A Look INSIDE the VENTURE CAPITAL World ft. @bmalloyIII

What's up, Believe Nation? Welcome to another YouTube Hangout. Super excited to be here. I have a new friend with me. His name is Bill Malloy. He is the founding general partner from a venture capital company in California called Sway Ventures. He is an expert on building teams, on building revenue, on investing in brilliant people. He was an early investor in Uber and a bunch of other high-profile tech companies. And today we're going to talk about how to raise capital and answer your other entrepreneurial questions. Bill from the offices of Sway 9 AM in California. How you doing, man?

Doing well. I think I'm probably a little bit warmer than, uh, than you are up in Toronto, is my guess.

We are slightly above freezing today, so that's exciting since the snow is melting down. But, uh, yes, we are envious of the San Francisco weather. Um, I'm excited to have you on here. We haven't had— we're just talking the pre-show— a lot of the people in the VC industry are, are not recognized as thought leaders yet, haven't really broken through, and the people talking about raising capital are not necessarily the ones actually practicing it and being in the business. So it's awesome to get your firsthand experience. I'm excited for the questions. As people are joining us live, I just want to get your quick take on where you think the state of VC is right now. If I'm an entrepreneur looking at raising venture capital, why should I go with a VC firm versus other options?

Yeah, it's interesting. I was pulling some stats at a conference I spoke at 2 days ago. Last year, there was $150 billion that was raised in venture capital globally by entrepreneurs. So, you know, massive amounts of capital. And part of the question was raised around ICOs, or ICOs, which there was only $5 billion. So I still feel like venture capital is a major access to capital for entrepreneurs. And part of the reason that taking venture capital outside of just getting, getting money to fund your business is a number of venture capital firms, including ourselves at Sway Ventures, have really taken a value-add approach. So we're really, having been entrepreneurs before and having built successful businesses, we built our teams around many operating businesses to help help the entrepreneurs because we know how hard it is to build and scale a company.

So where would you start in terms of how much money you would put in? Like, what's the first check that you put into a company typically?

Yeah, so our, our sweet spot, if you will, for investing is we ideally want to be entering Series A. And that, that can mean a number of different things, so I'll generalize. Typically that company will have product they'll start to have some customer traction. You can see line of sight to about $1 million in recurring revenue. So for us, that's, you know, we like to look at investing about $5 million in that round. We do invest in Series B as well. And for us, the average check, the initial check is $10 million. So we just led Series B in a company called Fetch Robotics. They're autonomous robots that help move goods for companies like DHL in their warehouses. So it was a $25 million round, we led with $10 million. So that's the sweet spot. Now, what I will say to entrepreneurs out there, we as well as a number of other venture firms will invest earlier. So I do have the ability, we just invested in an amazing machine learning company out of Berkeley, And it was a small check. It was only $100,000. Our goal there is that the entrepreneur, he has some pilots, but he doesn't have revenue. Our goal is we'll help that entrepreneur build his business and then we can invest a larger capital amount. So it's kind of that range. And it's a broad answer, but for us, it's almost like idea through Series B. And depending on where the entrepreneur is at scale, Depends on the check size. Got it.

And now I know you love technology, you want to hyper-grow companies, but you're also about the team and the management. So if I'm an entrepreneur, I'm looking at getting venture capital funding, I'm gonna, I'm gonna pitch you, I'm gonna pitch Sway. What are the 3 to 5 most important things that you look at to say this is worth me putting some time and money into?

Yeah, exactly. I think you were a venture capitalist in a former life because you're You're already alluding to some of the areas we focus on. So different venture capital firms, I think, focus on different areas. For us at Sway Ventures, first and foremost, we're all about team. So we tend to look for founders that have done kind of one of three things. You've worked inside of a larger organization in a product line that's very similar to what you're doing. Number one. Number two, you've already founded, exited, maybe it failed, maybe you had a good exit, but you've already done something in that space, or you're just some genius that has a unique insight from undergrad or grad school. And I think the common theme is we're looking for a unique competitive advantage in the team. I think that's one. Number two, I think entrepreneurs really need to focus on co-founders. Ideally, you want to have 3 co-founders. There's a company we invested in called Split.io. They're in the developer tool space all around release management for software, and the 3 founders had worked together at Salesforce. 2 were technical, so you, you get this balance. It's kind of the hit-by-the-bus scenario that venture capitalists will look at. You just never know. So try to create a balance with your your co-founders, I think, is a key part. And then the final piece is, for us, we look for software as a unique competitive advantage. So ideally, we want to have someone that's a part of the founding team that has a technical background. If it's two brilliant MBAs and they've outsourced a product to some development shop, it's really not for us. So those are probably The 3 areas that I would focus on as an entrepreneur around team, and then there's some other areas, but if I had to pick one, it's team and those 3 areas.

Got it. Now, now around the idea of partnerships, it comes up a lot on this channel. A lot of my viewers ask, how do I find the right business partner? How do I know that it's going to work out long-term? Uh, what advice do you have for entrepreneurs who are trying to find that right person, uh, especially if they're kind of gearing up to be able to really hyperscale and, and go out and venture get venture capital. Do you have pearls of wisdom around finding the perfect business partner for you?

Yeah, look, this is the magic in building a business is the co-founders. I think some concrete examples, look, in Canada, Waterloo as an example is really, you know, scaled as an amazing engineering school. So depending on where you went to undergrad or grad, trying to tap into your alumni network is, I think, a great, great area. We see founders actually inside of larger organizations that meet their co-founders there, and then they decide to leave, obviously being very careful about the intellectual property that you leave behind. So I think you've got universities, you've got companies that you work at, and then there are a number of great incubators that have come up. A part of that is You may be a brilliant entrepreneur and a part of what the incubator does is help you find that co-founder. I'm on the board of an incubator called NexCube, and it's one of the things that they focus on. So you can have a great idea, a great technology, and a part of that process is actually finding that founder.

Is that ever something that you guys participate in? Like if there's a weakness in the management team that you help find maybe the president or the CEO, if the person is like really good technical marketing but they need the leader, do you guys get involved in that process? Or you want that figured out before they come to you?

No, 100%. I mean, I think one of the main pillars for us at Sway Ventures is focusing on adding value where the entrepreneurs want it, which I think that's a key thing. It's not just about adding value, it's being aligned with the founder or founders. And part of that is talent. So I don't want the founder community to feel like they need to come with everything completely completely baked and completely ironed out early on. We're currently— we've been working maybe for 6 months with one founder. He had a successful exit in the voice enterprise space. We're working with him on his business model. We're working with him on finding his co-founder, and we haven't invested a dime. So whether it's early on or later on, there's a company, Mokana, in the security space, and, you know, we've helped find a CEO, we help find a VP of engineering because teams change over time. And, you know, the founder may wanna move to an executive chairman role or a CTO role. So I think there's a number of dynamics that we kind of pride ourselves in being value-add as we grow and focus on talent.

When an entrepreneur is going out looking for capital, whether that's a VC or even smaller, they're going after angels, What do you think are the best questions that the entrepreneurs should be asking the investors? They're doing their pitch, they're going to get asked a lot of questions, but what questions should I be asking you if I'm coming to pitch you?

Yeah, very good point. I spend a lot of time, you know, with our founders focusing on this because the reality is it is a two-way street, meaning with the venture capitalists as well as the entrepreneur. And I think first and foremost, I think there's a cultural, you know, core values or principles, whatever you use in your own terminology. I think you need to find out at a partner level who you're gonna be working with and what their core values are. And I think a part of it's conversation, a part of it's spending time with them outside of the office. So I think there's that first and foremost, because this is gonna be a long-term relationship. I mean, it could be 5 years, it could be 10 years, it could be longer. Number 2, I think what are the specializations that that partner and that firm focus on, right? For us at Sway Ventures, it's capital, revenue, and talent, but different firms may have different approaches. Some entrepreneurs are better off with venture capitalists that are just financial investors. We wanna give you money and then it's up to you to go execute. So I think focusing on what is the partner and what is the venture capital firm do. And then finally, I think the key thing is how much capital is gonna be in what's called reserve coverage. So if we're writing a $5 million, or I'll use this example, we're writing a $10 million investment into a Series B, we typically hold $10 million over to the side for follow-on investments. So I think the idea on can the firm grow with you as an entrepreneur is important.

I like it. Well, guys, if you have a question for Bill, leave it in the live chat, and I will hopefully be able to get to a good chunk of them. Uh, up first is Emervim Hussein. First question for Bill: going public versus private capital funding, what do you think?

Yeah, very, very timely, um, conversation. I was just meeting with an endowment, uh, as we think about our investors, right? We have to get capital. The endowment was saying Because larger companies, Uber, Airbnb, Dropbox, Palantir, are now staying private longer, it's actually causing a ripple effect and a problem at the LP, the limited partner community. So for founders, I think going public is something that's costly and something that has a level of regulation and oversight. So I think it all depends on the investors and the founders is a long way of kind of around to say it, because staying private is great, but you need to find ways to inject capital. So if you're someone like Airbnb or Palantir and you can stay private longer and you can get private market investments, then there's no downside. The only thing that I would say is, as companies stay private longer, they need to implement regulations, compliance, and oversight like they were operating as a public company. You mentioned earlier, we were an investor in Uber, and, you know, I think we've all seen the troubles that they've gone through. It's an amazing business. I think it's changed the way that we think about transportation and logistics. But at the same time, they were able to stay private longer, and now new CEO, new focus on control. So if you do stay private, focus on that kind of public control mechanism early, just like you were public.

I love it. A bunch of people want to know what your thoughts on education is and how it relates to entrepreneurship. Should they be going to school? Should they be doing their business? What are your thoughts? Maybe we're hitting a hot topic, but what do you think about education and the relevance to entrepreneurship?

Yeah, education, I think for all of us, It's going to be very interesting over the next 25 years to see how the education landscape changes. I think there are some amazing branded schools that, you know, still today people are looking for that, that checkmark, right? As you think about graduating from a university, either BS or master's degree. So I still feel like it's a checkbox that a lot of people are looking for. But we've seen some amazing founders that just found their niche early on, and it could have been in computer science. And for them, it was a laser focus on what they were passionate about. And they are, they're amazing founders and they've been able to succeed. So I think it all depends on the person and what their unique competitive advantage is. For me, I felt like I needed, I needed to focus my undergrad on engineering and get those technical skills. I felt like I needed to get a master's in business. Because I needed to round out what I'd done from a technical standpoint. But I've also seen amazing entrepreneurs that dropped out of 1 or 2 years of undergrad because they felt starting their business at that time was right for them.

So I used to work at a venture capital firm here in Toronto, and if we saw a business plan where all of the founders had all had PhDs or multiple PhDs and no kind of entrepreneurial background, it would be almost a strike against, like too much education and not enough practical experience. I wonder from your perspective, if you see everybody with PhDs, is that a good thing? Is that a bad thing? Do you even care where they went to school? Like how do you evaluate education when you're looking at who you're going to invest in?

You know, I have one of my old mentors that said the best thing you can do is not look at someone's resume before you meet them. And, uh, because it starts to create this, this bias, right? You have a PhD, do you not have a degree? So I try to follow that as much as I can. As I'm meeting someone, really understand them for who they are. I think it's something that's very important. I also think it depends on the type of technology, right? For us, we're using, we're looking at software as a unique competitive advantage. We will invest in hardware companies, but as an example, some of the unique stuff that's happening in artificial intelligence and machine learning, the truly, truly unique stuff is still in universities. So you're actually, it's actually a benefit that have 3 PhDs that have never really built a business, because you're betting that they're going to create some new algorithm around machine learning. But a more mature business that's security or infrastructure, that's more business execution where the PhD wouldn't really matter.

Got it. It's really interesting how you don't want to look at a resume. The managing partner at my at our firm would always say, he'd always try to find the horse for the course. Like, you bet on the jockey, not the horse. And so I'm curious for you, how do you, getting the meeting with the VC is the first step, and most people don't even get that first meeting. So how do you determine where you're gonna spend your time, 'cause it's so valuable, if you're not looking at the resume of the person? How do you make that judgment call on who to spend time on?

[Speaker] Yeah, and look, I think there's the, what do I ideally wanna do, and then when I'm looking through the presentation, every entrepreneur puts their logos but, you know, behind them. So I'm not going in detail on the resume, but I do have an idea of what they've done before. So I think, you know, for us, we're fortunate. We've made 50 investments. We've been investors in great companies— Twilio, SendGrid, RelayIQ, Uber. So we've got this kind of referral network that now comes from our existing founders. Where they're having exits. We're now investing in their next companies. We've got great relationships with, with large corporations, which I think spawn some of the innovation that's happening in technology— Google, Cisco, Microsoft. So our deal flow, I guess, is come from known networks as opposed to just kind of sitting there stumbling into it. We're very proactive about how we think about our deal flow.

I love it. Well, the next question feeds into that. Nisi is writing in to say, "How do you connect into the networks of venture capital?" So what would you recommend?

Yeah, I was sitting on a panel a few months ago about this. I think it's like anything, treat it like sales, meaning do your research and try to find something unique. So different venture firms focus on different areas. For us, it's advanced enterprise, transportation logistics, cyber, and then finally like hard tech on the consumer side. And then each partner, you can find all this public information on databases like CB Insights, Crunchbase. Each partner does a certain type of deals, focus on their thought leadership on Medium, and really try to find a connection to a partner that is in an area. I think someone that's just going out and blanketing— like, I, I don't really invest in Bitcoin, as an example, um, from a firm standpoint. Now, personally, I may do some. So if I'm getting that business plan that that person hasn't done research on what I'm passionate about at Sway or what I'm passionate about as a partner— got it.

Uh, next question. Bill, I want to ask you, if you had a chance to meet yourself 15 years back and you had 1 minute to give yourself advice, what would you say?

Wow, that's an easy question, huh? So I think my father says this well, he's like, you know, you need to do a better job of stopping and smelling the roses. So I think taking that example, I'd say continue to drive hard, but spend more time focusing on those relationships, right? We're talking about team and people As opposed to, for me, I've been very execution-oriented.

So I go to my father saying, "Stop and smell the roses a little bit more." So then my follow-up to that is, if we fast forward 15 years later, you get asked the same question, would you be telling yourself the same thing?

I know. We'll have to debate that. 15 years later, you and I will meet in San Francisco or Toronto and we'll ask it and see what happens.

We'll be doing it in VR, though, not over YouTube Hangouts.

Exactly. Right now, with 2 kids, it's please get more sleep.

Salima is asking, what kind of control do you give up as an entrepreneur when you get money from a venture capitalist?

Yeah, so venture capital compared to private equity is you're typically not taking controlling stakes in companies. So you're buying, you know, I'm saying on average 10 to 25% of the company. Now, what does come with that is, I'd say, a board governance. So in every round that we're leading, what ends up happening is we create a board structure. So if it's early on and we're the first money in, we'll create a board of 3. It's us, the founder, and then an independent that's selected by us and the founder. So that board control sets the governance for the company. So it does become more of a balance where now the board, in a sense, controls the company, not necessarily just the founder.

So that was interesting because you said, if I'm the first money in. If you're not, if there's angel investors that people have taken deals with, what percentage does the entrepreneur still have to own themselves when they're coming to you that you would still look at the deal? Because you don't want to buy out another— investor and you want them still to have enough equity so it's meaningful, right?

Yeah. You know, it ranges. It's such a wide range. We see, depending on the stage of company, because founders, you know, will get diluted over time, it could be they own 10 to 15% of the company. And if it's early on, they may own, you know, 70% of the company. So the good thing, if you're doing it right and working with the right venture capitalists, what you do is you go through new financings, you're doing what's called expanding the option pool. Because the founder, let's say you start with 50% ownership, as new money comes in, that founder is gonna get diluted down, 50 will go to 35. But what you can do, if the founder's still active, is you can issue them new stock options as a way to kind of re-up their ownership. So we're a big proponent of that, because you want it to be meaningful, right? The founder, not only for the founders, but for the executive team, We spend a lot of time focusing on cash compensation as well as equity compensation. We actually have a matrix that we've developed for our founders that helps them baseline because a company, I'll give you an example of a company in our portfolio, he said, look, I don't wanna pay market rates for our team. And that goes for me as well as the CEO. I'm gonna make, you know, X dollars a year, and that's 50% of what market is, but we're gonna overcompensate in equity. So a part of it is what is the company modality to compensation? And it has to, the CEO and the founders have to live what they're saying for them personally. But then just get that benchmark, 'cause you may say, look, we want a cash compensation 125% of market and undercompensate in equity. Just understand what that ratio is for you as a founder.

At what percentage are the warning bells kind of going off for you? Like if I'm coming to you for Series A and I own 8% of my company, that's probably a big risk, right? So what's the lowest percent that like where it starts to— your alarms are going off for you?

You know, look, I'd say 15 to 20%. Like if you're that low in ownership early on, there's kind of something that doesn't smell right. Now it also depends on how many co-founders you have, right? So if you have— if there are 3 co-founders and everyone owns, you know, 20-25%, well, maybe then it starts to make sense. So I think it depends on how many co-founders you have because, yeah, if it's one founder and you come at Series A with 15%, there's something going on.

Got it. The next question is coming in around margins. What kind of margins are you looking for for the products or services that your companies are selling?

Yeah, so we invest in both hardware and software. We're always looking for software as a competitive advantage. So hardware companies obviously have just inherently lower margins, albeit they're good. So we invested in a company called NoonHome. It's part of the executive team from Nest, which sold it to Google with a multi-billion dollar exit. And now launched a lighting product that's hardware/software. And the margins in that are going to range from 35% to 60%. And so we're fine with that, right? Because they can get scale and volume, and it's a very hard technological problem to solve. And if they're able to solve it, it's a massive business. On the software side, we're looking at 60% to 90% margins. So I think it very much depends on the business model of the business.

How much do you prioritize top-line revenue growth versus actually turning a profit?

Yeah, there's this term in venture that's called unit economics. So I think what you have to be careful of are the unit economics of the business. And what I mean by that are, If you look at the top line revenue growth, you're willing to absorb a loss until you start to hit scale. So you have to make sure that the unit economics at scale makes sense. We're investors in an e-commerce and logistics company called the Tote. So as they add new distribution centers, their margins dramatically increase because the cost of shipment goes down. So you can make a business case that the unit economics get get better over time, because almost all the time we're investing in businesses that are losing money, right? They're investing so heavily into R&D. So it's all about can you prove the unit economics makes sense? I think to the founders and entrepreneurs that are listening, I think that's a key thing to focus on, is focus on the unit economics of your business and proving that you can get to a profitable business and that those assumptions can be validated.

Got it. Next one coming in saying, "Bill, I'm 17 years old. I want to be an entrepreneur.

What advice do you have for me?" Either start coding on your own, go to like a Hack Reactor, or if you want to go to university, but like, I'm being an engineer myself, you know, I'm a software investor, right? I invest in technology and innovation. So I think you really need to understand how products and companies are built would be number one. And number two is like, just go start something. Doesn't even have to be a technology company, but if you can, like, build an app, get it launched, try to do something, you know, write a book, see if you can take it out, make money, just do something. Because running businesses is hard. You know, when I was an entrepreneur sitting around board meetings The venture capitalists that I love the most weren't the venture capitalists that when my business took a downturn, they were criticizing me, they were there helping me. And the reality was those venture capitalists had built businesses, so they understood how hard it was. So I think focus on the technological side and then just go start something. Got it.

I think time for one more question. Uh, Bill, what advice do you have for entrepreneurs who want to develop their leadership skills?

Your leadership skills. So I think the best advice that I can give is focus on surrounding yourself either officially or unofficially with mentors and advisors. So, you know, you can do this where if you have, you know, 1 to 5 mentors or advisors, I think, like, really go out and ask them And it could be, you know, your way to treat them is you invite them out to lunch, but really focus on people that are in sectors that you wanna build businesses or have leadership skills that you feel like you need to focus on. So I think that's the informal way. If you already have a business, I highly, highly advise building yourself, if you don't already have a formal board, you can build an advisory board and actually give them some sort of stock options in your business. We're gonna come out with a template that the audience can use. I think the way to do this is not just to issue, I'll make this up, X percent to the advisors, but to really make it based on what they do for you. So we're gonna agree on a 90-day plan, Jane Doe, and you're gonna help me with how to think strategically about my business, and I'll give you Y percent of stock options. And then let's sit down in 90 days and see if it's working for both of us. I think there's a lot of drag in businesses that I've invested in for advisors that don't really add a lot of value.

Hmm.

I think focus on informal, take someone out to lunch or dinner, and just ask them to be a mentor advisor. And if you're at scale, build yourself an advisory board, I think it'll prove dividends.

Cool. Well, if you get that template created, let me know. I'll share it. I think it'd be really helpful. I'm curious myself to see it, so I'm excited. Uh, Bill, it's crazy how quickly time flies. One, like, 30-second final message that you want to share to the entrepreneurs watching?

Yeah, look, I think for us at Sway Ventures, a part of our belief is over the next 25 years that software is going to help improve the lives for us as consumers as well as businesses that are running the world. And I think it's this idea that old-line industries are being transformed, machine learning and artificial intelligence are really now starting to become mainstream, and then finally this idea that devices, right, the Internet of Things, is really coming, coming to fruition. So I think for the audience that's listening, If there's any way that we can be helpful in what you're building your business, I think you've got my Twitter account, but please come to swayventures.com, swayvc.com, and happy to be helpful.

I love it. Bill, thank you so much for the time. Guys, check out Sway Ventures. Bill on Twitter is @bmalloyiii. We've linked it up in the title of this video so you can check him out there. Really appreciate you spending the time with us. Looking forward to connecting in hopefully faster than 15 years on VR.

All right, buddy, take care. Thank you.

Cheers.