wanting to know timetable schedules.

All right, that makes perfect sense. So you decided to raise. How that decision came to be? Like, what was the driving force behind deciding to raise?

Yeah. So I think on that one, it's a case of, you know, it was a very small business. So when I went in, there was 10 people there. They were making, you know, they were running along. They'd been going for, I think, about probably about 7 years, maybe 6 or 7 years when I went in. So it was steady away, but it was just consultancy work. It was very ad hoc. You know, it wasn't, wasn't, and it was also quite expensive to do. So they weren't making a lot of money. And I think the sort of gut feel at that time was like, what's the next step? You know, we need to productize this. So it was a transition of this is how we currently make money, but this is how we want to make the money in the future. And it was thinking about, ah, there's a need to transition here. And that was the trigger really for that investment.

Okay. So effectively the whole business strategy changed, right? You were like, hey, 'We are this for 7 years, 10 people. We've been doing this, mainly consultancy. This is how we make money. But this is what we're thinking now, which is a different business module. And to get that done, we need some funding.' Yes, exactly that.

Yeah, it needed a different way of thinking about it. So the processing, the data processing, was quite expensive at the time, so we needed to make that cheaper. You know, we needed to make it easier, easily, more easily accessible. Um, So it was more about creating like a SaaS platform with these insights in that we could then sell to a much wider audience.

Okay, so effectively preparing it for scale. So your raise story then was, it was a plan of achieving a much higher scale then?

Yes, absolutely. And I think it was a case of, you know, we couldn't carry on, we couldn't grow just doing what we were doing, right? Because it was expensive and we had a limited market that we were able to operate in. So we needed to open up that market a little bit. Proven what we could do, what we needed to do with the technology. It was a case of opening up that market a little bit and then actually bringing the cost down as well, the operating cost, to make it a profit model.

Okay, so for raising, timing is quite crucial. Did you guys target, you know, a certain season, a certain year, or were you just like, we need money, okay, let's prepare, you know, let's go raise?

Yeah, I think in that one, I don't think it was specifically targeting a certain period. I think it was more of a gut feel of we need to do something a bit different and we need help to do that, which was bring the raisers in. I think as well, sort of when I think into later businesses as well and ones that have grown again, it's more being triggered by, ah, we need funding now, we need money to grow. So it's always been triggered by that rather than anything, any specific time of year.

Okay, I get that. I mean, it would be quite hard. Would you say that it would be much harder right now to raise money than it was in 2018 when you guys were raising?

Good question. Yes, I think fundamentally, I think if you have a good business and there's a good opportunity there, an investor will always want to invest. I think because now there's so— it's, you know, in some ways it's almost easy to get everyone's attention with, with certain things. A lot of pitches can start to look the same, so trying to stand out is probably harder. I think the market is more challenging as well. Um, and so I think investors as well are just being a little bit more risk-averse. Um, so that, that does make it a little bit more, more difficult. Um, but you know, a good business with a good strategy behind it and a good leadership team will win investment.

It's a selective market right now, isn't it, because of the global economy challenges? I fully agree. And it's like investing in a startup as VC, it's, it's not the same, but we can use analogy as buying a stock in the global markets. Like, you know, why would I buy NVIDIA right now where, you know, everyone's, you know, buying? Because it's like, we know it's AI trend, we know it's a semiconductor, you know, and maybe right now don't buy it, not the financial advice, but there was a time where that trend was kicking off and the market was not great. We're talking about 12 months back and people were still investing in that business. So It's very similar to VCs when it comes to the startup. We have mentioned, it's like if the business is good, you will find the money. But in general, there's just less money in the market right now.

Yes. And I think actually it's a really good point because when you think about, oh, what's the readiness for the business to be ready for investment, actually you need to think about, okay, so if I'm inviting people in to potentially make, um, make an investment, you know, what's their exit? What's my exit? And, you know, it's thinking about that because that will give you a realistic scenario for actually what the appetite for investing might be anyway. You know, if you've got a really niche product that's got a very wide market and the timing's right, you know, even now that's going to look attractive to an investor and it's worth a punt, right? So yeah, I think you just need to think about when you understand if you are ready for that investment, you know, think about the investor, what would their exit look like for that investment?

Would you do that yourself though, or would you employ third-party services to do that? Because I'm thinking like, you know, if I'm a founder, I'm a CEO, maybe I do something well, you know, sales, marketing, I'm getting business and, you know, decide to raise the money. And now there's just a whole new shebang of questions which opens up, right? How do I talk with VCs? What do I do? Like, would you try to go, go and do it yourself, or would you just like, you know, I don't know, buy into like a raising agent or something like that?

Yeah, I think a lot of this comes down to professional networks. So one of the— I think one of the key things actually is having a trusted network of people that will give you a bit of a reality check as well and sanity check, you know, some of the things that you're potentially pitching or some of your thoughts and ideas. And I think it's easy sometimes especially as a founder, and I've done this myself, right? You can almost overinflate what you think your accessible market is, and you do need someone to bring you back down to earth. And whether that's sort of an employee consultant or a trusted advisor, you definitely need those grounders, those people that will ground you or at least challenge your thinking so you can then go away and check your facts and numbers are right.

Yes, I love that challenge your thinking. Piece. That's so, so important because a lot of founders have their head in the clouds, and, you know, rightfully so. They had big dreams and they, you know, they're doing something about it now, and, you know, they took it somewhere and they want to continuously, you know, fire into the clouds and go to space. And, and you need that, you need that challenge around some of these points because, yeah, you know, and actually that's one of the things.

So doing the fractional stuff now, that's one of the things where I can bring that kind of almost that impartial advisor thing to the business there's a lot of businesses I do get excited about, but I'm actually fractional there. I'm not there full time. I can take a step back and come to the idea fresh and actually challenge it a little bit as well. Whereas sometimes if you're in the business all of the time, it's very difficult to have that sort of outside perspective. So that's one of the things I actually enjoy about being fractional, right? I can help founders with their dream just by giving them that little bit of a challenge. And they answer questions that they wouldn't have thought of themselves.

That's exactly what the external expertise actually, you know, has as a big value. You know, are you thinking about everything? Because, you know, you don't know what you don't know, right? Like, exactly. I think you're always going to be in the bubble of your knowledge and expertise, and if someone comes in with a totally new bubble, you're going to get questions you never thought about. All right, so, so we decided to raise, uh, we think it's good timing, so we start preparing to raise, right? So How do you find VCs to talk with? Like, we talked a little bit about the network, but let's say my network game is weak, right? So I'm a founder, I do have a network, you know, clearly I have a business, so I'm probably on LinkedIn, you know, doing some, you know, B2B, B2C relationship building, but it's not VCs, right? So I don't have any public big image, so VCs are not seeing me. How do I go from zero to one? or from -1 to 0.

So actually the best way I found, and what I would always kind of try to kind of rely on a little bit, is accelerator programs. So I did one myself with my business through NatWest, which was fantastic. I was also part of an accelerator in the Leeds City Region called Build, which was for, you know, for new startups that again, like, just they bring all of that stuff to you, right? So being in there, first of all, you're in with other businesses that are also looking to pitch, so you can share ideas on that. But then they're hosting events or creating events where investors are going to be there. And that's how I've got those people in my network. And so for me, that is the core thing. And I think if a business is coming to me and saying, Michael, can you help us raise the first thing I would be doing is looking for accelerators that we could potentially apply for and think about how do we get on them, how do we leverage their connections as well.

Would you do that for businesses which potentially are more matured, like the one you talked about, which you had like 10 people, 7 years in the market? Would accelerators be— would they be too big for accelerators or would that still go?

So to be honest with you, that business was ideal for an accelerator, to be honest. And they, I think they were also on an accelerator just before I went in, I believe. I think for a slightly larger business, you know, where you may be looking at Series B or more growth funding, you know, you're more likely to have that network then because you're going to have a larger leadership team and you will have potentially already been through an investment round as well. I think one of the things to look for if you're looking for seed investment or to bring an angel in, like when you're talking to them, how do they get out of the business? You know, what do they see the next level? Because they have a lot of connections with the VCs, right? So, you know, I think that earliest round is definitely the hardest one. And that's where I would use the accelerators. After that, it's just your professional network, I think, in my opinion, really. And, you know, you might— I'm just thinking of one, I know a VC that are based in Leeds, right? I know the building they work in. So it might be a case of if I just wanted an intro to them, I'd find out who's based there on LinkedIn and just potentially try and reach out to them and say, would you be available for a coffee? But ideally you want a warm intro. So someone who already knows them. So again, LinkedIn is useful in that sense because you can see how many, what degrees of connectivity you are away from them. And hopefully you can try and get an intro if there's someone specific that you want to speak to.

Yeah, that's a very good shout about LinkedIn. And I think people who never used LinkedIn Sales Navigator don't actually know that it shows you a map how to get to the person. It actually shows you connections and how you can actually, you know, get to the person and get that warm intro.

So absolutely. And I have to be honest, I'm not the best at LinkedIn and it's not, you know, the social networking side is not something I'm sort of great at, if I'm completely honest. But, you know, when it comes to it, that sometimes is the way into someone, right?

Yeah. The warm— yeah, the cold outreach, especially in a booming market when Everyone's raising, I mean, think about how many of these messages VCs are getting. Just think about it. Like, you're gonna drown basically in the sea of these messages. And if you flip this right now, as a hiring manager, if I, you know, put the role up, I get hundreds of applicants, like hundreds, like literally hundreds, like 300, 600 for a role. Because this is right now, that's the market, right? It's like, there's a lot of roles and not a lot of people, right? So it's like, I'm sorry, there's not a lot of roles and a lot of people on the market who's looking for a job. So, so it's the same with VCs. Like, if everyone's looking for money, they get tons of applications, and that cold outreach will, will have a real high, you know, high, real hard times performing. So if you can get to the warm one, that might be just a better use of your time to come up with a strategy of how you can get you know, a warm introduction rather than trying to put your time in and effort into cold outreaches.

Okay, absolutely. Yeah. And again, that's where the accelerators come in super useful, right? Because actually they're providing dedicated time with those people as well. So yeah, for sure.

Okay, so accelerator is one, spending time on LinkedIn, you know, trying to get the warm outreaches, you know, second. Let's say we were successful, you know, let's say something is happening. And, you know, we're getting some conversations scheduled, we're getting some phone calls, uh, and we are able to go and, and talk. What should, what should one expect? Like, let's say we never did that, I have no idea what, you know, maybe I have some idea because I Googled or whatever, but, you know, in real terms I never experienced it. Like, what a founder could expect from these initial calls?

Yeah, I mean, the key thing is you, you need to think about your, your messaging, right? You need to think about How soon can I land what I'm selling? Well, not selling, sorry, but what the opportunity is to the investor. So really make sure you have a good hook in your pitch. You really want a short, condensed pitch deck and you want a version of that where you're sat down and everyone's looking at a screen. But you also just want a version that's just you speaking, right? It might just be you're meeting over a coffee or you meet them on a phone call. So you want to really articulate in a in a concise nutshell, you know, what the opportunity is, you know, and you can phrase that in different ways depending on whether you're speaking to an angel or a VC. You know, angels are generally looking for more kind of, you know, they're expecting to look probably at smaller businesses. It's probably more of a personal relationship. So they're wanting to know you as well as what the business is. A VC is probably more interested in actually what's the plan behind getting this strategic growth. So it's just thinking about the different people you're speaking with and really just make sure you nail the hook You know, why should they invest in your business? Make sure you get that message in early, and then from there, you know, just feed the conversation with detail.

How important is their interest alignment with what you're actually pitching? Like, before I go on a call, should I do my research and understand what type of businesses VCs are investing in, you know, what they're looking for? Or are there VCs who just generally invest in anything goes?

Yeah, I mean, as with anything, you definitely need to do the research. I think that that's probably more applicable to, um, to angels, to be honest, in terms of, you know, angels will have certain things that they're interested in and they can add value to as well. VCs, I think, are probably a bit more of a broader stroke. So, you know, if you, if you can articulate, you know, the opportunity for them and the plan to how you will get there, I think it's probably a little bit a little bit broader on that one. But regardless of who you're speaking to, yes, prep— I mean, preparation is key, right?

I love that. And I would probably speak with everybody who wants to listen to me, at least in the beginning. If you, you know, if you're like a founder who never raised money, you'll need practice. It's like with anything, you know, feedback. Yeah, exactly.

Always get the feedback.

Yes.

And obviously practice the pitch on friends and family as well. Um, you know, sometimes just What you have to remember is that you know your business inside out, right? So you can say something, it means it makes perfect sense to you. But if you can articulate what your business does and what the value proposition is, if you can articulate that to your friend's kids or, you know, someone's parents, you know, actually that is really a key skill. And it means an investor will understand as well. You know, they don't understand the technicalities of your business. They just have to understand the opportunity.

Yeah. 'Explain to me like I'm 5.' Yes, exactly. Or a mom test. I think that that's another one where there's just no doubt in understanding of how you're actually going to make money or how you're actually making money.

Yeah.

Okay. So we're talking with them. So we got our calls, you know, we went likely through numerous failed pitches, you know, 10, 20s. We readjusted the deck. We got some critical questions being asked. So we added maybe a slide which covers something which, you know, was a feedback. So we sort of have iteration on feedback loop and we are now doing much better. So now we're sort of moving to a second phase, you know, second meetings of getting asked a little bit more. How that second phase looks like?

Yeah, I mean, obviously at this point now we're getting more into the detail, right? So I think the key thing here is to be well versed in that detail. I think especially the financials, I think I think where I've sort of fallen down in the past is, you know, not necessarily understanding the financial side that well. And so, you know, you really need to make sure, especially if you're just like a founder and you're not a CFO or something like that, you know, really look to bring that person in who can help you with the forecasting, help you with the budgeting, that side of things, and really be clear on the numbers. And I think the key thing as well, when you are getting into the detail, Sometimes there might be elements that you feel uncomfortable with. You might have tech debt in the business, you might have a bit of a black hole in the finances. You just have to be transparent with everything, right? Let the skeletons out of the closet early if there are any. A lot of investors will have seen a lot of these things before anyway. But I think as well, it just helps build that trust relationship. And actually, you know, if they're interested at that point, it's going to take something really scary to put them off. So you're better off just getting it out of the way. It's going to be more damaging, I think, if you wait till further down the line and then bring the skeleton out of the closet. So yeah, just be mindful of things that, you know, you might be nervous about, but get them out there early.

I love that. I mean, it's as simple as would you yourself give someone money if you don't trust them?

Exactly.

It's like No, you wouldn't. Like, well, like, you don't trust the person, why would you give money? So it's like, yeah, just transparency.

Yeah. And listen, we've all written code we're not 100% proud of, right? So it's just a case of saying, okay, we acknowledge this, but this is our plan to deal with it, that sort of thing.

Tech founders, in my experience, concentrate way too much on, uh, on engineering excellence, and they think it has a unique positioning, sort of like a almost like a sales proposition where it makes the business more valuable. In my experience, unless this is your business, which is the quality of the code, it has very little impact. At the end of the day, the P&L, which you look at, and people buy your product— people buying the product, they have no idea how it's written, right? They have no idea.

And actually, in a lot of ways now, you know, with the technology that are available, it's quite easy to rewrite things as well and break sort of things up into microservices and sort of do it bit by bit. So, so yeah, that, that's not a areas it perhaps once was.

Yeah, tech debt wouldn't be like a, you know, the biggest ghost in your closet. It's probably going to be more, but you put them out there, you go like, here's the worst you would see, everything else is brilliant. You have situations if they're not getting put off, it's awesome. You know, you look at the numbers, so you're probably going to create like a data room folder where they're just going to ask for stuff. You'll need to provide documents.

Yeah. So the old shared drive, obviously, with things in. And I think, again, I think for me it's trying not to be too detailed in the conversations, but almost be referencing back to that, especially if you're still in the pitch deck stage. You don't want to overload with— you don't want sensory overload on the pitch deck, but it's having that detail behind the scenes. So you might have a link into a shared drive with all these are the financials for the last 24 months, for example. And obviously you don't want to put all of that on the slides. But yeah, just having key things like that, key architecture decisions, you know, key sort of any market research and things like that. You know, you can put the summary on the slides and have that in the conversation, but then have a link to that so they can go away and look at it afterwards and then ask questions.

So it's a combination of a dream and how you're going to achieve that, right? That's what you want to have in the slides. So it's not about the nitty-gritty details, but it's like, hey, you know, we can be so much bigger and this is how we're going to get that done.

Yeah, exactly. Yeah. We, you know, we believe from our research the market is this big and it is a nice simple graph, but then you can put the detail behind. This is how we've come to this conclusion. And these are the numbers behind that as well. You know, if the market is this big, if it's 20% smaller, these are the numbers. And if it's 20% bigger, these are the numbers.

Okay.

So yeah, you can also sort of have a few different— I think it's good to scenario plan. Not everything goes exactly to plan, right? So I think turning up and showing an investor that you've thought about actually worst case scenario versus best case scenario, it just gives them a bit of reassurance as well in terms of your planning and what you're expecting from the investment.

I love that, the risk management piece. It's a boring slide, I guess, but it's, it's, you know, it's quite, quite, quite important to actually showcase the editor about it. Maybe it doesn't have too many details, but it is quite boring.

But if you think about the one thing that's going to stop the investor from investing is risk, right? It's a risk to their investment. So it's probably— it's pretty critical, to be honest.

Yeah, they need to be able to assess the risk of that investment for sure. Okay, so we now went into the second stage. We got a folder. Data Room, shared all the documents, things are, you know, going well, and we're seeking an amount of X, right? So, so the question would be, how do we know how much money we're trying to raise?

Yes, I mean, I mean, that's a good question, right? At this point, you, you should already know, you know, you've identified the reason for going out for investment. So I think if we think back to CityLogic, you know, we, we know we wanted to productize, so we'd put a roadmap together. These are things we need to do, you know, this is the engineering team that we need to be able to do that. This is the marketing strategy we need to go out for these new customers. And you put a budget and a plan in place for that. So that informs that funding amount. Obviously, if you're scaling, then the sort of levers will be different, but you will still need a plan behind that. So you should know beforehand, you know, what you're asking for.

Hopefully, hopefully, hopefully you know what you're asking for. So that was a probably wrongly placed question from my end. But yeah, so let's say you have X amount, you're asking for it. How does the negotiation go at that point in time? Uh, is it possible that we're going to get offered less money than we're asking for and we'll need to raise, you know, another branch with someone else? Is it possible that we'll get the money we're asking for but they think it's too much, so they're gonna maybe take more equity to manage? There is like How does the negotiation go here?

Yeah, I mean, there's always the case for those scenarios, right? And I think actually it comes back down to the preparation on your side as the founder. You need to be realistic about what your business is worth today versus what it'll be worth in a few years. You have to be mindful of how much of that business you're potentially going to invite someone in to run with you, they're going to be a shareholder, you know, you need to be mindful about potentially how much that will be. And I think in terms of that valuation, right, I think if you do that realistically, you will have a good idea of where your valuation is. And then it's a negotiation on the share of the business based around that. So you should have operating parameters. And I think the key thing as well, don't be scared to push back, right? You know, it's your business and you're— yes, you are asking for help, you are asking for investment, but, um, it is your— it's your business at the end of the day, right? And you're actually giving an investor an opportunity to potentially come along for the ride and also make a lot of money, right? So you have a lot of cards in your hand, um, but it comes down to your preparation, you know. And I think you need to be realistic is the first thing. I think it's very easy for a founder— and I, again, I've done this myself— you over you kind of overvalue what your— it's your baby, right? You've built this, um, so you, you potentially put higher value on it than, than realistically what it would get out in the open market. So it's just being realistic about that.

That, that happens all the time, at least how I see it. It's like, you know, we're making like a million right now, we're raising on a $16 million valuation. It's like, man, that's a, that's a big jump.

And, and I think, to be honest, if you are realistic about that and you go in prepared and you know realistically where you are at, you know, actually the negotiation isn't that much of an issue.

Um, you know, it's going to be hard to be able to defend your numbers and, and be actually comfortable with your numbers.

And actually, and if you do that, then actually the, the investor's assured straight away because you know your stuff and, and you, you know, you, you've, you've really thought about it and understood it.

Great. Yeah, fully agree. Okay, so we know how much we're raising, uh, renegotiating. Um, in, in your experience, what's the equity share we're losing on Series A?

That's a good question. I'm trying to think. I think we were 30% at CityLogic, off the top of my head. Um, but I mean, it, it depends. It depends on, um, what, what kind of stage. At that point, we were, we were obviously generating revenue, but there wasn't profit really in there, you know, so it wasn't a profitable business. There might be other businesses actually that have a lower operating cost and are more profitable, so therefore that share might be a little bit less. But I think the key thing is you need to be thinking about, okay, what does this look like now? So we're giving, you know, we're inviting someone in at 30% now, but then when we raise the next round, what does that dilution look like as well? And I think sometimes you can get sucked into going too high, too early and then realizing a little bit too late down the line, actually, you've potentially lost a little bit of control of your business there.

So, um, this is where the CFO would help, Michael, isn't it? Like, uh, yes, just modeling out the future and potential future raises. Um, maybe you won't need— I mean, it's very unlikely that you wouldn't raise again if you're raising— if you're basically gonna grow through, you know, raises, you're gonna be raising a couple of times, maybe later you start buying other businesses, so you start merging and you start growing through mergers and acquisitions. But if you do one— yeah, yeah.

And I think one of the other things as well that I'm probably more inclined to do now is I would probably— if, you know, if I'm going into a startup and saying, oh, we want to look at a $5 million Series A, but then I'd be looking to think about, well, actually— and this is where the CFO comes in really handy as well— think about cash conversion. And actually, what can we do to mitigate having to go for further investment rounds? How can we think about our cash conversion and how we, you know, how we generate cash in the business to actually limit how much we need investment in the future? Because even if you still need to go for that investment, it will reduce the amount that you need to go for and therefore reduce the share that you need to invite someone in at. So I think being a bit more proactive about that, you know, even though it feels a long way down the line, being proactive about that can really help in those, in those future rounds.

Definitely, it should be a proper planning. You do tend to see people getting very excited about the fact that they're going to raise money and, and potentially that excitement, that emotional response to the situation might judge your— might cloud your judgment, you know, looking like 3, 5 years down the line. So So having advisory around, either within the team or Fractionals or whatever, it's, um, I feel like it's a great strategic positioning, just going like, I probably don't know a lot about this, so maybe I'll have other people, you know, looking and sort of, you know, working on my blinders.

Yeah, absolutely. And again, as well, it's thinking about that future strategy, you know. If you think that you— or if there's not an intention to raise further down the line, but you might look more at the acquisition side, you know, that, that an impact on the cap table, and it changes what you can potentially do in that first round as well. So I think even though you're, you're looking at that first round and getting really excited about it, do think ahead, you know, what, what is coming down the line, and, and use that to leverage and, and get the best out of your first round, if that makes sense.

It does make perfect sense, Michael. So, so we have the— so we have the money, uh, no, actually, let's talk about cap table. So So we, you know, we got the fundraising. So now we, you know, have new shareholders. You know, they own the business now. How poorly this decision can go?

That's a very good question. I think, you know, when you're doing the fundraising, I think the key thing is like you are inviting someone into your business to be part of that business and you need to do your due diligence on them. As much as they are doing due diligence on you. I've worked in businesses that have investors that are a good fit and I've worked in other ones where, you know, investors can be a challenge and it depends, right? I think you need to be mindful of, for example, if you're bringing investors in that are very hands-on, you need to be mindful of that and you need to understand what that impact is on your day-to-day running of the business as well. Because the reality is, right, with a few further rounds or bringing, you know, maybe people that they're knowing as well, it could potentially be a case of you do lose control of your business very quickly. And that's not necessarily a bad thing. You know, if they've got a lot more experience than you and can grow it faster, you know, you actually might want that. You know, having a 30% share of a very high-value business is potentially better than having a 70% share of a slightly lower-value business. But I think you need to understand what you want out of that investor relationship as well and who you are inviting into your cap table with you. You've got to, you've got to work with them for a long time, right?

Yeah, exactly. And once the cap table is what it is, if there's mistakes around it, it might have big impacts for the future of the business.

Yeah, exactly as well.

So that's, uh, how bad that can go, which I've some answers of how good that can go. So let's say, uh, let's say we took that money in. So now, uh, you know, it's in our hands. Like, how does that happen? Do we get all the money transferred into business account, or is it, you know, some tranches? It's like, um, how do we actually get a hold of it?

Yeah, yeah. So I mean, that depends on the, on the agreement, right? CityLogic, I think we got the initial amount transferred, and then there was a further— once we hit certain targets, then that, that did the top-up and released the second round of that funding after 12 months, I think it was. But the one thing I would say though is it always takes longer than you want it or expect it to. So you really don't want to be at the point of you are running out of cash and it's critical to the business. You expect it to take a long time. I'm trying to think. I think it was probably around 9, 8, 9 months in total that we were going through the process at CityLogic and cash was actually quite tight at the time as well. So it was very stressful. But yeah, obviously once that initial tranche of money lands in the business bank account, it's quite a nice feeling.

So we got the cash. Excellent. You know, we open next morning, you know, we all come in the office, we log into whatever the banking system we're using and we're seeing, you know, all these millions sitting in a bank account. Great day for everyone, right? So I'm a founder and let's say I'm a CEO, you know, maybe a self-selected CEO, you know, potentially I'm not maybe that great as a CEO. Maybe I am because I raised money, but you have some situations where VCs come in and they go like, you know, we're going to look at your management team and, you know, they give some feedback about that as well. Because again, they want to position the business for success, right? Because they need to extract the money and hopefully make profit. So how does the CEO's mindset should shift when they actually get the money in the bank account and then, and they now have this VC partner?

Yeah, I think, I, I think the mindset actually is quite a big shift because initially a lot of your focus on just kind of getting the deal over the line, you are kind of thinking very short term even though you know the long-term plan. All of a sudden you've got that money and it's a relief. All of that is done. But what you have then is the expectation and actually a little bit of pressure to perform as well and hit the targets. And so I think, you know, the first thing actually is when you're in that round, be very clear. Is the management team that you've got now the one that you are taking through post-investment, or are you looking to bring people in to supplement that? That management team as well. But it is a big mindset shift. And I think the biggest thing is actually after a couple of months, right, the monthly targets can put quite a bit of pressure on the management team. And it's quite a tough time, to be honest. You have to stick together and stay strong as a team and just believe in your plan as well that you put together beforehand.

Did you have any situation where the VCs would change the management team?

Yeah, and actually that happened, it's happened a few times, to be honest. So if we think about the scenario at City Logic, actually what happened was obviously the investor put someone on the board and they also recommended a chairman to come in as well. But actually in that scenario, what ended up happening is that the CEO then left the business, but the chief operating officer also had to leave the business at the point the investment came in just because of a conflict. And that completely changed the entire dynamic of the board. So it wasn't something that was intentional to happen. I think, you know, the chief operating officer had to leave because of the conflict and then CEO ended up leaving the business, but it then left the sort of the controlling part of that leadership team back with the founder who, while he was very critical in his knowledge and expertise he brought to the leadership team, he didn't really have that growth mindset. And it really upset the forward plan really on what best to do with the money. And it did disrupt the direction the business was taking. So it is a big challenge. You know, you have to be mindful if there's new people coming in and if those investors are very hands-on and they're bringing their people in as well, you know, you have to make sure that they're buying into that plan that you've put forward or you accept that you're going into their plan.

Yeah, I, I, I do like it. I mean, it's a great, it's a great story you shared, Michael, because, uh, that, that new chapter, it's, it's a different chapter. So now you raised Series A, you know, you're, you're accountable to the shareholders, where before you were potentially accountable to yourself because you were like majority shareholder, you were a founder. And, uh, you know, you have skills because you created a business and, and you raised the money and and, you know, clearly things are going well, but, you know, there's an element of that performance which will be expected out of you and as well the whole management team. And, you know, not necessarily that you are ready for that new level of game.

Yeah.

And because there's definitely levels, you know, to the game, and VCs might come in who have a lot more experience, they will look at the team and they will go like, well, not everybody is, you know, are well positioned to, to actually take and make this business successful. So maybe there's a replacement maybe readjustments of roles. And it's good if you're getting these advisors rather than just getting the money and, you know, being left alone, because it probably goes back to our point of getting challenged and, and, you know, getting your blinders sort of fixed to some extent.

Yeah, no, absolutely.

Okay, so I'm a founder, um, all is well, so we're continuing with the plan forward. Um, how do you— so we already sort of have a plan, right? So, so we know how we're gonna uh, how we're going to spend the money. Did you ever seen or have any stories to share where you seen the money being spent poorly? And, and, and if so, what do you think were the, um, not the outcomes but the reasons of money being spent poorly?

Um, I don't know if I would say poorly per se. I think, you know, there's always an element of money in the marketing plan, for example, and, and sometimes that doesn't quite translate, the outcome of that doesn't quite translate to what you wanted, so you end up outlaying quite a lot of money and not getting the results you expected. So that can be a challenge. I think, I don't really think, you know, it's a case of spending it poorly. I think if you end up having to deviate from the plan, ultimately that decision has to go back to board and get signed off anyway. And then obviously if you're not spending it to plan, then that's raised as well. I think there's the scenario that I have seen is just where you are spending it where you intended, but just not quite getting the results that you would hope for. And at that point, you know, you just have to maybe reevaluate and do you want to continue that spending or do you reforecast and replan and maybe try a different route? But obviously at that point, you really need to be engaging with the investors and setting expectations as well.

So you wouldn't be able to effectively, you know, buy everyone a holiday to Bahamas and 3 cars because that would need to get signed up by CFO.

I've not seen that one signed up in the investment plan as yet, but you never know.

All right. So, okay. So how do we approach rethinking the headcount change, right? So we've got the money, you know, we clearly will need to accelerate the plan. So most likely that plan has a headcount increase and all of that. Like, like, how do you plan that area out and how do you execute that area?

Yeah, so I think, I mean, depends on the team. So if you're building out the engineering team, for example, the critical role really is that kind of that head of engineering, you know. And ideally you want to bring that right person in and then allow them to to recruit that team. So obviously all of that spend isn't going to happen at once. And ideally as well, I think if, you know, if it's such a critical role, you probably have an idea of the candidate as or just before the money lands. But yeah, I think, I think it's a case of having a nice resourcing plan. You know, what are the key roles you need to fill as soon as that money's in the bank and get those people in as quickly as possible. And then it's just about building building the team around that, then one of the biggest challenges I think you have, you know, as a sort of, as a founder, as a small business, and then you get this money in and you scale the team, is all of a sudden you're getting a lot, you know, the percentage of people in that business that are new is quite large all of a sudden. And you have to be mindful of the potential impact on the culture of the business, you know, the ways of working, what it does as well to people that have actually been there from the start. You know, that they'll start feeling a little bit different because of the different dynamics across the team. So it is really an element that needs a lot of effort, I think, from certainly from the founder, but actually from, from the senior team to help ensure that the culture does remain consistent through the business.

So, so we got effectively management level, which will likely will be challenged or overlooked by VCs, and then we get the right people in the, in the you know, Chief Technology Officer, Chief Financial Officer, Chief Marketing Officer, and all of these seats. They will then build their own teams based on the plans we have, which gives us, you know, the whole new company. And as you rightfully pointed out, a lot of new people will bring a lot of new flavor. So unless you are hiring for a certain culture and you're screening for that, it will be a mashup of all those people coming in. So talking about cultures then, or talking about maybe high-performing team cultures, how would you do all that hiring? Like, how that hiring should be structured or planned to actually end up in a year or so when you get all the headcount filled, you know, with a certain culture which leads for, you know, leads or tends to be a high-performing culture?

Yeah. So I think a lot of this comes back down to sort of your values as a founder and the values you instill in the business. And I think you really— I think it's important, you know, as you're going into the investment, you need to be mindful of that. But I think it's also worth sharing that with the investors, you know, as you're pitching to them. These are the values of the business. I mean, I think for me, one of the best ways to create a high-performing team is to just empower individuals to do what they need to do. Right. So, as a founder, you know, you're going to trust your leadership team to run those different strands of the business. And the Chief Marketing Officer, for example, is going to trust his team, you know, to deliver the results from the marketing side and exploiting the different sales channels and stuff. So, you know, it's just about empowering people to do their job. And again, I think this is one of the things as well, setting the expectations when an investor comes in, you know, if you have too much interference on that side or an insistence of bringing certain people in, that can impact your ability to empower other people within the business. And then you start to lose that little bit of the culture that you've instilled already that you want to grow on the business. So yeah, I mean, listen, everyone's always looking for good people, right? But I think the key thing is once you get those good people, just empower them to do the job that that they can do, right? And the mission and values of the business should then drive the direction the business takes going forward.

Would you do that before you start building a headcount or more like let's just fill the headcount and let's then set the values?

And I mean, to be honest, the values need to be there from day one, really, to be honest. Even— and I think as well, I think it's important to be making those clear to the investors. You know, when you're pitching for investment, You know, you want to give them a flavor of what your values are, what the business values are, because you want them to align with them, you know. And if there's— I know it's tricky to say because you're potentially going to want money, but actually if that investor doesn't quite align with the values that you have in the business, you don't necessarily want them in that cap table, no matter how tempting that check looks. So yeah, I think you definitely need them beforehand and then you need to just understand there's a bit of a calculated risk. And if they don't quite align, do you want to carry on down that path, or would you want to maybe end that conversation, maybe look a different route?

Okay, so we, we do have now this, um, headcount filling challenge, right? So let's say we raised, you know, anything above like a million, 3 million or so, and, uh, or, or maybe a better context is we, we need to get like 60 people in, in the next, you know, like 6 months. Like, that's a big headcount to fill, right? So we're probably gonna, you know, use some recruitment companies or whatnot. Still a lot of interview, uh, tactically speaking, a lot of time, you know, talk and, you know, screen and all that stuff. And, and you're not gonna get all the best people. You won't, because you're gonna have less— you will have less time to actually look for people. So you probably will meet, you know, need to make some trade-offs. So, so the question effectively is around like diversity and inclusion and how you, you know, think about the team and structure, structures of a team. It's like, is that part of values or do we think that that actually leads to better performing teams?

I think so. When you bring a large volume of people in, right, you're going to have different channels for bringing them in and you're going to, you know, you can People are going to be coming into different teams as well. So you're potentially going to be working with one recruiter for the marketing team, for example, versus a different recruiter for the technical team. I think the key thing there is to work with external companies that understand your business and having them do that sort of early stage of kind of, do these people align with the business, is really useful. I've done it before, actually, with a couple of tech recruiters in Leeds, where just regularly meeting up with them and feeding back as well. When they put candidates forward that aren't quite a good fit, feedback to them as to why, so they get to know you a little bit. And what happens then is, I think as well, they can sort of look at that pool of talent that they have and go, these are a good fit, or these are potentially not quite right, but would you like to speak to them anyway? And then I think from there, it's just Yeah, again, it's just empowering people to, you know, if you've got a head of engineering, just empower them to create their best team, right? You have the KPIs that the team needs to perform against. Trust them to deliver that and bring in the team that will do that. And actually, some of the strongest teams, you know, you have quite a lot of diversity, like just in ways of thinking and, you know, different approaches to things, you know, people are able to challenge the norm as well. You know, that's, that's how you really create a strong team. So yeah, you have to be open as you're recruiting to, you know, bringing those characters that might feel a little bit uncomfortable in but are fundamentally there to challenge everyone else, right?

Hmm. Talent attraction, or are we just using recruitment? I'm just thinking like, if we need to fill big headcount very, very quickly, do we invest in making the company look appealing for the broader market, or are we just going with recruitment?

Yeah, the company needs to be attractive, right? There's actually quite a lot of competition out there for candidates, so you need to be attractive to the candidate coming in as well. I think if you're looking for highly skilled roles, then there is an advantage of using niche recruiters. If you're looking for developers or architecture specialists in the tech sphere, looking at specialist recruiters for those is definitely an advantage. But regardless of that, you know, when you're put in contact with the candidates, your business needs to be attractive to them as well. You know, you need to offer a nice working environment, you know, good culture, a good business brand. You know, people want to be associated with companies that are doing good, companies that are good to work for, you know, in a good location and a nice working environment as well. So yeah, there's a lot of moving parts in bringing people in.

Okay, I do agree. I mean, sometimes you get candidates who just look at the, you know, they get a call from a recruiter or they, you know, they look at some LinkedIn job listing and they just apply and they don't really do much of that research around your company, around the values, around, you know, culture, environment and and things like that. They just go like, you know, it's a job, I'm just going to go have a chat. And then there's people who actually care about that. And you probably, if you want much, much better candidates, you will look at the people who look at your company and they take, you know, they take time to actually understand who you are. As a result, you want to position yourself in such a way that you look appealing.

And actually, you know, if your, if your company is out on LinkedIn and, you know, and your, your sharing information on the kind of benefits and you will actually attract people as well that align with the values of your company and want to be involved. So that's a way to kind of find candidates organically. And it might be that you don't have the role straight away, but actually by linking up. Yeah.

And we got the people in, we got good teams, we're going through the plan, which probably was like 3-5 years plan. You know, of course, ups and downs along the way, people leaving, you know, some products don't work, you know, marketing strategy didn't work, you know, pivots and whatnots. But everything is going fine, right? So a couple of years later, you know, all our numbers on paper are going up. So, you know, we're going healthy up. P&L looks good, sales looks good, everything looks good. At which point would you go and say, do we exit or do we raise a second round, you know, to accelerate that growth?

Yeah, that's a good question. I mean, I think the first thing is how much has the journey taken out of you, right? I think don't underestimate how exhausting fundraising can be. And then actually when you get the funds, you know, getting everything right after that is also very challenging. I think, you know, it kind of comes down to what you want out of the opportunity. You know, there might be a point where actually you feel you've taken the business as far as you can take it, and that might be your cue to exit, right? So I think you kind of have to assess that as and when you get there, just because you can't know beforehand how much energy you're going to need to put into to, you know, get, getting through that Series A, get, getting that, that sort of growth journey started. Um, and, and yeah, you just sort of have to, you know, markets change as well, and, and, you know, the business, the business will evolve as you're becoming more hands-off. You might decide that actually there's less value that you can add to it as well, and you might want to just move on organically.

Can you, can you exit alone? Like, um, So, you know, like if you're a founder, after VCs you have a package left, 15% or whatever. So it wouldn't be like selling the whole business, it would be just you selling your shares to, you know, maybe back to the same VCs or someone else. Like, is that a possibility?

Um, so I mean, typically to exit you need an event, right? So that's either another investment event or, or a sale. Um, but you're going to need an event to happen in order for you to be able to exit. That's not to say that you can't— a manufacturer event is not necessarily a phrase, but if you decide at that point, you know, you want to exit, then you are ultimately then looking for an investor to come in and buy your 15% or 20% or whatever it is. So there's, you know, at that point you're still thinking about, and you might be speaking to the shareholders and saying, look, this this, this is my scenario, I want to look at exiting. Are you interested in buying me out, or do we need to look for someone else to potentially come in and, and take my, my share? Um, but yeah, ultimately you're going to need some kind of event to happen in order for you to exit the business.

Okay. And it's always probably challenging to others when, when a founder and potentially like CEO or anyone in the management decides to sort of leave because it will force you to regroup the whole business. But you've been here for numerous years and everybody has their time, as they say.

Yeah, you don't necessarily know straight away when you'll want to exit, right? You might have a big plan for what you want to do with the business, but then your life changes as well. Different life events happen to you. You know, there's always that, there's always going to be that little bit of element of uncertainty. But I think, you know, it's all about communication, that one. And I think, you know, speaking to the shareholders, speaking to the management team across the business as well, you know, if you are looking to exit, I think just being a bit transparent really for the reasons behind that as well, you know. I think communication can do a lot in helping smooth that journey out a little bit.

It can be unsettling for Why would, why would one choose to exit instead of raise a second round? Would it be all about, you know, I'm done, I just want to exit, or would there be potentially other reasons?

Um, I know someone, for example, who had a health scare, um, and, and decided, you know, that, that they wanted to spend more, more time with family, for example, rather than being in the business. Um, there might be I'm just trying to think of another scenario where in more of a case that they felt they couldn't take the business any further. You know, they wanted to look at bringing another CEO in to run the business for scale as well. And they wanted to use the opportunity to exit the business. Obviously, you could also stay as a shareholder but not run the business at that point. But yeah, I mean, I think there's a variety of reasons, right?

Okay, guys. So here, you know, here you have it, a quick high-level journey from from should I raise until the exit and all in-betweens, some tactical applications and advices from Michael. So thank you, Michael, for coming and sharing all of this with us.

No, thank you for having me. And, uh, yes, look forward to sharing future insights as well.

Ah, here you go. Thanks, Michael. Thanks for coming again. Thank you.