Start-Up Lessons From Successful Serial Entrepreneur Jothy Rosenberg

Welcome back to Mastering Tech Growth. I'm your host, Mike. Today we're talking tech startups. We're going to be going from starting strong and finishing big. Joining us today is Jyoti Rosenberg. So Jyoti's backstory is nothing of a true inspiration. A two-time cancer survivor amputee, a book author, a serial entrepreneur with, and I think I might be getting this wrong, but I think it's about 8 startups, Jyoti, which you launched, scaled, and exited a couple of them over $100 million. So that's a big achievement. So Jyoti has a book which is called Tech Startup Toolkit, which you can see in his background. People listening, you can't, but you can Google it. So the book packs a punch of knowledge, and today we'll try to explore some of that. We're talking about critical role of CEOs, effective fundraising, and how to actually build a winning team culture. Jody, welcome to the show.

Thank you very much. It's great to be here.

Good to have you. Before we kick in, to our listeners, guys, your reviews, your subscribe means a lot to us on Apple Podcasts, Spotify, or wherever you tune in. All that love helps us to bring more content to the tech community we all cherish so much. So, Jotty, when I say mastering tech growth, what comes to mind?

Well, um, figuring out the most important thing for any startup is to figure out the market that they, that they need to enter and And, and it's got to be— there's got to be a problem in that market that's really big. So the market has to be big and the problem has to be big for the, the company to have continuous steady growth and, and get to the point where it can exit. And so many people kind of— they— a lot of tech startups, I don't, you know, I, I don't want to overstate how many, but A lot of tech startup people think that, okay, if I built this great thing, then they're going to come, they're going to find me. And it's— so I had a startup where the market was so ginormous. I know that's not a real word, but I love that word. It was so ginormous that we didn't actually have to do nearly as much work as I've had to do in every other startup. And it was, why was that? Well, it was because it was 1997 and the market was the web. Now, people may forget that the web actually was launched, if you will, in 1995. Yeah, the technologies had been around for a little bit, but really what happened is that networking came to everyone's desktop. So, and the browsers started to exist. And then we discovered that we were just putting static marketing content on the web. And then one day it was the Super Bowl and Victoria's Secret put an ad up and it said, to see more of these beautiful women in this beautiful lingerie, go to your web browser and click on our site. Well, their site crashed so fast. And that was when we and everyone else discovered that, oh, this web thing is going to be huge, but it's not going to work very well if people can't figure out how to put websites up that can scale. And we were right there ready with a scaling product. And I've never seen anything like it. We, within, we had, we were doing $2 million in revenue and this was my first one that we had a sale and it sold for $106 million. And we'd only taken $4 million— no, yeah, $4 million total in investment. Most of us aren't— and I never had that happen again. Most of us aren't going to see that. Most of the time you've got to work pretty hard to figure out what is the problem, what is the market, and how do I make sure that the product that I have is really gonna be what people want, that they're going to buy. And that's called product-market fit. And there has never been a startup that's successful that hasn't proven product-market fit. Anyway, so that's starting to get at the answer to your question. It's a big question.

It's a big question. So the follow-up on this one is if you would choose one, uh, from all the elements which are important to any tech growth venture, what would you choose? But I feel like you entered that. Would that be a market product fit?

Then it's the product market fit. Okay, there is a little bit more to say about that because, because, you know, it, it, it's kind of a, you know, a short phrase, product market fit. It's like a hyphenated 3 words. But it's saying a lot of stuff in that 3 words. So here's how I sort of walk people into, you know, solving this problem. So the first is you've got to have a sense of a big problem that needs to be solved. Okay, let's, you know, Let's say it's this scaling of the web, even though I said that was a pretty easy one, but let's just pretend it's not easy and you're gonna walk yourself into how to solve this problem. Okay, so this ability to scale your website on the web is a big problem. And if you don't solve it, then your website will crash. People will go away and you'll never have any business. So that's a big problem. And so now you could decide, okay, I understand what the problem is. It's big. Now, how am I going to get into that market? You can't boil the ocean. You can't say, I'm going to just solve this problem for everybody. And so what we had to do was say, well, who's got the problem the worst and will pay for it? And what we decided was financial services. People like Fidelity and Schwab, they wanted to actually have people think of their site as a big application. I want to go to Fidelity and I want to You know, look at my 401, which is a, sorry, I'm using a US term for, you know, a retirement account. Okay, it's a retirement account. So you say, okay, you gotta have a narrow market. Why? Because you're a startup and you don't have the resources to get to the buyer in every market. 'Cause not everybody understands yet that there's this scaling problem. So you need to be efficient. So you've got a vertical market that you're going to go after. You know that the problem exists. And now, how do you get a product that isn't— it doesn't have too many features in it that are expensive for you to create and just solves that problem, but solves it well enough that a customer will buy it. And we call that minimum viable product. How are you gonna figure out what that is? What I always like to do is find a lighthouse customer. That's a customer who's kind of an early adopter who will work with you to make sure that what you're building solves their problem, You're not overbuilding it, but they will pay for it. And now, last step. I'm still making it seem easy, but these are the steps. The next step is, is that minimum viable product that you have worked out with this lighthouse customer good enough to sell over and over and over again in that market? And so, you have to start working with other customers, not just the Lighthouse customer. And we always like to say, this is something I learned as a math major, 1, 2, infinity. You prove something for 1, then you say, okay, good, I got that. Now you prove it for 2, good. It still could be that you've found two exceptionals, and then you— when you get to the third one, you say, I think I got it. And that's called product-market fit.

Okay.

And now it's time to go to town, start selling like crazy. Let me just say one, one negative thing though.

Yep.

Because you still might not have proven product-market fit, because there might be that situation where Okay, there's 3, but there's not 100. And that's happened to me. That's okay. You just iterate a little bit more. You haven't quite gotten enough in the product. Anyway, that's my answer.

I took some notes, so I want to just dig deeper before we continue. I think it was Steve Jobs who actually said, build it, they will come. So we're basically saying that in this modern age is just not enough to concentrate on building. You actually have many more steps to be successful. So we're just going to put that phrase back to where it came from. Like, you know, the times are different, right? Like, you can't just concentrate on building. And you're absolutely right. The tech founders, they love the technology they build with, especially if they did, you know, the hands-on tech founders, you know, that they love the code they've written. Somehow there's an innate belief that if they put a lot of energy and knowledge in that solution, solution from technical perspective, that that will somehow make a good product. But ultimately, when people take a product, they don't really see a lot of technology behind it. They just see the problem or the value the product delivers, right? And sometimes the tech you build, it is just irrelevant at the end of the day.

Yeah. Um, but you know, it's funny that I, I know, I know Steve Jobs said that. But it's funny that, um, okay, so he's the guy that brought the Newton to market and it was a disaster, right?

Yeah.

Um, and, and then he came back at it again and, and the next thing out was the, um, the iPod, right? The, the music player.

That was good.

Except what they did then, and of course no one knew that it was possible. We used to have, uh, we used to walk around with a thing that played cassettes, um, called a Walkman. Sony made it called a Walkman. Um, but the idea of having 1,000 songs in your pocket was something no one imagined. And what, what Apple had to do was they paid millions of dollars for an amazing advertising campaign on TV and radio everywhere that said, "A thousand songs in your pocket." And then you saw them put a little thing in the shirt pocket, and he's listening with his little earbuds. So I feel like he might have said that. But then I don't think he acted on that again because he worked very hard to make sure that everybody knew that this problem had been solved and that you could now have 1,000 songs in your pocket.

Yeah, I agree with you, Jody. I mean, it's a very crowded market. So we are a technology, you know, podcast. So we talk tech ventures, you know, software, mainly software, right? So it's a solution which will go online. Maybe it's a service, maybe it's a SaaS platform, maybe it's, you know, cloud engineering or whatever, but you're gonna be selling online. So there's millions of domains, right? There's— it's a crowded space. So if you have a good product which solves problems, as you believe so because you build it, you have to make sure people know about it. It's like if you're not gonna shout from a rooftop, and that's, you you know, marketing campaigns, you know, maybe paid ads or some type of advertisement, people have no idea that you exist, right? So you can potentially, you know, grow organically where you go like, I have one client, two clients, they will tell their friends. So I get like 5, 10, but that's a very slow burn type of, you know, organic growth. In my view, you want to buy into some campaigns, get that scale and really look or understand if you actually have market fit. As you just mentioned, potentially there's no market for whatever you just created.

Yeah, and like you said, a lot of us, and I've done it too, do a build it where we're sure they'll come. And there was actually a great movie called Field of Dreams that was about that thing as well. I had a company where we, we had what we thought was fantastic technology to, uh, to, to monitor the XML coming out, in and out of a, a company. And this was early in the early days where it was suddenly becoming common that all of your data, your, uh, between part various parts of your company exchanging this massive amount of XML because it just made it so easy to interface one type of system to another. So we decided, well, look, what if we could monitor that XML and we could figure out what it was? And then we could, you know, there are all kinds of things we could do with that. We could tell the company all kinds of things useful to their business operations. And so we had this product, and then we had this, you know, typical kind of situation of, okay, we have a solution, now we're looking for a problem. And I get you, we never found one. That was a disaster.

It's so interesting. I get caught in that pattern thinking myself where you get spark coming from somewhere and you instantly solutionize. You go like, this would be so great, and something draws you into actually going and building, and you start buying domains and, you know, putting some advertorials, but like you didn't even check the market. You had no idea about the needs. You just had this idea and you started from upside down where you should just go ahead and actually do some market research and see if that would stick in any way, shape, or form. And I get a lot of like tech startup founders who get caught by the same thing where they go like, I think I'm solving my own problem. And many books actually says, go solve your own problem. But I think what they miss is to actually go like, you think you have a problem, you're going to be solving your own problem. How about as a next step, you actually go and interview some people and see if they actually have the same problem? You know, is there a market for that problem?

Yeah, it's exactly right. You're convinced that if you have this problem, everybody does. And that might not be true.

Exactly.

That might not be true.

So I really liked when you walked, you know, through the steps, Jody, and you went like, you know, this is MVP. Now you need to find your very first client who would help you build this and actually, you know, pay for this. You coined it as a lighthouse client. So how, how would I go about finding this? Is it just as simple as maybe, you know, in my network, angels, you know, my family, my friends, my colleagues, or do you actually want someone who has no relationships to us? We have no network connectivity, so we go out do some cold outreach? Like, how do I actually get a good lighthouse client?

Um, so you've got a group of founders, let's say, uh, 3, 5 founders, um, and they've all— they're all LinkedIn to each other, okay? And but they're, they're, they're not just, uh, 20-year-olds, so they're they've got a fair number of LinkedIn connections each. So, I've got about, I don't know, a few thousand LinkedIn connections. And let's all remind ourselves that LinkedIn has now reached a billion people. And my second-level connections is already a million. So I have a few thousand, and then just because of the way the math works, there's a million level 2. So I don't really need to even go to level 3. Most people don't know that the search mechanism in LinkedIn is way— has way more features and way more powerful than most people think. And so I believe if you're a B2B play, that you can find a Lighthouse customer using LinkedIn. That's all you need. Yeah. And the mechanisms that LinkedIn has in its search, I've tried to outline, and I think I've done an okay job of outlining how you can use that in the book. And it is amazing. You can search by, you can say, I want to find people with this title at companies in this industry that are in my first and second level connections. And then you pay the money to get LinkedIn Sales Navigator. So that you can actually message them with a, you know, and it's a, you know, a short message. And it's really important that you keep it short. You gotta figure out a way to say in a few words what it is you have and why they might be interested. Because think about how you, react to messages through LinkedIn. It's got to catch your eye or you're going to just say no. You're just going to make it go away.

I love LinkedIn.

I think with a little bit of, yeah, with a little bit of practice, I think you can do that. And that is literally how I have found my Lighthouse customers the last couple of startups.

Yeah, it's probably the go-to, you know. There's some other B2B lead generation companies who are effectively just, I believe, just take people from LinkedIn and put it in the separate dedicated services and they sell the list. But ultimately, yes, if you have Sales Navigator, you know, the Boolean searches are very effective. You find your customers, you do in-mails, You try to get to someone and hopefully you find your way into their inbox and into their opinions and you land your lighthouse customer. I personally, when we talked about messages, I don't respond to messages. I get way too many. So I have, I send them away to my calendar and I go like, if you want to talk with me, you know, here's my hourly rate. Because responding to all of them is just physically impossible. Once you reach a certain level. But InMails, which is not a normal inbox, you know, it's separate, you know that people are actually paying for these messages. You know, they either have a Sales Navigator or some recruitment account, or they bought InMails, you know. So you know that that's, it's almost like an advertisement, right? That someone put a monetary effort to reach you out. I do pay attention to these. So you open that connection, you get your lighthouse customer. So let's say things are going well, you know, you did that beginning well and you find yourself in, you know, after 6 months or so, you find yourself within the business and you are founder. So by default, you're probably the CEO of the business. So how, as a first-time CEO, and let's just say this is our first-time gig, you know, we're doing success. So as a first-time CEO, What are the most crucial strategies I'm thinking so I'm making sure that I lead my first startup towards the success?

Well, you know, you gotta build at least a minimal team to get really, you know, to get going. And you don't need too much. You know, it could be just the founders. Before, you know, you've— with the founders group, you've got maybe a little bit of foundational technology that you, you know, you know how to build. I mean, look, if you have a, you know, if you have a founding team that came together because they see a huge opportunity, because there's a huge problem, that they think they can solve. So at the very beginning, you have probably a sense of what kind of technology your product is going to depend on. You don't know what the features are for sure yet, but you're not starting with a completely blank sheet of paper. Okay, so then you try to find this lighthouse customer. Then this, you know, what the CEO has to do is say, okay, I'm going to need to raise some money because I'm going to need to pay these people. There's only so long even a dedicated group of founders is going to be able to hang around for, you know, not pulling a salary. So you're going to have to, you start paying people. And the founding team is probably not enough to really build out what you need as you start to figure out, I've got a product and I got to start marketing and selling. So you need some money. So it's, you know, it's the CEO's thinking about things in sort of this order. I've got to make sure before I raise money and before I have more than just my, you know, my very strong founders, that I've figured out what we're going to do. Then I need to have a little bit of money and raise and hire some people. We can come back to, you know, sort of the fundraising in a minute because it's kind of its own topic. And at this point, even though it seems like, oh, you know, are you sure you have to mention culture this early? Yes, you have to mention culture this early because the culture is how you're going to attract and retain a really good team. And culture is really, it comes from the CEO. Everybody else becomes part of that culture and helps spread that culture. But it comes from the CEO. And it's got to do with values and communication. Those are probably the two most important aspects of culture. So, okay, you're establishing culture right away. And then you're starting to build out the team. Those are the most important things to really think about in the first 3 months. And then the stuff we were talking about before starts to come into play. And we could talk, if you want, we could talk about sort of strategies for fundraising, you know, early on.

Of course, that is a logical next step. So we mentioned you having a founding team, which is always, always easier. I mean, duos, you know, two founders, one sales and marketing, another technology, is a very common good duo in tech ventures. Often though, you have solopreneurs, you know, people who can code the products themselves like full-stack developers, you know, they know the backends and frontend, they can put something together. That sometimes kicks off as well quite successfully. Of course, if you have the foundation of the founders, which is, you know, you hit the nail on like the sales, the marketing, the technology, you know, maybe go-to-market experts or whatnot. But then you walk into like 3+ people, which is quite rare to have a group coming together, you know, to solve one problem or build one product, and they sort of have synergies around that. So mostly it's like 2 people, but all or one. So if I'm one, for you, we're having some success. You mentioned, you know, we don't have salaries, but let's say we're paying something to ourselves. So is the raising money like something we should be keeping in mind like instantly, or is there a way where we can avoid raising money?

Uh, sure, there's a way to avoid raising money, and that is if you, um, if you're If you're long-term, let me put it this way. So you can definitely start, be self-funded if you have a service. So what I've seen work really well is to start with a service knowing that you're going to build a product as a result of the service. So for example, You've, you've, you've been there. What we had this situation where we had people, this is in the early days of what we call client-server, where we were transitioning from everybody did everything on their desktop. And, and then people started using databases and And that was a hard transition for the world to make. And we jumped into this and said, oh well, this is really a distributed computing problem. You got your desktop that can do some stuff, but it can't do everything. And everybody has to share the same data on a database. But we had some simple technology, and then, but mostly it was a service because everybody's, stuff was different. And we did an engagement where we charged for our time basically with a telecommunications company and did that. And then we did one with a financial services company. And we started to see things that were common and that not everything was custom. And so we said, great, let's kind of productize that thing that looks to be common. And then we found some other things that were common and we figured out what things were different and we made that, you know, be a simple, you know, configuration interface. And lo and behold, in a matter of a short time, it was a product. And we went from services, which is 35% margins if you're lucky, to product, which was worst case 80% margins and could, could get to be 90 plus. And that's a beautiful model if you can do it. My current company My current company is a, it's a hardware-based cybersecurity. And so we had to build hardware. We needed money to build hardware. That was not a service. And so it depends on what it is that you're building, whether you can, fund it organically. I mean, obviously, if, if one of the founders is extremely rich, great, you're, you're, you're set there. But that's not often the case.

That's a real case.

It's never been, it's, it's never been the case for me.

So I really love what you said with about services, where you went, if you get 35% margin, if you're lucky, 'Cause I do see people thinking about, you know, doing like consultancies and services sort of like a kickstart. I do believe people underestimate that it's a very small margin. Just get a job. Just like have less problems basically. Just a side note. Okay, so let's say—

Oh, oh. Yep. Sorry, one other thing to remember though. So like I said, 35% margin is the maximum I've ever seen services get. But another thing to remember is that the multiples on an exit are 1. 1. Yeah, if you're a services company.

Yep.

If you're a product company, you can get— well, it depends on the industry and the product, but you can get 5 to 15. Yeah, times revenues. So that's an important, uh, factor as well. You don't want to stay a pure services. I mean, unless that's your business. I mean, obviously, um, you know, Accenture and, and, uh, you know, all of those gigantic, uh, services companies, um, they've, they figured out how to make that work, but they don't, they don't get more than 35%. And, uh, and they, and, and if they're going to get bought, they're going to get bought for 1x revenue. So that's an important thing to remember.

Yeah, that's a very good shout, Jody. Very good shout. And I do love raising money and actually exiting in the bull markets. I think that's worth the mention because we gave like such a big range of valuation multiples where we went like, you know, if your service is going to get 1, but you could, you could go from like 5 to like 15. I feel like that of course is market specific and, you know, the richness of all of that. But if you actually are in the bull market, you know, where liquidity is all around and, you know, banks has money, VCs have money, it's actually a lot easier to find money and it's a lot easier to get a better multiple for exits. Like in this market where right now, where we just have like dried up liquidity, it's actually quite difficult or it is more difficult to raise money than it would have been, let's say, like 2 years, 3 years back. A side note. All right. So let's say we're raising money. All right. So we are fairly good now, you know, first-time CEOs, we got the startups, we have a couple of founders, you know, we're doing well. We went from our Lighthouse client, we scaled up, maybe we're in the ranges of a few hundred people, some type of retainer, you know, monthly revenues or whatnot. So we're in a good position. You know, we have good numbers, we have a good roadmap, we have a very clear vision. You know, we have the definition of a problem, market size. We think we're gonna, you know, be there in like 3 years. So we have a pitch. So how that all of that goes, like, you know, how do we think about the pitch? How we look for money? Like, what's the Jyotish approach?

So would you say that we're at the seed stage or even before that?

Let's take it to the like foundations. Let's say we are at the very first raise. It's a seed raise, uh, you know, we didn't take money yet from anybody. It's, you know, we are quite organic. Maybe we are a little bit self-funded as well, uh, you know, maybe we put in some money of our own, but effectively it's a seed money.

Okay, um, right. So, so you can raise a seed. So the, the, you know, to me the barrier between seed and Series A is is this back to the same really important concept we've been talking about, which is product-market fit. So pre that, you can raise money as a seed with a small foundational team, a clear identification of a big opportunity, and you don't need to yet be getting any revenue. So you can, you can, especially, you know, so if you're in the software only, you know, if you're a software only product, especially if it's SaaS, you can, you can get people excited about it. VCs are used to this model. And they're, you know, they're going to be kind of easy to work with. So you have to think through the fact that VCs don't do well with cold calls. They definitely don't just send a a business plan to a VC. It's like sending a manuscript to a publisher that hasn't heard of you before. They have giant shovels and big bins in the back. They just shovel it straight into the bin if you send a business plan over. So there's two ways to avoid the fact that they won't take a cold call. One is you find somebody that does know the VCs, and, and maybe they do it as a business, or maybe they just do it as, you know, as being helpful. And they make warm introductions for you to get to the right VCs. And you should— you're going to want to do some research on what are the VCs that are at this stage. So they, uh, they're seed stage, so their funds are relatively small. Remember the size of their fund is going to be the telling thing about which stage they can invest in. The guys that have a $500 million fund, they still only have the same number of hours in a day. And so, and the number of deals they have to look at versus how many they're going to invest in is also gonna stay the same. So if they have to put $500 million to work versus $125 million to work, and you've got the same number of people and the same hours a day and the same odds of how many they have to look at, you realize that the guys that have a bigger fund have to put more money to work. And so they're stuck. They can't do seed. They have to do Series A or Series B. Now, there's a few exceptions. You've, you've seen people like, um, uh, Andreessen Horowitz create a seed fund specifically so that they can find the, the really exciting early stuff that they then will help along, and then they want to do be the first choice Series A. So keep that in mind. You gotta look for the people that are the right size for you. You've gotta look for people that like the area that you're in, that you're operating in. And then you're gonna want somebody to help you connect to them. And by the way, back to LinkedIn. You can find these investors through LinkedIn, and you can find one of your connections, first or second level only, that know— that, that is also connected to them. And, and then you ask them to please make a warm introduction, and they'll of course want to find out all about what you've got and all that. So again, that works really well. I've used that for not only finding my Lighthouse customer but for finding my investors.

Yeah, we're not affiliated with LinkedIn, just for people listening. We're not advertising, you know, LinkedIn. There's no affiliate links, but it's such a huge number one B2B platform on the planet that it's just unwise to not put in any attention to it. If you're thinking to be a business at some point in your life, or even, you know, like a professional. It's a very, very good professional network to be part of. So, um, one thing which I took as a note, Jody, when you were talking about, you know, the seed and the sizes of VCs and, and the fact of, you know, they have the same amount of time but they have much bigger funds, and the ones with much bigger funds, they're not going to be looking at, you know, the seed rounds. Well, you know, who looks at the seed rounds is actually accelerator and incubator programs. And you mentioned, you know, A16Z, which they have their own like seed bucket. So a lot of banks, you know, they have these like small stakes, like $50K stakes, you know, $100,000 stakes. And they run these programs to just sort of have that ability to, you know, have connection with the market and these early ideas, which usually one or two founders, you know, they help them. Till to, to go to the market, you know, try to validate the idea, you know, do the market fit. So they have, you know, all of these programs where at the end you might be actually getting the seed, but at the same time it actually teaches you to how to do that very first step properly and correctly.

Yes, I know about, um, a number of those. I have not used one myself, so I don't I'm not really an expert on them in any way, but I do think that they have a lot of value for the right stage. They almost all were earlier stage things than what I needed. So that's partly why I never— there's one in our area called Techstars. I did interact with one in Silicon Valley called— I think it's just called Playground. There's Y Combinator. And so there are a lot of them. I did something different. So I had— so this current company, the hardware-based cybersecurity The initial idea came out of a big research program, a government research program. You may have heard of DARPA. It's Defense Advanced Research Projects Agency. So it's the Pentagon's research arm. And I was running a project there. And when we finished and we had good research results, it wasn't ready for the big bad world. It needed to be incubated. But as I said, it's hardware. So I didn't see any incubators like the ones we just mentioned and dozens of others that was suitable for that type of thing. So what I found instead was a laboratory that wasn't exactly, you know, an incubator, but they were interested in incubating something like this. And so it's here in Cambridge, Massachusetts. And I spent 2 years there, built my team from me to, 9 of us inside of this lab. And when I felt like we'd gotten to a point where we've— we'd proven that the technology worked, um, Ben Sharf, I felt like, okay, we can spin out, we can stand on our own feet and, and, and, and start doing all the things we've been talking about all, all, all morning here with with the, you know, the— and ready to raise money. So I do think that that ought to be in people's minds, that there's potentially these various laboratories which, if you're doing something that nowadays people seem to like to call it hard tech, that's a good option, I think. What we have is definitely hard tech.

Okay, I never heard of a term hard tech. What, what that— what type of products are behind that term?

Things that are, um, protected by patents, right? And, and, and so hardware is, is definitely, um, uh, a common, uh, common feature amongst all the things that are hard tech. Um, there are now, uh, seed stage VCs who specialize in investing in hard tech, and the reason is, is that, uh, it's risky, but if, if it takes off, it's highly differentiated, it's protected because you've, you've— like, we've worked on getting patents early there's a set of plaques on the wall back there. We've already got 5 issued patents on this stuff, and we're a seed stage company. It's— so it's— and the hard part is not that it's— well, it's hard to do, I suppose, but it's very hard to copy. It's very hard to do the same thing because it's protected. And it's also, it takes a while. It takes, you know, so we were 5 years as a research program, 2 years incubating. So there's 7. And so, and then it's, you know, you come out and you're out of stealth mode and you already have 4 or 5 patents. You're highly differentiated. That's why they like to invest in it.

I get that. I can see that easily. Um, I want to take a step back to, um, you mentioned on a seed, effectively, if you're raising a seed, you know, you need to be able to prove an opportunity and you don't necessarily need to have a revenue. So I feel like a lot of textile founders get sucked into that, that they go like, okay, you know, on the weekends or at home or whatever, you know, we build something and we're gonna try to raise a seed. And they're not really being successful with that and they, you know, they try it again, they think that the pitch is wrong or, you know, they're not getting exposure to right VCs. So they're looking not at their product or service as a, you know, as a problem, but they're looking at the process of actually getting the seed as a challenge, right? For me, all of these situations go, you know, I go like, look, like if you would actually have an opportunity, I think you would just get seen, right? So I think it's, you know, probably is the, you know, it's the product itself and that's why you're not getting seen or the fact that you have no revenue. So I always seen that, you know, if you have literally no revenue coming in, I think it's if you are effectively looking to raise money on the dream, right? It's like, like, what, what's your take, George? Like, if you have no revenues, like, who do you— like, how do you talk with VCs? Like, you know, how do you defend the fact that you're not making any money right now?

Yeah, so, um, well, it's a really— it's a— it's a really good question, um, and I have, um, I have just found that if you have a clear understanding of a problem and you can, and you can, you know, pretend it's a court of law, you know, that you're— when you're talking to the VCs and you have to prove it. All right, so, you know, do your homework and be able to prove, um, you know, let's, let's take it— let's take a, a not a super new example, but recent enough and current that everybody knows about it. Let's take Airbnb. Okay. So, and I forget the founder's name, but, you know, so he understood that what was going on in the world before he had his idea, it was really haphazard. Any Buddy that wanted to have a bed and breakfast was— would maybe, if they knew what they were doing, they created a website. How would they get the word out about it? How would they know that the people that call them up and get a reservation are trustworthy? I mean, there were so many issues with it, and And so there were a lot of people that just might have tried to offer their part of their house as a B&B and didn't and were afraid. And he came along and he said, I got this idea. And so you're just talking to a person who's, you know, intelligent and they and they're going to look at this idea and say, wow, that he's right. That is a good idea. And then they're going to get excited about it. So you have to be able to tell a story. What a lot of founders have trouble with is getting out of the weeds and turning their pitch into a story. Later on, you could show numbers, you know, look, I sold this many, you know, I'm, I'm, I'm coming in for my Series A and I sold, you know, this, this great thing to these people. They're big name companies. You've heard of them. And, and, and I've got testimonials. Yeah. You get, then, then you're going to convince them on that. But you can also convince an early-stage investor whose job it is to listen to these pitches. And they got to be stories. They got to convince him that, or her, that they've got something. The idea is something. I mean, you went over it relatively quickly in your question. You said, Well, you know, is it the pitch? Yeah, I am actually saying it is the pitch. Okay. And that at this stage, it's all about the pitch.

So effectively, it's possible to have something but pitch so poorly that it becomes nothing.

Yeah.

Okay.

All the time. All the time.

I'm opposite on that one, Jordy. I'm like, You can have a shitty pitch, but people who put money professionally, they will be able to sense that idea is good. Like, I get that the pitch, you know, gets you from probably, you know, from like 1 to 5, you know, it gives you a range of how successful you're gonna be. But I'm like, if your idea, you know, is not good and you're actually not solving anything, there's no problem. You can't go from like -1 to 1. with the best pitch you can. Like, you know, like, let's say your pitch is excellent, but if, if there's really no, you know, tangible potential business behind that idea, you can be the best pitcher on the planet, you're just not gonna get that seat.

I don't think what you're saying is quite fair because I agree with what you, what you just said, but I, I think when I say the pitch has to be good. I don't mean that your slides are beautiful and that you're articulate and passionate. I'm saying that the story you're telling that is so compelling. You know, let me give you an example that's very near and dear to my heart. So, you know, my pitch to you know, the seed investors was, look, there was an attack that scared the heck out of the Pentagon, a cyber attack, because for the first time ever, somebody wrote a couple hundred lines of code. I'm, I'm not exaggerating, a couple hundred lines of code, launched it, and it destroyed physical equipment halfway around the planet. So that was the first time ever. It made everybody wake up Whoever wrote that taught the world how to do that. And now the Pentagon was scared out of their minds. So we were a research program there. We had tremendous results. And by the way, all of these things I just said, we could prove. And we're, we're here now to ask you to invest in us commercializing this. And here's what we will do with your money. And here's, here's what we'll have at the end of 12 months with that money. And if we're successful, we're going to ask for another round of money to go a second year. And at the end of that time, here's where we'll be. Mr. Investor, will you invest?

I get what you're saying. I still feel like you have a, like a, you know, like you have body behind that because it's like it's It's like it's a big— but I see what you're saying. It's still a dream, right? You don't have an actual hardware. You still don't have—

Still a dream.

Yeah, it's still a dream. It's just like, look, there's a big problem. We're going to try to solve that problem for you.

And, you know, you get that story said, okay, well, yeah, no, I more than just try to solve the problem. I'm going to say, here's our research results from the 5-year program. Basically what I was doing, and this is, you know, not fair to say, to generalize for people, but what I was saying was we had $25 million of non-dilutive financing to spend 5 years carefully researching how to solve this problem. Here's our research results. We proved we could do it, but we haven't done it yet. We proved that we, We, we, we could, um, and what we want to do now with your money, Mr. Investor, is build something, a prototype, that a proof of concept, um, will solve a commercial, you know, a different attack, a commercial attack. We chose Heartbleed. I don't know if you remember that one. It affected a third of all the servers on— sorry, two-thirds. Of all the servers on the internet. And we solved that one. And that was what enabled us to get the second year of funding. And, um, and I think, I think that story, what I just told, is generalizable enough for, for people listening to say, oh, okay, I see. You know, you have to be very convincing, you have to have evidence, Yes, you're telling a story and yes, it's a dream and it has to be understandable to somebody that's not a deep expert and didn't spend 5 years doing the same research you did, you know, and that's the delivery part. That's the, you know, the communications expertise part. And you can get help for that, by the way, you know, there, there, because this is hard, There are lots of people that offer services to help you craft your pitch.

Do you have to do that yourself? Like, can you just go like, okay, I'm a founder, you know, I'm part of the founding team. Maybe it is only me, but I'm gonna, you know, hire someone who's a professional pitcher to deliver my story much better than I can do.

I would stop just shy of that. I don't believe that in an early stage that anyone except the person who's got the vision and the most passion, they have to deliver the pitch. But they can get help in somebody who says, you know, you're confusing me, you're not telling the story very clearly, let's try this. That's like a speechwriter for a politician, you know, they're not delivering it, but they're helping you make sure that your message is clear, easy to understand, et cetera.

Okay, I get you. All right, so we conclude that it's possible to raise the seed on a dream without actually having revenue. And let's say we have a different picture. Let's say we got the seed, you know, things are going well, we're proving something. So about a year later, you know, maybe 2 years later, we're looking at the series A, what's the difference between those two? How do you approach, you know, is it different VCs, the process is different, or are they actually, you know, very similar in the sense that, you know, the pitch still needs to be— the story needs to be there? Do the slides differ? Do we put different type of data in there?

Well, you've got— yes, there's going to be— so, so to, to a certain extent, they're very similar. You're going to start with a problem statement, then you're going to you know, describe that you have a solution. You're gonna, you're gonna lay out that, that you're, you're, you're, you're way better than your competition. Here's the size of the opportunity. We've got proof points. We've got 3 customers. That's different than the seed. You've got some numbers, you know, about that. The VCs are different. We went through a little bit about how they're different because they're They're bigger funds. They're maybe, they're a little bit more experienced investors. Sometimes they're certainly dealing with bigger amounts of money. So they're very professional money managers, but you've also matured to get from seed to A. So you'll be ready to talk to them. Uh, but it's definitely a different set of investors that you have to go out and find. Don't forget now that you have, you have, uh, your seed investors who know a lot of people and may have a, uh, and, and they have a, a high interest in making sure you pick good Series A investors. And so they'll know some, they'll be introducing you. So in some ways, life gets a lot easier. Yes, the stakes are higher. You have to be on your game. But, and this is the time to think, not necessarily do something about it, but think about, should I maybe be bringing a strategic, a corporate investor in as well? There are pluses and minuses to it, but it can be a very good thing to do because it shows that there's, you know, there's commercial company that thinks what you have is so important that they want to actually invest in it. And so I've almost always added in a mix of, of VCs and corporates, um, and it's, it's done, it's done well for me.

Okay, so how much I'm giving, how much equity I'm giving away in, in the seed and in the Series A as a founder?

Yeah, well, uh, yeah, it's, it's, it's tough. It's it's a tough subject because I started off owning 100% of the company, but at that point the company was pretty worthless because without a team, uh, I couldn't do anything. So I gave away, uh, 20% of the company to the seed investor, um, and, and then, um, when I did a Series A, I gave away another 20% to the Series A investor, um, and, and it continued to get, you know, diluted over, over time. Uh, but, you know, people do get a little bit hung up about ownership stake and dilution. What really matters is, uh, well, if you sold it today, what might you get? You know, you all the way along, you have a pretty good sense of what the valuation of your company is. And, and that matters the most, um, and which is why I, I always, you know, caution people not to get too, uh, focused on dilution. Um, if, if, you know, if going from seed to Series A, if your valuation went up significantly because you've done well and you get diluted. Well, just— but be careful, do the math. Did your stake get a lot more valuable even though you own a smaller percentage of the company? Um, and, and, and then that's how to really, I think, think about it. Um, and, and you want your valuation to steadily go up each round. You don't want to push your value away, to, to sort of force investors to think of you as worth twice as much as maybe you should be. Because if they invest in you at a very high valuation, like it's, it's at the very maximum of what they think a company that's done what you've done and achieved your results, if they think that you're at the very top of that range and then there's a, there's a stumble, there's a— something happens, which it always does, uh, and then you need to raise money again, if that's a down round, you've got a big problem because you scare your whole team that everybody's stake went down. How much people— if it suddenly sold now, they would make less than if you'd sold it earlier. And they would also probably make less than if you'd been careful and modest about the valuation you demanded from investors. Um, because then if you stumble, they would— they might say, well, we built that in, we built in a cushion, uh, for the inevitable problem to occur. And so no problem, your valuation is going to stay constant as we enter the— as we put in more money. As opposed to, no, no, we're going to punish you, we're going to have a down round. Uh, just a little side comment to caution people.

I, I do love that saying where, you know, 100% of nothing is, is still nothing. And that's like, there's an innate psychological element of feeling that you're losing something if you're giving equity out. But at the end of the day, you know, the equity translates if you sell it or there's a, you know, exit event to an actual monetary value. And as long as that value is growing, it doesn't matter how much equity you have within the business. But there is something where people don't, you know, they just don't want to give equity out. But if you keep the pie—

well, let me say one more thing about that, if I might.

Yeah.

So, um, if, if all you focus on is your original founding shares, um, that that, you know, you're getting, uh, that is getting diluted. True. But, uh, try to keep in mind that at each successive round of, uh, each, each new priced round— in other words, when you bring in a new investor from outside and they set the price, and like I said, you're getting a steady uptick in valuation— well, each of those rounds They also plus up the option pool, and we always try to keep the option pool at a new round around 20%. So it's 20% of the company, and that's what you're using to— it's the incentive pool, or they're called incentive stock options, ISOs. And you're using those to incentivize especially new employees coming in. And also people that have vested a lot and you want to make sure that they stay motivated. So you give them some more. Well, that applies to founders too, to some extent. If you've all been diluted a bit, you can, you know, ask the new investor who isn't going to be hard to convince if the founders are starting to look like their stake is too small. They're, they're not going to be too hard to convince to make sure that the founders get topped off a little bit. And then you just make sure that those are options with automatic full vesting on change of control. All that means is that yes, you vest over 4 years, but if you do a sale, you're going to vest all your remaining shares all your remaining options, sorry, are going to become shares. And now you have a, a bigger stake. You have to, you have to pay the exercise price for those shares, but you know, that's going to be a lot less than the actual value of the share.

So yep, you know, that's some— that's just the point there. Yeah, exit math, investment math. So I want to talk a little bit about the teams and, you know, growing and downsizing the businesses. So once we get the money in, you know, naturally, you know, we get investment, we have more, you know, more cash. So there's some growth plans on the table, so we need to hit some targets. It's very likely that we're going to be adding headcount, uh, you know, more people We lose the culture potentially if we're not careful about that. Maybe we grew too quickly, you know, we spend all the cash and maybe there's some challenges economically speaking, maybe the market changed. So now we need to shrink the businesses. How do you go through that volatility as a business for, you know, a couple of years in front of you? Like, how you do that well without really, you know, causing huge injuries to the business?

So is your question really about doing downsizing carefully and then surviving that? Is that what you're talking about?

Yeah, yeah, I would say so. Yep.

Well, look, the people that join a startup are not expecting a risk-free situation. And And startups have to do layoffs all the time. It's just, it's a common thing. The thing that you have to keep in mind when there's a downsize that has to happen is it— you're going to, you're going to do a nice job of communicating what's happened, you know, We missed something. We, you know, we've got to retrench so that we can survive. You know, all the things you have to say. And you have to talk to each person individually and say, this is what's happening. We're laying you off today. You're getting 2 weeks, 3 weeks, whatever severance. And that's it. You do that quickly. It's like pull the band-aid off really fast. But now, the most important thing is how you communicate with the people you didn't lay off. That's what really matters. And what you have to do is explain to them what's changed and what's the strategy going forward and why it's is the opportunity still great? And we're sorry that, you know, some of your friends had to go, but they'll be okay. And, you know, and then, and maybe you've worked it out so that everybody that stays gets a little top-off of their options. You know, that's the kind of thing you have to, And when you're preparing for this downsize, you know, spend 80% of your time focused on— 85% of your time focused on the people, the team you're carefully crafting as the go-forward team and what you're going to say to them and how you're going to treat them. And 15% of your time on, okay, you know, these are the people, this is what we're going to offer them, this is how we're going to talk to them, this is when we're doing it. Do not do it on a Friday, and don't do it right before a big holiday weekend. It's just mean.

I don't know why that made me laugh, Jody, but it is mean if you do it on a weekend, for sure. So you'll need to get your pitching skills back with that conversation, isn't it? Because you probably learned some along the way to pitch well, you get all these investments. So when you're going to be explaining why the opportunity is still great, these skills will be quite handy for the people, you know, who you didn't lay off. Okay, so just to sum up what we did today. We spent a lot of time about investment, but we did touch from very beginning, you know, the market fit, the, the first-time founders, the most likely CEO seat, you know, where you look at that, you're getting the teams, you're looking at raising money, maybe it's a seed, maybe Series A. We talked a little bit, you know, about downsizing as well, a few tips over there. So that wraps up our conversation for today. A huge thank you for Jyoti for sharing. If you enjoyed today's episode, don't forget to subscribe, review us on Apple Podcasts, Spotify, or wherever you get your podcast. Your attention do help us grow and bring more insightful topics to the show. Uh, before we wrap up, Jyoti, how do people get in touch with you? How do they buy your book? How, if they want to dig deep into your background and all of that, how do they get in touch?

Okay, so I have a website called jothyrosenberg.com. It has— it provides information about my podcast, which is called Designing Successful Startups. And it also has the book, not to buy the book, but it it talks about the book. Amazon is one place to buy the book. It's also at Barnes Noble and it's orderable at any bookstore. And it's called, and it's here for the people that are looking at the video, Tech Startup Toolkit. And what's in the book is 31, what I call anecdotes. What's different about this book from many other books is that A, I'm not just writing a book to brag. I know that a lot of startup people have done that. I'm also not writing something that's all this didactic stuff about, you know, do this and then this. What I'm doing is telling stories. I love stories and they're on different topics. So there'll be one about your founding group and how to treat them and how to think about them and who should be a founder and who shouldn't be a founder. Founder. And, and, and so every one of them is, is telling real stories from one of my 9 startups. And, uh, and, and the thing that I'm not afraid to do is talk about my mistakes, and I've made a lot, and they're in there. So, um, I think it's helpful. Yes, there are some parts that are didactic. For example, I lay out exactly what you should have in a data room when you're raising money and, and you're, and you're investors are going to look at you with a fine-tooth comb. So that's how they can get ahold of me. And on LinkedIn, I'm easy. In fact, you could just type Jothy. It's such an unusual name that it's 5 letters and you can find me on Google and you can find me in LinkedIn.

Well, we'll have all the details in the show notes, so whoever is listening or watching, just scroll down a little bit. All the access points to Jyoti is in the show notes. Thank you again for tuning in. Hopefully you enjoyed this episode. Till the next, stay safe and see you online.

Thank you.