Best Practices for Raising Your Seed & Series A with Patrick Lor, Panache Ventures

I really love it when VCs come in and basically do more than just ask about numbers. They ask about how we're doing as far as our mental state goes. Because especially at small companies, the performance of the company tracks directly to the physical and mental state of the founder or the founding teams. If a founder isn't doing well, then the company typically isn't doing well. And this is so, so important.

I need some traction. You need some traction. Let's get some traction.

Hey, what's up innovators, entrepreneurs, visionaries and disruptors. This is your Traction podcast host Lloyd Lobo. We're a community of over 100,000 people just like yourself, on a mission to help you get the methods, the money and the madness to explode your business growth. Featuring stories and tactical advice straight from those who've done it before, like Shopify, Twilio, Asana, and many more, this episode is brought to you by Boast AI. Each year the US and Canadian governments give out billions of dollars in R and D tax credits and innovation incentives to fund businesses like yours. But the application process is cumbersome, prone to frustrating audits, and receiving the money can take up to 16 months. Boast AI gets you access to research and development tax credits and innovation funding opportunities without the headache and red tape. Join thousands of North American companies leveraging Boast AI software to maximize cashback. Check out B Oast. This episode is also brought to you by Launch Academy, an international tech hub that provides mentorship, resources, network and the environment for entrepreneurs to launch, fund and grow their startups. Since 2012, Launch Academy has incubated over 6,000 entrepreneurs, of which 300 have grown their startups past Seed and Series A and have collectively raised over $1.2 billion in funding. To learn more about Launch Academy's programs, check out LaunchAcademy CA.

Exciting topic today on how to raise your seed in series A in 2022. Our speaker today is an old friend I've known from from when I started the company and he's a serial entrepreneur. He's a VC at Panache Ventures, which is raising its fund too. He was a co founder of iStockphoto, which was acquired by Gettysburg and one of the OG hyper growth entrepreneurs, Community builders. Just the man in general and that's why we can see here hundreds of people have registered. Pat, welcome to Traction. How are you?

Thank you Lloyd, Great to see you.

You've had a terrific journey, right? As an entrepreneur, community builder, investor. Walk us through your journey. How did you get to where you are today?

Yeah so Lloyd, I feel like a couple of things have informed my journey as an entrepreneur. And as with all people, I think it, it starts with a little bit of a personal story. So I saw my parents really work hard and struggle to get to where they're, where they were at. So I was born in Hong Kong, parents immigrated to Canada when I was five. And I saw them give up these professional jobs and come over to Canada because they didn't have the English skills. They were working as factory workers, they bought a grocery store and they were running a grocery store. And so I really grew up to seeing what small business looked like and the struggle and the hours. So that, that was the childhood. But then I went off to university. I ended up working for some great, for some great people. Just always lucked into some great entrepreneurs and some great mentors. And eventually I started working at Adobe and I was at their content division which sold clipart and photos and fonts. We were actually selling them on, this is in the mid-90s. We're actually selling them on CD ROMs and diskettes, three and a half inch diskettes. So that was way back in the day. But eventually broke out on my own, went back to school, got an MBA and ran into an old colleague who had started up something called Istockphoto and he was just in the middle of a pivot. We pivoted it from a CD ROM business to an online business and the rest is history from there. I think I will have to say that at that time we didn't quite understand what we had. So we sold the company for $50 million US to Getty Images and we didn't realize that we had a billion dollar business on our hand or a multi billion dollar business on our hand. But we sold a little bit early. So I think going to today, Lloyd, for me, I think that I have a little chip on my shoulder, which is I won't ever let a company now sell for a fraction of what they're worth if I believe they can get to unicorn status. And you and I have talked plenty about making sure that you're squeezing out the full potential of a company before you let it go too early.

This was 2006. $50 million is a lot of money in 2006 here. Every day there's another unicorn. Rounds are $50 million. I'm sure you and the founders did pretty okay and then you went on to other companies, but the comparison is hugely different now. The market is absolutely bonkers right now. How should founders think about fundraising and valuations in this market. You're a vc, but you've also been a founder.

Yeah, for sure. So I think a couple of things, Lloyd. I think it's super important to say that money isn't the only measure. I think that I look at it and I say that when somebody put, when Getty Images put that $50 million in front of us, I think that we weren't confident enough in ourselves to believe that we could take it any further. We didn't have the confidence in ourselves that we could build a billion dollar company. And more so than the money, I want to be part of that community that helps instill that confidence in the founder community and the entrepreneur community, that they can build billion dollar businesses with that support around them. So I think that's super, I think that it just, it's just super important that you reach outside of your local community, whether it's entrepreneurs or whether it's investors. Because all of a sudden you've got a wider market for you to value. And I would say that typically in smaller Canadian cities you might see a 5 or 7x multiple on revenues, but then what you may look at as far as New York or San Francisco multiples, we're seeing upwards of 150x annual revs in some of our follow on investments. So there's a massive contrast and you have to be able to tell the story. And I think you have to get in front of enough investors to make that happen.

When is the right time to raise?

It's an interesting question. I think that it's time to raise. If you think that you can get a little bit of momentum and a little bit of speed, I think this probably goes for goes at all times. But I think especially now when there's a lot of FOMO in there, like you say, there's a lot of money, it's bonkers. And if you can get a term sheet and you can get enough excitement around your investment that you can close within a month or so, then yeah, I think get out and raise. You'll find out pretty quickly when you talk to investors how fast it can close. I think that I've seen companies out there still, if they're not telling the right story, if they don't have all the information together, if they don't have enough traction to raise what their target amount is, that they struggle and that gets out in the market pretty quickly. So you want to be able to time it out so that there's enough excitement in the round so that you can get it done. It's a signal for people that they can jump. If it's going fast, they'll put a little more effort, they'll put you at the top of their pile.

Have the metrics changed significantly? Like you're looking at seed A B, what do you think are the right metrics at these stages in this day and age?

So at the top of the scale or at the top of the valuation scale, for each of those areas, I think you're starting to see it move quite a bit. So for instance, what we used to see in the Canadian pre seed realm was that it was, let's say a five or six million dollars Canadian pre or post money valuation somewhere in that area, raising 1 to 2 millimeter, that's gone up drastically. And we used to see early revenues, we used to see some product market fit at pre seed previously, not anymore. So I think those rounds have gotten more expensive and I think pre seed has gotten more speculative in that. In that the investments are being made on founder track record and on teams and on market and concept rather than on a built product. So we're seeing a lot of that happen as well. I think it's a really interesting market is that if you want to invest pre seed, it's gotten a lot more speculative. And so I think that what I would advise for companies raising out there is just making sure that you have some metrics to get people super excited. Because I think founder, what investors are looking for in absence of revenue is that they're looking for other signals. So I've seen companies raise on early, the typical stuff, early contracts, on pipeline, sales, pipeline. I've seen other companies at seed raise on not necessarily revenue metrics, but they're raising on metrics such as net revenue retention. So if they're able to run a land and expand program, I've seen companies basically at fairly low revenues, but with big NRS be able to raise big rounds as well. So tell the story. If you can't tell the revenue traction story, you've got to be able to tell other kind of customer or product traction story.

What is the ideal founder profile or startup profile for you guys?

Yeah, so ideally, and this is really in the sweet spot where we really like to be is 5 to 10x revenues. Although that seems like it's just. It would just be an absolute bargain in most cases because we're seeing numbers much higher than that. As far as founders go, we really want to see some indication that they're top decile, top 95% in the world. So for instance Lloyd, you and I see a ton of businesses. So if we see 20 businesses, there might be one founder that looks like, man, they're just the best. And so that would put them in the 95th percentile. I think we'd like to see that kind of founder, whether it's because of hustle, whether it's because of network, whether it's because of who they know or what they figured out in product. And right now I think we're reliable, relying on a lot of signals that are just indicators that the founder has abilities. Because in the early stage it's gotten expensive enough that all you have to do is show maybe a couple of those signals to get funding.

What do you look for at seed level and at an A level, is there a hard revenue growth numbers that you look at or it's arbitrary?

I think it's all over the map. And so in our best deals, we're seeing one and a half to $3 million at seed, but we're seeing the same kind of metrics raise at A valuations. So it's been, I think that, yeah, it's quite variable. But ideally for us at seed, we're looking at a million dollars or so.

Annual revenues, A million or so annual revenues at seed. And seed is, which is very interesting because back in the day seed was, you have an idea and you have some validation. Right now people are exhibiting more and more traction earlier and earlier, making it competitive.

Yeah, and I think there's a couple of things, Lloyd, and you've seen this, is that there's many ways to get there. So we've seen companies basically spend a lot of money on marketing and essentially buy that traction. So I think investors have to be careful about that, that it's actually sustainable, a sustainable go to market plan. But yeah, I think that as things have gotten more expensive that founders are getting pretty smart about laying out their business intelligence metrics, really digging in, showing not only revenue traction, but showing that they can scale their marketing programs, scaling that, showing that the product has got traction off of some off the daos or mouse and other kind of engagement metrics.

And so let's dive into the process a little bit now. It's interesting because you're probably coming in from both sides, right? Like you're looking at it from a VC perspective and also a former founder. What, how should founders approach their funding round? What should the process look like? Planning, prep, dive into that a little bit.

What do you see? Yes. Yeah. And this is a really a tough one, Lloyd. I think that as you've experienced on your end. I think fundraising is a long journey. It's a long term. You got to have a long term plan for that. So I would say that you've, in both case, you guys have done it perfectly. You guys have been in business for a long time and you were never out actively fundraising, but when you decided to raise, the offers just flooded in. It's because while you weren't fundraising, you actually were fundraising for five or 10 years. And so it's just a super long journey to get there. Which is to say that, look, when you, if you're doing good work, if you've built some really great relationships, ones that you've, especially the ones where you've built trust, where you've added value to the ecosystem. So I would say that, I would say that's the first thing. Build those relationships, talk to people, show value to the investor and entrepreneur community even before you're raising. And then it just makes the raise that much easier when you're out there. So that would be the first thing. But I would say that make sure that you have enough goodwill, that you have enough information in the community. What I often find is that people are out there and you just don't know how to. You don't know how to communicate what you're working on or you're too, you're too opaque with your numbers and you just want to build these relationships where you're updating your VCs and it makes it easy for them to dig in when they're meaning they're fully educated and you've built this relationship of trust by the time you activate them. And so I would say that's the first thing to do when you're doing it. And also make sure you have something of substance to show people. You want to show that you're progressing the company along the way. So if it's an annual update or a quarterly update, make sure it's. Your chart is tracking up and to the right. So I think those are a couple of things that I would think about.

How do you see, like the best founders build relationships with VCs before they need to fundraise.

Yeah. Here's the almost a dirty little secret of the VC industry is that yes, we do accept cold emails. You can find us on LinkedIn, there's a form on our website that you can get a hold of us on, but our percentage of conversion there is so low, there might be one out of every couple hundred emails of a company that we would actually screen because I think the companies there are just either too random or too early. But we take almost every intro through a trusted relationship. So for instance, Lloyd, when you intro companies to us, we always take those intros because we know that you're an experienced operator in the space and you know how to screen companies. And so anybody going through Lloyd is always a meeting for us. So there's a market difference. So then you're going from a 0.1% or a 0.5% conversion rate on cold inbounds to almost 100% on intro. One is better than the other is superior to the other. So the dirty little secret is this, is that every VC likes to get out there and basically say, oh, we'll take cold inbounds. You don't need to be connected, always write us on email. But that's really more like PR and being entrepreneur friendly. I actually think that it's selling a little bit of a dream that can never come true. So I basically say, look, if your deck shines, yeah, we'll get to it eventually on the cold inbound. But if it shines and one of our friends, if you go through Lloyd, we'll get you a meeting next week for a deal screening meeting. So there's a way to understand this system. There's a way to get 200x better results. And the first one is through intros. And so that's one of the ways to do it. The second thing to do it is to just be transparent with the numbers. And so don't be shy, don't ask for NDAs, but share what you absolutely can. Show some real numbers because I think that's where you basically give the indicator that, look, we're not going. We trust you with the numbers and we're not shy about our numbers. We actually want to brag about the numbers. And here they are if you want to see them. So I think those are a couple of things that I would keep in mind.

I think people should start building relationships when you don't need it. It's funny, I say this story a lot. After we raised in December, we weren't actually raising. We met the investors through our network, the Radiant guys through Traction. They wanted me as a venture partner and whatnot. So built this good relationship and it came together over the summer. We got pulled into this B round. Lots of people just inbound, a lot of press, of course, sunicorn list, that list, the other list. And then we found ourselves in this rut for a B with 21 VCs in the mix. And then we were like, hey, we don't need the money. We just took money. There's cash in the bank. Execs are here for two months. Why are we raising? So we punted. We literally emailed all the VCs on a Friday and say, hey, we don't want the execs. And the team has gone from 30 to 100 people in a few months. Feel like they're running with a gun to their head. So we're going to pause this through next year. And so that created this sort of fomo, but then it also enabled us to continuously build relationships with those growth stage investors.

Right.

And over time, and then you get to know them. It's a long marriage.

Absolutely. Lloyd and I saw a number or I saw a question coming through on the chat. It basically says, hey, how do startup founders add value to VCs? And I think that's super interesting. You just mentioned a couple of those points, which is one, you guys understand industry, right? So I think that you guys have a very rich view of a community and so you definitely add value to VC sysfy. Either talking about what's happening out there in the ecosystem, or you could probably highlight some of your top companies and make those intros to VCs. And so if you're in the middle of deal flow, certainly your opinion and your view of these startups is super valuable. So I think that founders can add a lot of value to VCs as well. So I think those are just a couple of the areas that, that you.

Can help and I think making good intros. So I think it's very important to understand what stage the VC invests in and what's a good fit for them. Because if you make blanket intros, you'll just blow your reputation if they're not a good fit. Right. Pat invests in seed companies. Let me just send him every napkin idea. And then that's the best way to say, I'm not going to take Lloyd serious anymore, that sort of thing. Before the bee that we punted all these growth stage VCs, I would occasionally make intros for them because we're in that sort of circle and our friends are raising or clients are raising, and then you make those intros.

I think most people that I've met know how to make good intros, meaning double opt in. Make sure that email contains just enough information, include the deck, all those kinds of best practices. But I would encourage everyone, if you don't know how to make a good intro, you don't know best practice for BCC ing people for getting double opt in all that stuff. Get on the Internet, search up, search up how to make a killer intro and do all of that template that and once you get good at that you'd be surprised at how quickly your network grows and you should essentially get really good. This should be one of your top skill sets is making great intros to VCs and other entrepreneurs 100%.

And for those who don't know what double optin is, never make a blind intro to a vc. Just reach out and with some high level metrics of the business. This is why I'm excited about these guys. Here's what they do, growth rate, et cetera. Would you be interested in an intro and then make that intro when they approve? If you just make it blind you're going to blow your relationship. I syndicate with a lot of investors. I use a tool called Mixmax and so if you see here, these are both my portfolio companies. I reached out to 86 investors and about 30 took intros with them. I sent an email like this to 8090 investors and then 20 or so will say hey I'll take the intro. And they appreciate that versus imagine making 80 blind intros.

Yeah and Lloyd, not only 80 blind intros but I mean that you're running a clinic on how to make intros which is would you like this intro? And by the way Here are top 3 points why you should take this intro meaning here's some revenue traction, here's what I know about the founders, et cetera, et cetera. Imagine getting that email versus hey, I know this guy, would you like to talk to him? And there's a market difference between a good intro and a bad intro.

I tell the founders if my network invests in you then reserve like a small amount for me. And they're happy to do that because you made the intro, they got a few checks and that's worked really well. So let's talk through this process of figuring out the price. This valuations is nuts and most founders think that they can go and command the 20, 30, 40, 50, 100x. But how should people think about it?

It's super tough. I'm not sure that we figured it out exactly but you really have to show that you're going to give them a top percentile return. And top percentile return means that you're in a big market that there's a potential for a billion dollar exit that you can return not only the magical 10x but I think you got to be in the 50-200x range on the original investment. And the way to think about it is this. Can a VC put money into your early stage startup and then by the time you exit or by the time they exit or you all exit, that they can return the entire fund? And these funds, for instance, range all the way from our little fund at Panache being $58 million to some funds being hundreds of millions of dollars. For instance, Inovia's latest growth fund is something like $430 million that was just announced on Beta Kit today. So any one investment, either in my fund or in Inovia's fund, needs to return that entire fund. And so that's the thing to look out for and do the math on that, understand how big it is. And I often see people say, why wouldn't you invest in my company? I think I can return a solid 3x or 5x. But if you look at the math that it takes to pay and run a VC organization and to pay investors back, 3 to 5x won't do it. So I think that's the first thing is either convince them that you're either growing on your way there, or if you're pre revenue and even pre product, that you're building enough disruption or you're moving into a category that's big enough, where the TAM's big enough to address those big return issues.

I have friends who have 1, 2, 3 million in revenue raising at 2, 300 million valuations. That's not the case for everyone. You need to have something either like a growth rate on free users or there has to be something that's abnormally spiking, isn't it?

Yeah, I think you want to show something that's a metric that somehow they think that matters, that is well above industry standards. So you want to show essentially top percentile indicators of something. And so for instance, I mentioned net revenue retention. So for instance, for every one new dollar coming in, if you can produce $2 eventually, then you have a net revenue retention of 200% as opposed to a lot of companies show revenue churn. And so they'll churn X percentage a month or X percentage a year. And so just to show that, hey, when a dollar comes in on day one, by day 180, that becomes $2 because we have a great land and expand strategy. And So I think VCs are starting to look at and other investors are starting to look at those metrics because they may predict future growth and future potential of a company. So you don't have to show that metric right away as far as just pure revenues, but show some of that stuff. I think also show that one of the other things is that marketing is really expensive. So we see companies that are showing incredible pipeline or incredible efficiency around the go to market getting good valuations as well because man, it's expensive out there to buy impressions on AdWords or on Facebook. So if you show that you've got scalable marketing that doesn't depend on paid advertising entirely, I think that's another case for asking for a higher valuation and paid advertising.

I feel like each year it costs about times and a half more to squeeze the same roi. So what unique channel, what scalable repeatable channel you have your advice for raising from angels, like when should it be done? What is the best way to do it? I mean there's a time and place for everything, right?

Yeah, I feel if you're raising from angels, you're probably, you should definitely raise from angels and you should do it early because I think angels typically are a little more valuation sensitive. I know I was, when I was playing in the angel game, which is you're not as an angel, you're probably not buying into 50, 100 million dollar valuation companies, you're probably buying into sub, let's say sub $10 million. I think that if you're attracting angels, you're attracting two things. Number one, you're attracting their network and their advice and not just capital. So if you've got an angel like you, Lloyd, you've got an extensive network of investors, you've got experience, you've got network of operators as well. Getting you in there because of your experience I think is really valuable. What I read into is this, is that if Lloyd has seen 10,000 startups over the last 10 years, that to me having him on your cap table is a real signal that this is a serious business. As opposed to getting your grandmother to invest in. Your grandmother may, may have done 10,000 deals but most grandmas haven't. So not to disparage any grandmas out there, if you have a family member that doesn't do angel investing, they put, they're putting in 20 grand versus Lloyd putting in 20 grand is very different. So I would say definitely get sophisticated angels early onto your cap table. It's a great signal, I think.

I couldn't agree more. Early days getting like some experienced operators to invest because they not only then invest in, they make intros, they help you out with strategic advice and it's a It's a good positive signal there. There's a lot of founders playing FOMO here, right? Like in, in this day and age. Oh, I'm talking to lots of investors. Tiger is in. Like, how do you feel about this? Like, FOMO tactics from founders and how do you react?

Oh, man. Number one, it's real. So there are legit billion dollar funds out there writing earlier and earlier stage checks on earlier metrics. So it's a very tough environment out there. What I would say is this, is that right now I think everyone is acknowledging they're overpaying. And so it's important to understand what people are overpaying for. I think they're overpaying for top percentile founders. And so I think you have to give a, give the impression or at least have built a track record that you are people of your word, that you're, that when you make a promise, you're going to follow through, that you're good at projecting revenues, that you're good at executing. So really show that you're smarter, that you hustle more, that you actually can deliver and execute. So I think that's super, super important. I think the second thing is that at least this is something we're doing at Panache and we're seeing a lot of other firms do. It is that if you're overpaying for something, is that we have a vested interest in getting you to grow into that valuation. So you're seeing the best VCs pouring efforts, whether it be consulting, whether it be coaching, whether it be mentoring, some kind of program to put companies on track to grow and helping them, coaching them through that period. So we've implemented programs to help our companies grow faster with coaching and with our impact team and consulting.

What is the target percentage ownership for the founder, typically at seed? Ab, what are you seeing out there?

There's a quick metric on that that you can run, which is, I typically say that as a founding team, pre seed and seed, if you give up, if you own 100% to start, you give up 25% on the pre seed, you give up another 25% at seed, by the time you hit the Series A, you'll still own more than 50% of the company. And so only if you dilute another 25% on the third round would you go below 50% ownership. And so to me, I think that if you were around those areas, if you were 20%, you'd be obviously better. If you give up 30, you're going to be a little more diluted But I would say that you should try and maintain majority ownership amongst the founders at above 50%, either into the A or into the B, depending on how good your traction is and obviously how valuations work out.

What is the most common method to raise seed, convertible note safe or price round?

I like seed at seed and pre seed to do safe notes because it's just faster. The legal bills coming off a safe are about at least the 25 or max 25% of what it is to do an equity round. It's just with an equity round you have to diligence all the shareholder agreements, et cetera, et cetera, and that's a little bit heavier. Our preference is safe and I think the closer it is to standardize template off the YC site, the better because it's just less legal fees and less time.

What would be enough traction? What I'm seeing here, at least in the bays, is half a million to a million at seed. I'm seeing A deals getting done at 1 to 2 million and B deals done at 3 to 5 million.

Yeah, and Lloyd, the reality of it is that it's incredibly hard to just pick one metric and say, you know, this is how to get to X valuation. Because the reality is none of those rules apply, is that I can show you cases where companies at $3 million are struggling to get their skills seed and then companies at half a million dollars have oversubscribed A rounds. And so there's no rhyme or reason to it. I think that if you combine all those measures and look at industry, look at growth curve, look at founder profiles, look at product, look at the competitive landscape, you have to combine all of that to get a valuation formula. And that's what's frustrating, I think, to founders in general, which is give me a number and I'll hit it. And the reality is there is no algorithm, there is no set number.

All my friends in my circle here are raising and often it's starting to feel like it's more supply and demand versus metrics, which is really strange. I have a number of friends raised at very high valuations and it just seems like supply and demand if they think it's a big market. You have one of the two growth metrics at like maybe a triple, which is either revenue or user growth. And you have very high NRR net revenue retention. And for everyone's benefit, it's your revenue minus churn plus upsell, cross sell. If you have some fundamentals and there's a bunch of FOMO going on there through your network, it's easy to raise. And if you look at Dooley, you guys are in Dooley, right?

We are $80 million series B. Yeah.

So they raised 100 million in seed series A and B in a span of six months at a pretty good valuation.

Yeah, really good valuation.

What do you think was the standout there?

I think that they really had a great product or still have a great product. And even when I saw this company three and a half years ago, I saw Chris and Justin are just fantastic entrepreneurs, really love the product that they built, really like their hustle. So I think that's the beginning of it all. But as we dug into it, as we worked with Chris and Justin, what we discovered was that the product was not only beautiful from a product review standpoint, but their customers. They were landing and expanding every customer account so that some incredible industry leading net revenue retention numbers. And I think that the customers or investors really saw two things. Number one is that this was a hot space. So there was a lot of money and a lot of revenue expansion opportunities as a marketplace in general and a real opportunity to be disruptive. And secondly, just incredible, incredible customer traction numbers. Behind the scenes, a bunch of folks.

Are asking on like raise struggles and if I can't raise, should I stop? So I want to share from a founder perspective here, being a part of two failures and both doing okay build a company because you believe in the market and you want to deliver value to customers versus going through the ebbs and flows of just to fundraise. I look at it as dating, right? So your first phase is you don't go to a bar and say I want to marry you. You optimize for the number and then the text. So it's like the first phase is validation. You're trying to validate the market. Maybe you get 5, 10 people in the B2B space to pay you to try it out. Next step is product market fit and you're optimizing maybe to get to a million. And the next step is product channel fit where you're trying to figure out one repeatable scalable channel. And you get to a point of scale where you're spending time scaling what you've nailed and small amount of time trying new things to nail. I think build your business in with the mindset of hey, what do I need to get to by the end of this year or next year? What do I need the money for versus oh, I'm just raising. It sounds really cool to raise money right now. Which as silly as it may seem, but a lot of people want to raise for the wrong reasons. Just make sure you're not raising for the wrong reasons.

Yeah. And just to build on that point, Lloyd, I think it's important to understand that just because a VC thinks that you can be successful, doesn't mean you will be successful. And VCs get it wrong the majority of the times. It's just that when they get it right, they might be able to make 1000x on your investment. Meaning that a VC essentially can be wrong 99% of the time. And if they're right once, but big time on that once, once out of a thousand, they've more than paid back their fund. And so we're talking about investments like original seed investments in Coinbase or Uber or Airbnb. Those are the ones where they return thousands, if not tens of thousands of X return. And so really, when you look at it, a VC saying that they love you is basically just, you might give you a 1 in 100, 1 in 1000 chance of actually being successful. And so what you're talking about is, man, if customers want to give you money, that's probably a much better sign than VCs giving you money for your future success.

Exactly. Like Speakeasy, we had raised 6 million on an idea was incubated by Bessemer Ventures. The company failed because we couldn't get retention. The product was broken and we ran out of that money. More money, more problems in the sense that when you have money, you can't stop spending it. And this is advice you gave me, I think eight, nine months ago when we were speaking, you heard make sure people are aligned with not spending all that money. You had an example from Fotolia days when you guys raised.

Yeah, for sure. For most companies, I can just talk about this a little more generally, but when VCs give you money, the whole interest clock starts to tick. And so think about this. The VC money, just like any other money, is not free money. People want a rate of return. So. So people that invest in VC funds are expecting better than their typical average investment returns. So what are the investment returns out there right now? If you stick the money in the bank, you're probably getting less than 1% interest. If you're in a bond, it might pay, I don't know, depending on the bond type, 5 to, let's say 8% on a corporate bond. Apple bonds probably pay, I think, in the single digit percentages. So it's low. And then something a little more risky might pay 15 or 20%. Those are MES debt funds. And then go on and on. What do you expect out of a venture fund? I think venture funds are these days expecting anywhere between, let's say, 20 to 40% annual returns. And what it means is that for every investment that a VC fund makes, they're expecting you to double or triple in valuation every 18 months, 18 to 24 months. And so let's say if somebody gave you a $10 million valuation today and they gave you $3 million, they're expecting you to use that $3 million to essentially triple your valuation within the next two years. And that's a lot of pressure. And so if you were raising that money, you just go, no, I'm going to go slow. I'm going to be conservative. Your VC is not going to be happy with you. They really want you to take that money and grow this company fast. So, yeah, really make stuff happen. And not only that, but there's something called the T2D3, which is a triple double. That should be your growth plan over five years if you're going to start on the venture path.

Yeah. And there's a lot of folks now in the growth equity space or different types of venture investors that are fine with 50, 100% growth. Whatever you do, just make sure you're picking the right investor for yourself. If somebody wants to return the whole fund like a triple double, like Pat said, but the others may just invest in 50 to 100% growth. So just make sure you're subscribing to the right thing. Humera asks here, how do you define pre seed versus seed? It's incredibly confusing. We hear both for our company.

Yeah, way, way too confusing. Hi, Humira, how are you? Yeah, I don't know that there's a real definition. I would say that a Canadian pre seed is sitting around, let's say anywhere. I would just peg a number 6, $7,000,000 under 6 or $7,000,000 pre money or post money valuation raising, let's say a million or two. And then that, that might be just a friends and family round. So a Canadian US pre seed might be as high as, let's say a 10 or $15 million US valuation. So more than double that. A US pre seed is probably a Canadian west seed is probably a Canadian A. So along those kinds of lines. And so I would say that don't worry about whether it's a pre seed or seed. Really focus on what size check you think you can justify or what size round you think you can justify at using a 25% dilution. Typically, I look at companies and say that if you're trying to raise $2 million, would you. Do you think that you can get justify $6 million pre money valuation, meaning that at an 8 post your investors get 25% of the company? Can you justify that?

Yeah, any valuation you get, you got to grow into it. But these days it seems like people are forever raising and may need to catch up at some point. How do you estimate your pre revenue valuation?

I think that unlike most things where there's price transparency, meaning that if you're buying or selling a house or buying or selling a car, you get to ask for, you know. Yeah, I get to have an asking price for your house or car because there's so much transparency in pricing. You know, what your car year and model and mileage is. You get to estimate that against the previous 10 or 20 transactions and you get to come up with a price. Unfortunately, or fortunately in the venture world, because there's no direct comparables, it's really hard to compare pricing. And so I think about it basically in one of two ways. Number one is you can run the math, you can run some comparable metrics, you can try and get a metric around or estimate a valuation. And to me, I would only use it as a estimate because that's not what you're going to get. You don't get asking prices in this startup funding game, but you get offered a price. And so that is to say that companies are never sold, they're bought. So you need a buyer to make the first bid. And so I think the biggest mistake that most companies make is that they spend a lot of time justifying a valuation and going out and pricing the round and asking VCs to basically buy in on that price. And the reality is what you should do is basically say, we need X amount of dollars. Determine whether you need 1 million or 3 million over the next 18 months and see if you can justify that and see what kind of offer comes through. And so for instance, if you need $2 million, somebody may decide, oh, this is a really great company, I'll take 10% of the company for that. And then all of a sudden you've got a $20 million pre. Or somebody may say, you're so early, I would want a third of the company for that. And so then all of a sudden then your Pre money's at $4 million. I wouldn't concentrate so much on the math. I would concentrate on the comparative valuation that a VC is willing to offer.

You Would you say like all the companies in an accelerator, for example, the valuation that they get, is that a good comparative for a pre seed?

I think that ultimately you would want multiple people at the table. The more people that are willing to buy in at that valuation, the more solid, hopefully the more solid it is. Although these days it's hard to tell. But I think that multiple people at the table at an oversubscribed round says that, says that it's probably priced exactly where the market wants it to be priced. And so the more sophisticated of investor and the bigger the checks are, the more validated that valuation is. But yeah, it's really tough. The signals are all mixed up these days.

The other thing I'd like to share just from my experience is optimize for the relationship. If you over index on the valuation and you treat people like a transaction, the first time or second time, a major roadblock hits, either they're out of there or you're out of there.

Right.

Folks asking here also, how important is it to get a branded VC in the Series A if they're a branded VC and you're mid range for them? Marry somebody who loves you more than you love them. It's not a bad strategy.

What do you think of that? Yeah, it is. I like that strategy. It seems, it seems like really we're talking about. We're reminded by the phrase that your VC relationship might be more important than your marriage. You'll certainly you might spend more time at work than you do at home, which is unfortunately the life of most entrepreneurs. But I think the real key is that the branded VCs are important because of the signaling that it gives the it's much tougher to get into Harvard than it is to get into a local community college. And I think that the same thing applies much harder to get a investment from Sequoia than it is from, let's say a local angel group. Not saying anything bad about local angel groups. Is that ultimately the rigor around due diligence and investment track records, those ultimately matter and people read signal off of that.

Let's dive into investor communication through the fundraise process. What have you seen typically? What are some best practices there? You've had one call, you've done the pitch. How do the best founders manage that all the way through a term sheet?

One thing that I've seen really consistently out of one group of founders coming from a certain program is they're able to get the pitch nailed down. They're able to speak to their ideas and through the vision with conciseness. And that would be most YC graduate companies in that we schedule 25 minute meetings with our founders. And I find that at the top of that scale are YC founders because after 15 minutes they answer all of our questions because their answers are so sharp and so concise that they can take what a typical founder does in five minutes and give us a 30 second response and have that be a richer response. I would say that if you're pitch ready, you can pitch your company in 15 or 20 minutes along, complete with Q and A. And that would be a real signal around how to show, sharpen up that process, but just show that you're pitch ready. And then I think a couple other things around this is just make sure that you're asking all the right questions around the fundraise. So get a VC friend, start reading VC books. So for instance, read Venture Deals by Brad Feld, read the Secrets of Silicon Valley or Sandhill Road. We have a VC101 presentation that we can post a link for Lloyd that shows, that shows what a VC wants. And so once you understand what a VC wants, I think you can tune your pitch there and really get them exactly what they need to know, get it done quickly and then you can start to ask the right questions, which is, hey, what's your decision making process? What are the things that you need to see from us? What can we follow up with? Are there, what are the metrics that you're looking at? What are the decision points? Who are the decision making process? How do you go through the investment memo or the research process, et cetera, et cetera, et cetera. And so the closer you can understand their timelines, the better.

And one other tip I'll tell people is it's like sales. Everything is sales. When you meet a prospect, an enterprise prospect or whoever, after the call, you send them a thank you note and summarize the conversation. Do that like just communication is huge. And remind them of why some key moments in the conversation that you enjoyed and summarize it and send them the items you promised.

And Lloyd, I think what's really important, I love what you showed on your email intros is that fundraising is just like a sales process. It's not random. You've sent out 80 or 100 emails, you're tracking the returns in a CRM, you're tracking all the responses. So what I've seen, best practice is even if it is a no, it's not just a no. Thank you. In most cases it's A no, because we want to see this metric. And so once you gather up and start cataloging that information, then all of a sudden, oh, there were 30 VCs that said no and they gave us a reason, so we better go sharpen that up. But 10 said yes and, and so here's the reason why they said yes and here's what went well in that meeting. Both are very rich sources of information.

As a founder, what's the most valuable thing a VC has done for you and what's the worst thing as a founder?

I think that as a founder I really love it when VCs come in and basically do more than just ask about numbers. They ask about how we're doing as far as our mental state goes. Because especially at small companies, the performance of the company tracks directly to the physical and mental state of the founder or the founding teams. If a founder isn't doing well, then the company typically isn't doing well. And this is so important to me. That's one of the real keys here, is that we really make sure that the mental state and the attitude of the founders is just tuned perfectly for optimal performance and that they go in, they're showing great leadership and really motivating the hell out of their teams.

One piece of unconventional advice that founders don't utilize enough.

I would say that people don't focus enough on trust. And so just think about this, is that everything that comes out of your mouth, everything that you do, say or do is about trust. And I didn't realize this early in my career, is that every interaction, even that's not direct with an investor, I might be dealing with an investor's friend or their network is that most of your sophisticated investors will go out and do a community reference check and they'll say, hey, how's this Pat guy? Is he what he says he is? Have you ever worked with them? Et cetera, et cetera. And so you've got to start on these relationships early. You've got to be adding more into the community than you're taking out. And make sure that people in the community know your work and people in the community trust you and that they're saying good things about you and that you're doing things without that are that you're doing a lot of things that are non transactional. You're not always just doing things just because you want something and if you build that reputation, you're just going to find it so much easier that when you give more than you take that when you're ready to ask for a take that it's just so much easier when you come back to it. But that, I think, is think about raising money five years ahead when you need it, and build that goodwill five years ahead before you need it.

Looking back on your career, what is the one thing you wish you did less of and one thing you did more of?

I would say that. So, Lloyd, you and I, I think most kind of scrappy entrepreneurs like us have had a lot of failures. And I think that I would forgive myself for all the failures that I had. I think that there's always a fear of failure and I certainly have that, had that and still have it. I have a little less of it these days. But I think that I don't look at failure right now as something that will kill. I think that the true test of character is that when you fail, how fast can you get up? How fast can you brush yourself off and do it all over again and do it with the right attitude? So to me, I think that if I could tell myself, if I could go back 20, 30 years and tell myself something, it's just, you're going to fail. Don't worry about it. But make sure you jump up, get back fast, because nobody can keep you down. And I think the only person keeping you down is yourself and those failures. I certainly have done a fair share of that, but knowing that I can recover has been really my key to success. Chumbawamba. I like that comment, Barbara.

It's a fantastic comment and also in line with what Rocky Balboa says. I think in Rocky 4 or 5, it ain't about how hard you hit, it's about how hard you can get hit and keep moving forward. Thank you so much, Pat. I need some traction. You need some traction. Thank you for listening and we hope.

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