268: Michael Cardamone — Creative Ways to Fund Your SaaS Company

Are you thinking about how to grow your business with near and offshore staffing, but you're also wanting to make sure that it's reliable, cost effective and really well done? I think docsa talent is the way to go. Here's why. They don't just fill your jobs. They bring integrity, top talent and a people first approach that's hard to find. I've known the people at Doxa talent for over 20 years now and I say that you can count on them. I have. Talk to Docs of Talent and you won't be disappointed. Go to docsatant.com Bill G Again, that's doxatant.com Bill G One more time. Doxatalent.com Bill G Check it out today. Hi again everyone, I'm Bill Gallagher, Scaling coach, host of the Scaling Up Business podcast. Before we get into it, I want to talk about one of our sponsors and I think many of our companies face one of the biggest challenges is getting technology developed right, finding the right technology partner. And even if you have some in house tech teams, you're often looking to complement that. Or maybe you're some kind of traditional business, you've got no tech team at all. If you're looking for a technology partner, you know, it's really important to find that proven expertise, but finding that right fit somebody who's got a delivery model, a process for working with you, who's sized like Goldilock to the particular situation that you're dealing with, whose cost and balance between quality and agile development works together at your level, in your stage, who can bring resources to bear, ramp up quickly and up and down can make a huge difference. I've come across a lot of companies like this, but one of our own scaling up companies is a scaling up venture incubator based in India that has a great sort of formula recipe for doing tech development for our clients and really balances that to by being a scaling company. They know and understand your world and your way of working. Their model is totally tailored to companies like yours so they can have quite a bit of of advantage over other vendors that you might outsource to. That company is Clarion Technologies. And if you think it might be a match, go check them out, have a conversation with them. Bit ly Clarion Technology is a quickie link with some more information and and where to get more and that kind of thing. Bit ly clariantechnology is the link. We'll put that up there for you as well. Hi everyone, As I said, I'm Bill Gallagher, Scaling Coach, host of the Scaling at Business podcast. And our show is all about how to grow and develop your business, no matter what's happening in the world, in the economy, what industry, what part of the world you're in. And you can find hundreds of episodes on all the topics to deal with people, strategy, execution, cash, and even the leadership required to grow and develop your company. All that and more@scalingcoach.com I want to welcome Michael. Michael. Pronounce your name for the listeners so they get it right because they'll read it on the screen and they'll be like, michael Cardamone.

Although, you know, my Italian grandparents would say cardamone, but Cardamone.

Cardamon.

Yeah.

So we're going to talk today about funding your SaaS business. Funding your business in general, and because I think the same ideas apply. How do you get involved in this? What's your background? Give folks a little bit more about how you come to be involved and focused on funding in particular.

Yeah. So I'm originally from upstate New York, but wanted to get into tech. Moved out. Yeah. Moved into San Francisco in 2008 and basically just got lucky and ended up at Box when It was about 25 people. And looking back on it, I literally had no idea how to think about a company. Like, people are like, oh, my God, you must be so smart. You end up at Box now it's a big company. I was like, I had no idea how to think about equity value, how to think about, like, the likelihood of a company getting big. It was really just like a small team, a fun culture, and they were giving me way more responsibility than I frankly deserved at the time and so decided to do it. I knew so little about tech at the time. I, you know, coming from New York and business school, I literally showed up to the interview in a suit, and Aaron Levy asked if I was going to the prom afterwards. It was a nice intro to the tech world. And now here I am wearing T shirts all the time. So, anyway, I did that for a little bit, went to another startup in the edtech space that we grew about 24 million in revenue and left there in 2014 and was kind of seeing this. Obviously, 2008 was the early shift to the cloud, but in 2014, felt like there was a lot of momentum behind the shift to the cloud, but I felt like it was still in the early innings. There was a lot of opportunity to get involved in helping to facilitate that next wave of that shift from on prem to cloud and to SaaS products. There were A lot of generalist accelerators out there like YC and Techstars and 500 Startups, but there were only a few in the country focused on B2B SaaS. I got fixated on that. I was doing a little bit of angel investing, I was doing some consulting, helping companies with go to market, but got fixated on this idea that B2B SaaS focused accelerator was able to convince a critical mass of people from my network who I was fortunate enough to have met in my experiences who were part of that first wave of SaaS companies. So a lot of early salesforce, early Marketo, Early Box, CEO of Zora, CEO of Gainsight, a lot of really good SaaS operators to get involved. Was able to pull together tiny first fund back in 2014 to kind of test the concept and now fast forward about, I guess coming on seven years now we're on our fourth fund for the accelerator. We've worked with like over 200 companies at that, like founding, you know, founding team may or may not have customers like very pre seed often first check in. So we've worked about 200 of those that have gone to raise, I think like well over 300 million in following funding now from a bunch of branding funds. Then also have a seed fund now as well that invests in more traditional institutional seed rounds, usually like one to $4 million rounds that we're investing in out of that fund as well, have had a lot of data points to learn from over the last seven years of helping early stage companies through the fundraising process.

That's really incredible, right? You know something about something in this world. And I think we have an increasing number of listeners, viewers in SaaS in particular B2B SaaS a lot. And even more than here in the Bay Area where we're based is our global reach. Like folks in other parts of the world who are saying like, I don't have to necessarily be in the Bay Area. The Bay Area has advantages for recruiting talent and that talent pool. But as we've seen especially in the last year, being flexible in where you attract people from is just really amazing. What folks have realized. They don't necessarily have to have an office dressed out the way that we used to think about the office.

Yeah, yeah. I mean, just to give an anecdote around that, we have a company called First Base. The founders, originally from Scotland, came over to New York to be part of our pre seed accelerator program. We then invested in the seed round. He then recently raised the series A from Andreessen and he tweeted recently, actually, I saw him tweet it that he's never. And to be fair, he's building a remote company, solving a problem for other companies, trying to build remote very much in their etho. But he tweeted that he's never stepped foot in Silicon Valley and he's now raised from. He's raised close to $20 million from Andreessen, did the A. And he's growing quickly. He's building a global team that's fully distributed in a bunch of different markets, and he's literally never stepped foot in San Francisco. So I think to your point, increasingly that's going to become more normalized and kind of democratize opportunity for people all over the world. I think, I don't think you. It's not the case anymore where you have to be in San Francisco to build out the team and to fundraise.

Yeah, people would try and trek here right from around the world to do the march and make pitches up and down Sandhill and around the bay, but that's become far less important. And certainly being around here and hearing people talk about what they're doing led you to think about, oh, if we raise money, we could do like this and then we could add that, we could hire that, and then we could leverage this. And you started to think about things differently and things that could scale that being involved in that environment. But we're not really limited that way anymore in that thinking about problems. And we've had people on the show in the past talk about exponential organizations. We've had Chris Ye on talk about Blitzscaling and things like that, that the notion and the way of looking at the world, let's do something and let's. Let's solve a problem and let's do it on a big global scale is. Is really like core to that, right?

Yeah, yeah, for sure. And you know, I think the.

This.

There used to. There was a time not that long ago where a lot of the Sand Hill investors would require companies to come to San Francisco for them to fund it. I think Shopify was famous for that, where a lot of funds passed because they didn't want to move to San Francisco. And then Bessemer ended up obviously doing it, which was obviously a massive home run for them. But that wasn't that long ago that that was the mentality that pendulum has completely swung. I think there's actually a lot of funds who would prefer you take advantage of the benefits of hiring global talent so that you're not restricted in finding people with Certain skills within like a 20 mile radius of where your physical location is. And so yeah, I think that that is clearly changing and I think it's going to create a lot of opportunities for people that in the past may have struggled because they didn't want to, they didn't want to or couldn't move to San Francisco or other key tech.

Markets and then also benefited from different cost structures of tal and diversity of perspective. Right? You, you, you traffic around a place like the Bay Area, San Francisco, you develop a kind of a mindset, right? You go and do this in Austin, you do it in Southern California, you do it in Toronto, in Vancouver. I mean we work with teams all over the world and it's a really like the way that they work and operate is really, really different. And it doesn't have to be from here to, to raise a lot of money or to do something substantial.

Yeah, I think so. We have office, I'm in New York now in the New York area and we have offices in New York, San Francisco and Toronto. And I think there's still something about, which is going to take a little while to propagate out to other markets. Something about the San Francisco market and mindset of just pure ambition and wild dreaming of like how big you can build something. Like we work with a lot of founders in Toronto who are incredibly talented, very skilled and they're just, they're more focused on kind of like the short term execution and like how they get from like point A to point B. And sometimes you have to kind of coach them on what is the big picture, what's the big vision, how do you inspire people to want to come work with you and work for you and, and build a big company. So I think it'll take time for that sort of like kind of San Francisco Bay Area mentality of like swing for the fences type mentality to kind of propagate to other markets. But the more and more that companies go remote and distributed, the more that that mindset is going to start creeping into other markets. And I think, you know, I think generally that that will be good for companies.

Well, there's a, there certainly there's like ambition in the Bay Area and there's also a different way of looking at the world. Like we could build something, you know, extraordinary. We could accomplish something huge really quickly and surprise people. And that isn't true. I mean we have a, we work with SAS companies all over and we have a Canadian one, one or two right now. And, and one of the things that I Remind them all the time is that their pace is a little slower at scaling. Some of the others because of their perspective, like what they're trying to accomplish is more modest. People say, how do I drop all my business? I say play a 10x game. You want to double your business. You work at doubling your business, you'll spend years doing it. You think about how to 10x or 100x your business doubling happens fast along the way.

Right.

It's a different way of looking at things.

Yeah.

So fundamental and so simple. Like and, and we struggle with it sometimes. Like how to 10x your business is not an easy thing. Like you really have to reimagine stuff in order to do that. So talk about some of the others. You, you mentioned in preparation. Sote, Soti. Sot.

Yeah, yeah, yeah, I mentioned that they're building. I was a small and early angel investor in a company called Flexport which is building like a tech enabled. They're a fully licensed custom broker and like freight forwarder. And they're building, they're building it with tech from the ground up and have scaled immensely. I mean they're a multibillion dollar company now and I think, you know, and still growing very quickly in just what is a massive, massive industry with a lot of incumbents who are largely still fairly analog or at least like not leveraging technology as well as they should. SOTE is building freight forwarding in freight forwarding. Yeah.

Oh yeah. There's still fax machines in that industry.

Yeah. So Sote is building something similar to what Flexware is doing for Africa. And I saw a lot of similar dynamics and one of the reasons I called them out is in thinking about this theme around fundraising and how do you think about fundraising and strategies around that. One of the things that founders don't think about enough is how are investors going to evaluate your business and what is their process? Where do you stand in that process? Oftentimes one of the pieces of that process is if a fund is interested, they're going to write a memo and build out a memo around your opportunity and then they're going to talk about it as a partnership and they're going to make a decision. And increasingly we're seeing a lot of our companies, which I think is really smart and Sote did this in a really, really nice way, is just write their own memo for their own company. It reduces friction in the process, just like a sales process, make it easier friction. But it also just forces you to really thicken out. How are investors going to think about your business, what are the risks they're going to be thinking about, and what proof points or data points can you show to help them get more comfortable around those risks? And it just shows a level of thought around your business and your market and how it's evolving and how you can win in that market. So Sojay wrote this really long, very well thought out memo for their own business. And they weren't. It wasn't all roses. Everything's amazing. It was like, hey, here are the risks. Here's how we're thinking about them. Here's what we're doing to help mitigate those risks. Here's how we think the market's evolving and why we think we can win in that market. I just think they did a really good job with it. And I think more and more companies should do that, because just like in a sales process where you're trying to arm the people you're selling with to help sell it internally, it does the same thing in a fundraising process, and it reduces that friction in that process and can shorten that process a bit, and it helps the investors really think about it. You may have things in the memo that they weren't even thinking about that they'll appreciate. I thought that was a really interesting approach that I'm now seeing happening more and more. They ended up successfully raising a $3 million seed round from. From great investors.

You know, I think what's. What is great, and that I hear in that is anticipating and addressing the objections beforehand versus hoping they don't come up. There's a lot of reasonable objections or concerns, risks to any sale, to any business, to any funding. And if you're hoping that they don't come up, rather than actively addressing them, mitigating them, explaining them, or. Or. Or bundling them into the pitch. Right. Like o. That's why we're raising the money, because we need it to work on that piece. That's just thoughtful.

Yeah. We tell our founders to really think of the fundraising process as a sales process and treat it like that. And part of that is you want to find investors that could be a fit based on companies they've invested in or spaces they've invested in or things they're talking about. But then you want to book as many meetings as you can in a short window of time to help create urgency and momentum in the process. And then you need to be relentless about taking notes during all those meetings and reflecting on the conversations. What are the objections they're bringing up? What are the questions they have, did you have good answers for those? If not really write those out to the point where you may even have a written out FAQ that investors are asking with answers pre written that you can just share with investors ahead of time. To your point, getting ahead of the objections and making it clear that you've thought about them. And like every business has risks, especially early stage business, there's always going to be risks. They just want to understand, have you thought through them? Have you thought through how you mitigate them and like how you're going to navigate them? And I think the more you can be upfront about that and the more thorough you can be around that, the better. And so yeah, I think it allows you to iterate as you're having these meetings. If you're really good about taking meticulous notes throughout a company called Indio where they did a great job of like he was just really, really good at running a process around his fundraising. And like, you know, I think he did 20 very targeted first meetings. He was tracking how many went to second meetings. But like during those first meetings he was taking notes on the conversations, he was understanding where people were hung up. He was kind of thinking through the answers, getting feedback from people, advisors from us, from other people on. Am I answering this in a way that makes sense? Is this clear to you? Do you feel like it would get you more comfortable around this risk? And then he was continuing to iterate during those conversations and again successfully fundraised and ended up going on to raise an A and then a B and then his company ended up getting acquired in a great outcome. But he was really good about running it like a sales process. And I think founders need to do that.

Yeah, and so that's true of selling fundraising, whatever, like outline a process and then refine it and go through that, start to tune it. So the first page is a stage is kind of developmental. You're tweaking and iterating on things and then you put in some big course corrections and then you start really adding volume behind whatever it is after you've sort of worked out the basics of it.

Yeah, exactly. Yeah, I think that's right. The other thing that I think can be frustrating for founders during the fundraising process is I can't tell you how many times I've heard this from founders of like they say, oh, they told us we were too early, but if we get to X amount of revenue, they might be interested or they see some other company in their space raise around and they know they were at some amount of revenue. And they're like, I just need to get to that amount of revenue and I'll be able to fundraise. And the reality is it's just not tied to some random, arbitrary, specific revenue number. That's not what it's about. It's all about, again, how investors are going to look at it. So they're going to look at it like, okay, every investor wants to invest in a great founder. What does that mean? Every investor says they want to invest in a great founder. That's like, it's so subjective and arbitrary because I don't know. Look at Honey sold for $4 billion. Those founders started six companies before they started Honey. Was it obvious they were great founders. They built a massive business but failed six times before it. They obviously were great founders, but wasn't clear based on their background. I think when investors say that, what they really mean is, can this person recruit great people around them? Which one rubric might be like, would I work for this? Are they so inspiring around the vision and the opportunity and how big this can get? Would the investor, could they picture themselves working for them if they weren't doing what they were doing? I think founders, again, just reframe how are investors thinking about you and how do you then prove that out to them or get them excited? Part of that is your energy level, your ability to, with clarity and conviction, talk about how your market's evolving and how you're going to win in that market and why you're going to win and what early signs or early data points do you have to make that believable and then how big can that get? That's one example. And just really understanding the market, how do you build momentum? Which obviously revenue and traction is one way to build momentum. But there's a lot of ways to build momentum, like pipeline growth and press a following on social media, building a wait list. There's a lot of ways to build momentum that doesn't always have to be revenue and traction that will still create urgency in a fundraising process. I think there's just a lot that founders can really hone in on to get better at fundraising. And a lot of that is just thinking about it from the lens of the investor and how they're going to evaluate the opportunity and what they care about.

So we use a leadership flywheel for our leaders at scale and our leadership coaching that we've spent many years developing. And it's a best of thing, applying a lot of great learnings from a range. But the first piece is that emotional thing, how do we convey passion and vision and boldness? And that whole first piece is designed to produce an emotional response. And I hear that in what you're speaking to Do I. Does the leader show up and talk about a big problem that they're tackling in a new, fresh and innovative way? Do they paint a picture of an altered future? Right, that like we get excited about that, we get inspired by that kind of thing. And then I hear also attracting and retaining the team. So it's one thing to get people excited about working with you, but if they don't see a role for themselves, you said, would the investor consider working for that team? Like if you can not only paint inspiring vision for the future and get people lit up about it, but then you can show them how they could be a part of it and connect it and you start to attract capable, strong, intelligent people around you like you're. You're leaning to that second discipline of our four. And then I also heard you touching on what we talk about in the planning piece. Have they thought through all the parts and the steps in the way and are they plotting multiple paths to things with a clear headed view of not only the best case, but also some very likely ways they might fail? Some of the risks and how they might address them as. Of course, you won't necessarily fail in the ways that you imagined. You will encounter something that you imagine. But the more flexible you are in thinking about, well, it could go wrong like this, it could go wrong like that. And having some backup plans makes a big difference.

Yeah, for sure.

It's interesting how the SAS funding is not too different from any kind of funding and not too different from any kind of sales. It's more comp. Like, you know, sometimes sales can be pretty simple and straightforward, but it is. But if you think about a large, complex sale, it's a lot like that. There's going to be multiple people weighing in on this. It's not usually a single. I mean in your angel round, you're going to get people who will fund you with money based on a conversation sometimes rather than a lot. But you're thinking about something. So you're creating and mapping out a process. You're treating it like a project. You're thinking about the perspective of the other party. What do they want? Well, their concerns be, you're addressing that, you're baking that into the things you talked about. Taking boatloads of notes.

Yeah, yeah, yeah. And similar, like just when you're to your point, like when you're selling. I think there's a lot of analogies there of like you want to understand your buyer and not just your buyer as like the company you're trying to sell to but like actually the person you're trying to sell to. Like what do they care? What is, what is their contact person?

Yeah.

What are they, what are the personal goals for them and like how do you help them accomplish that? And it's the same thing on the investor. A fund will have specific goals, but there's also a lot of dynamics that founders aren't even aware of in the background that are specific to the person at the fund. It could be you're trying to make partner and so you care a lot about getting a quick markup. So you want to understand is this company, do you see a realistic path for this company to go from C to A in the next 12 months or nine months and is that going to make you look good so you get your promotion into being a partner or are you a new partner and you're trying to prove yourself or are you about to go out and raise a new fund? And so again you care about that markup or you care about what other brand name investors are co investing with you. There's a lot of dynamics that are so specific to the individual investor and or the fund that are tied to things that are completely irrelevant to the company but like make a big difference in how they're going to make a decision. And so that's another piece that like I don't think founders are thinking about that or aware of that and rightfully so, like it's completely unrelated to them. But just like in sales, the more you understand about your buyer or in this case your investor at a personal level and like career, like how it impacts their career and their day to day, I think the more successful you'll be able to be and the more tailored you can be to kind of how, how you narrate your pitch.

It's interesting, you touch on the very human, very basic uniqueness of the people that you're dealing with. They're the broad terms of what is this fund like or what. But what about that one person, I'm reminded immediately, some years ago we visited the West Wing of the White House and one of my old mentors son went to work for Obama in the first Obama administration and this guy by the name of Awenate Kobena and.

He.

Was head of, I forget special assistant of the President for Legislative affairs or something like that. Right. Sounded very fancy and I thought, wow, he must be writing, like, lots of policy stuff. He's like, no, no. Here's what I do. I figure out how to take care of senators and congressmen and their staff from both parties without antagonizing them, like, making them feel good. So we cultivate, you know, and we're carefully managing what they care about so we have friendship and. And maximum leverage because we are not always aligned on our issues. They have constituencies they're trying to support and so on. So we certainly don't want to aggrav them personally. So we think about that and, you know, it might come down to, like, helping them take their high school friend around the West Wing or something like that. Like, he's like, it was just deeply personal. Or diverting someone down this hallway so they didn't run into somebody that they were currently antagonistic with in another hallway at the same time. Like, understanding and orchestrating all that so that nobody was unnecessarily triggered.

Yeah.

And felt as good as possible in light of the circumstances. And then sometimes intentionally, like, pushing it because they were pissing somebody off. Like reminding them something like, so thoughtful about the personal psychology of each thing. Right.

Everyone's human. It makes such a difference in. It's also like, you want to get to know that person because you're going to be working with them for the next six, seven, eight years. Like, if you're successful and you build a big company, like, you're going to be working with that investor for a long time. You want to build trust quickly. You want to feel comfortable working with them. You want to build good rapport. People want to work with people they like working with. There's definitely a big element of just building rapport and trust. And I think founders who can do that quickly, it's a big bonus for them if you can build trust quickly with investors, which there are a lot of ways to kind of do that.

I think, you know, it's interesting. So in early sales and pitching trainings and experiences, I learned to pay attention to the subtle small cues. What does the person's office look like? Do they have pictures of their family? Do they have whatever. Do they have those successories posters stuck around? What are they wearing? Like, what's their whole environment like? What are all the little cues? And today that's gotten a little harder because people have moved to zoom. So, you know, like, what would I say about you? Well, it's a white background, right. You've got what look like corded iPhone cords around, and you're wearing a T Shirt and you know, like, I would guess things. And also from your appearance. Right. A certain amount of like leanness and so youthful. Maybe active. Doesn't rely on artificial kind of. Oh, I don't need to wear a suit or that kind of thing. Has a kind of a practical down homeness fits in with this vibe. Is not like overly preoccupied with tech. The wired headphones could be because you don't want to have wireless interruption. Except they also don't give particularly good audio. So my guess is you're just pragmatic and expedient with things.

I usually use AirPods, but I figured these would be better audio than the AirPods.

No, probably worse, actually. Well, so you get less crackles and pops maybe. And you have a little bit. But the AirPods are pretty good in that regard. There is more risk of touching that microphone. Right? Yeah. Bump your shirt or that kind of.

Anyway, yeah, maybe I did that wrong, man.

Right. But I don't know if any of that's right. I'm like. But thinking about and picking up on all those cues is really useful. You talked earlier about somebody showing up in a suit to make a bunch of pitches. I remember once I was working at a very large telecom company and we were very sudi. And certainly with senior meetings with strategic partners, that kind of thing. I flew out to San Francisco and I went to a meeting. Well, I was. I had like a banking meeting or some other thing. And then I went from there to Levi's. Right. And. And I'm still like in a suit. I've never felt so uncomfortable. I, like, apologized. I'm like, look, I'm sorry. I know you guys are Levi, but I'm, you know.

Yeah, yeah. I mean, that's. Yeah. My. My story was with my, Myself, my interview. My first interview with Box when I was like meeting the CEO of Box back in the day in 2008. I showed up in a suit and I've never felt so uncomfortable. He was in like shorts and a T shirt and asked me. He started the interview by asking me if I was going to the prom after the interview and if that's right. Yeah, that's what you're saying. Yeah. So it was like I took off the tie and jacket and I was just like, this isn't. This didn't start off well.

You should have apologized for forgetting his corsage. It's funny. And in the beginning of doing something like that, you don't have like an abundance of swagger. So you can't just smack talking back with so we want to talk about some of the resources and distill out some things like that. Before I do that, let me just remind folks that choosing a technology partner, like having technical development, getting your projects done is a huge challenge for companies scaling especially if you're taking a somewhat non technical company and making it more technology enabled. If you're looking for a partner in addition to looking for that like basic expertise, you're concerned with finding the right fit, finding the appropriate delivery model, balancing the quality of the work with agile and process and being able to ramp up and down the team to suit your demands over time. And so there's a lot of people in that world. I've come across a lot of them. You've heard from many of them. But one from the scaling up world itself is a scaling up venture incubator in India that because they're a scaling up company they're going to be a lot closer to your way of looking and working at things things than you might imagine from other vendors in India. And they've got a model that's totally tailored to companies in the scale up space and that mid market and can produce huge value compared to so many. So I suggest you check them out, see if they're in fact a fit for your business. Bit ly Clarion technology is a link to some more information. You tell them a little bit about you and have a conversation, see if it's not useful for you. So bitly Clarion technology is where to go get more info. So let's talk about a few of those like core ideas or recap some of that stuff and, and make sure that we covered kind of all the things. So you talked about running it like a sales process, planning for a range of things, developing it, honing it over time. Right. Understanding that, thinking about the your business from the perspective you talked about writing a memo or pre writing a memo. But even if you don't do like getting in the mindset of how they're going to evaluate your business or your sale, we didn't talk. And you talked about building momentum. Right. And it's not necessarily just users and sales, but it could be the growth of the pipeline, the interest trials, any number of other kinds of things. Also the advanced stage of your demo or working product, the size and growth and pace of your team, all of that can make a difference in that. How about the valuation?

Yeah, yeah, valuation is a big one because it's a hard number to come up with. What I found is at the early stage, especially if you're raising, quote unquote, an institutional round where there's like a lead investor and we can talk about other ways. There's obviously other ways to do it, but the most traditional way is like there's a lead investor who's setting the price, writing the largest check, and then you kind of fill in the round around that investor. We're talking about if you're raising an institutional sea ground in that case, that lead investor often has pretty stringent ownership requirements. They want to own a certain amount of your business to make their math work on their fund for their LP is to return capital. Almost always the amount you're raising is going to dictate the valuation. In those scenarios, most of those rounds get done at 15 to 25% dilution. We found the average over a lot of data points is right around that 20% range. It's just if you can raise 2 million and you have enough momentum to get that many investors, it's just going to get done at call it 10, 8 to 12, with 10 being the average. There are obviously always exceptions. If a company gets really hot, but that's generally where it will get priced, then the question is, okay, how do you come up with the amount you want to raise? And that's a function of two things. One is like a practical sense of like, how much money do you need to get to the next milestones and what are those next milestones? And so like really modeling that out and understanding how much you need and part of it is just like, how much momentum do you have as a company? And like, can you raise that amount? And sometimes those are aligned and sometimes they're not. Like, sometimes you can raise a lot more than you actually really need, Then the question is, do you do it just for the sake of doing it because it's available to you? And what are the repercussions of doing that? There are pros and cons of it, but yeah, so part of it is just sitting down, modeling out your business, saying, okay, what are the triggers or things that you can change in your business that will allow you to grow and get to the milestones you want to do? And then if you had more or less of those, could you grow faster and therefore get to those milestones quicker? And if so, then test the model of layering in what more money would look like. Now, if it's a party round where there's a lot of investors, kind of smaller checks from smaller funds or angel investors, there's less of that ownership requirement. And so sometimes the valuation isn't exactly aligned with that 20% dilution. But more often than not, the amount you're raising tends to be the biggest driver of valuation. And then the key is figuring out how much should you raise and how much can you raise.

Let's talk about some of the pitfalls because I think we're touching on a few indirectly. But I think taking money from the wrong people, it can create massive headaches and I think taking too much money too soon can create massive headaches. What are your thoughts on that?

Yeah, so I'll touch on the second one first. There's two pieces to that. One is just the idea of taking too much money too soon. One is if you take a bunch of money, let's say you're pre product market fit and it takes a long time to get there, you run the risk of then having to layer in more money again at a flat round or not too much of a more than what your last round was at, then you start to lose momentum as a company in the ecosystem of the investor sphere because everyone talks to each other and it's going to look like you have to raise a bridge round because you didn't get enough accomplished when the reality is you just raised it too high of a valuation. If you had raised it lower, it would have been and would have been fine. So I think that's part of it is just like understanding how much have you proven out as a company and is raising more money right now just because you can going to benefit you. And if you're still figuring out who your ICP is and whether there's even product market fit there, I think it can be dangerous to raise too much. The other piece of that is sometimes when rounds get too big at the seed stage or get get too big is relative but get bigger than we see rounds. Now where it used to be a seed round was like 1 to 2, maybe 3 million. Now people are raising like 5 to $10 million and calling it a seed round. And a lot of times when that happens it's because some big multi stage brand name fund came in and they say we want to lead you around but we need to deploy X amount of capital and we have certain ownership and they wanted other people involved and it's just like balloons. And those funds tend to be a little bit less price sensitive. So they don't mind with the price going up a little bit because they're viewing it as just optionality of if this goes we want to back up the truck and deploy 50 million 100 million into subsequent rounds if it becomes the one that goes. But then you run the risk of signaling if you have one of these big multi stage branding funds that do the seed round and it's not going amazingly well and they decide they're not going to back up the truck and do the series A and series B, then you run the risk of like, well, why aren't they doing that? What's wrong, what's happening? And so, yeah, I think you got to be careful about the round dynamic. Who's in the round, what are their intentions in the round? And then like, how much are you raising and why and what's the valuation? And like, what are the milestones you think you can get to from that? And like, what valuation do you think think you can raise at based on those milestones? And just be very cognizant of that as founders? Because it's enticing, understandably to raise a big round if it's available to you at a high valuation. But yeah, you just got to think through what are the.

I think it also can lead to sloppy. So for sure you can get more pressure and you can set expectations for producing bigger results faster like that, but it also can lead to sloppiness, poor control in your spending, burning through a lot of money before you've done a lot and not thinking about how you're using the money that you've got. Somebody asked me once in the 90s when I'd raised some money for a SaaS business, if you can believe it back then, well, what would you have done if you had raised 5 million? Right. Instead of, instead of a fifth of that, right. Like, and, and I'm like, I'd have made the same mistakes in a far more glorious fashion because I needed to learn things. Right. But I would have done it with better furniture or like, yeah, I think it's true.

I mean, you'll hire quicker when maybe ahead of where you maybe should have or need to. You'll spend more on testing different marketing channels than you otherwise would have before you figured out what's working. So yeah, for sure you'll overspend on things because you'll feel pressure to spend the money. I don't have to. Not every founder does that. Like, we've seen founders be very pragmatic, even when they raise big rounds. But certainly that temptation is there and that pressure is there.

And if you're a particularly exuberant founder, it's great to temper and balance yourself with somebody who's a more deliberate conservative optimist finance manager and then the other one. I see, and I see this a lot now especially because we're less involved in directly in the funding and often in the aftermath of trying to scale between and during the rounds. And we will see people with board members representing different investors that are really counterproductive. Board members who have profoundly different views on what the priorities should be for the company and where they're going. People who simply aren't helpful, have no expertise. What are some of the things that you worry about?

Yeah, it's a good question. I think part of it is just at the end of the day it's the founder's company. And so I think as a board like you need to have make sure there's governance and help think through strategic decisions. But, but the reality is you made a bet on the founder. Hopefully they have more context on the business and the market than you probably have as a board member. I think where you run into issues sometimes is when board members can be really hands on around strategy to the point where they really fundamentally disagree with the founder and they're at a stalemate and then it comes down to are they going to replace the CEO or are they just going to agree to disagree. But, but yeah, I think it's just people who are board members should be really good listeners, should jump in when they have a way to help or have some ideas and thoughts. But at the end of the day it should be the founder taking in all of that feedback and input and making the final decision because they have the most context to make that decision.

But think about even subsequent rounds. Okay, You've gone through some stuff, you've done some work, now you're pulling in the next round and you've got a board member from an earlier round who's objecting, who's holding it up with potentially just silly vanity nonsense. Right by their ego sometimes.

Yeah, yeah, but I mean that's certainly going to happen. I think the venture world and like right now we're certainly in a market where the pendulum has swung to the founder like the founder in a lot of cases is more in control than the investor. And if you're an investor who builds a reputation around being difficult and blocking rounds or blocking an acquisition because it's only a 3x for you and you want them to keep building but it's like life changing money for the founder. I think those are hard stances to take in a market like we're in today where your reputation is the best founders have the pick of who they want to work with and if you've got that reputation, they're just not going to work with you. And so I think investors are very cognizant of that and they just need to be careful about it.

Yeah. Think about what drives them. Do they need you to win? Are they just placing a bunch of bets and you're close enough like that whole range of it. So if you want more information on on on Michael's group and work, ForumVC is the the the link to go to. We'll put forumvc.com up in the crawl and we'll put it in the show notes as well so you can follow up. Michael Cardamon or as his family would say, Michael Cardamone.

Thanks a lot for having me, Bill.

We should meet in in Italy and have this conversation over better food.

That would give me some soon, right?

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